Tax Type
Corporation Income Tax
Description
Apportionment adjustments; Interest in partnership
Topic
Allocation and Apportionment
Partnerships
Date Issued
09-26-1994
September 26, 1994
Re: §58.1-1821 Application: Corporate income taxes
Dear******************
This will reply to your letters of September 8, 1994, and December 15, 1993, in which you contest the assessment of additional corporate income taxes to *************(the "Taxpayer") for the taxable years ended December 31, 1989 and 1990.
FACTS
The Taxpayer was audited, and numerous adjustments were made. You contest two adjustments made to a member of the Taxpayer's combined Virginia return (the "Member") which changed the Member's Virginia apportionment percentage.
DETERMINATION
The department's auditor adjusted the Member's property apportionment percentage with respect to the Member's interest in a partnership ("Partnership A"). On its 1989 return, the Member included its proportionate share of capitalized rent from Partnership A in its own property apportionment factor. The auditor disallowed this amount in determining the proper property apportionment factor for the Member.
Upon review of the facts, it was determined that the department's auditor disallowed this amount because the amount claimed as rent expense was reported as interest expense on the Member's federal partnership return. You have confirmed that this amount is in fact interest expense; the auditor's adjustment is therefore correct.
The department's auditor also adjusted the Member's property apportionment percentage with respect to the Member's interest in another partnership ("Partnership B"). The Member is a partner in Partnership B, which owns various real property. On its Virginia returns, the Member included its proportionate share of property from Partnership B in its own property apportionment factor. The proportionate share included by the Member was based upon the Member's interest in Partnership B's profits and losses. The auditor adjusted this amount in determining the proper property apportionment factor for the Member, by utilizing the Member's interest in Partnership B capital (in lieu of profits and losses).
VR 630-3--409 provides "for purposes of the property factor each item of partnership property shall have the same character for a corporate general partner as if direct corporate ownership of the property existed." However, the regulation is silent as to how partnership "factor attribution" should be determined where the interests in profits, losses or capital are different.
Because of the unlimited possibilities through a partnership may allocate income, losses, and other partnership items, it is not possible to define a fixed rule for partnership factor attribution which fairly represents a partner's interest in partnership in all circumstances. Rather, such determination must be based upon the facts and circumstances of each case. In the instant case, there is no evidence of special allocations of partnership attributes which would make the use of the Member's capital percentage in Partnership B more appropriate than its profit percentage. Accordingly, the audit adjustment for this item shall be reversed.
The assessment for 1989 and the refund for 1990 shall be adjusted as provided herein and as reflected on the attached schedules. The net balance due, **** should be paid within 30 days to prevent the accrual of additional interest. Your payment may be sent to****, c/o Office of Tax Policy, Department of Taxation, P.O. Box 1880, Richmond, Virginia 23282-1880.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/7756M
Rulings of the Tax Commissioner