Tax Type
Corporation Income Tax
Description
Alternate method of allocation and apportionment; Capital gains
Topic
Allocation and Apportionment
Date Issued
09-07-1994
September 7, 1994
Re: Protective Claim: Corporate Income Tax
Dear*******
This will reply to your letters of August 16, 1994, July 14, 1994, September 20, 1993, and January 21, 1993 regarding the protective claim filed on June 4, 1992, for the taxable year ended May 28, 1989, on behalf of**********(the "Taxpayer"). I apologize for the delay in responding.
FACTS
On an amended Virginia tax return for the taxable year ended May 28, 1989, the Taxpayer claimed a subtraction from Virginia apportionable income equal to the amount of a capital gain recognized on the sale of the stock of another corporation ("Company A"). The subtraction was disallowed on the basis that the Code of Virginia does not provide for such a subtraction. You protest this adjustment, and aver that this capital gain is not properly subject to apportioned taxation in Virginia. The Taxpayer's subtraction of the capital gain has been treated as a request for an alternative method of allocation and apportionment in accordance with Va. Code §58.1-421.
The Taxpayer is a large multi-national corporation, headquartered outside of Virginia. In 1971 the Taxpayer acquired Company A. In 1988 the Taxpayer sold 100% of the stock of Company A. For state income tax purposes, the gain from the sale of Company A was allocated to the Taxpayer's state of commercial domicile.
The Taxpayer is one of the world's largest manufacturer and retailer of commodities. Company A is engaged in retail sales of consumer specialty goods. Company A sells its products at retail stores and through catalog sales. Company A does not sell the Taxpayer's products, or purchase products from the Taxpayer. Company A's product line was completely unrelated to that of the Taxpayer. The Taxpayer and Company A were obviously not engaged in the same industry.
The Taxpayer has provided extensive documentation demonstrating that its relationship with Company A was similar to the fact patterns in Public Documents 93-140 (6/4/93) and 94-93 (3/29/94), copies attached.
DETERMINATION
The department has examined the evidence provided by the Taxpayer in order to determine if a unitary relationship existed between the Taxpayer and Company A, and to determine if the Taxpayer's activities related to the investment in Company A were in any way connected to the Taxpayer's operational activities.
In considering the existence of a unitary relationship, the Supreme Court has focused on three objective factors: (1) functional integration; (2) centralization of management; and (3) economies of scale. Evidence affecting these factors was provided by the Taxpayer in clear and objective terms. There was no indication of a flow of goods or of a flow of values between the Taxpayer and Company A. Based on the information provided to the department it does not appear that a unitary relationship existed between the Taxpayer and Company A.
In considering the operational aspects of the investment, the department considered the evidence provided to support the Taxpayer's position. The evidence indicated that: the business did not complement the Taxpayer's operational activities before or after the acquisition; no integration of the two businesses ever occurred; no economies were achieved; the two companies were engaged in unrelated industries; the management of Company A was at all times separate and distinct from the Taxpayer; there was no attempt to take advantage of the fact that common ownership existed; and with few immaterial exceptions, no business transactions of any type occurred between the companies.
In light of the substantial evidence provided, it does not appear that the Taxpayer used its own operational activities to enhance the value of its investment in Company A, nor does it appear that the ownership of the Company A enhanced the operational activity of the Taxpayer. Accordingly, I conclude that the Taxpayer made a passive investment in the Company A that was not of an operational nature, and the gain recognized by the Taxpayer on
the sale of Company A did not relate to the Taxpayer's operational business carried on in Virginia.
In any proceeding relating to the interpretation of the tax laws of the Commonwealth of Virginia, the burden of proof is on the taxpayer. In this particular matter, the Taxpayer must prove by clear and cogent evidence that Virginia's statutory method of allocation and apportionment would result in a tax on income derived from a discrete investment function having no connection with Virginia in violation of the principles set forth in Allied-Signal, Inc. v. Director. Div. of Taxation, 112 S. Ct. 2551 (1992). Based upon the information provided, I find that the Taxpayer has demonstrated that an alternative method of allocation and apportionment is appropriate. Because of the extraordinary circumstances surrounding the relationship between the Taxpayer and Company A, permission is hereby granted to allocate the capital gain recognized by the Taxpayer on the sale of the Company A stock in 1988 out of Virginia apportionable income. The sales factor for this taxable year will also be adjusted to remove allocable income from the denominator.
All other aspects of the Taxpayer's 1988 allocation and apportionment shall be determined in accordance with §§58.1-406 through 58.1-420. The Taxpayer's claim will be revised in accordance with this ruling and the attached schedules, and a refund will be issued in due course with interest at statutory rates. This ruling is limited to the taxable year ended May 28, 1989, and further limited to the transaction described herein, and shall not be considered as pertaining to any other taxable year or transaction.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/7060M
Rulings of the Tax Commissioner