Tax Type
Corporation Income Tax
Description
Allocation of income; Sale of intangible property
Topic
Allocation and Apportionment
Date Issued
10-28-1994
October 28, 1994
Re: § 58.1 -1821 Application: Corporate income taxes
******1989 taxable year
Dear******
This will reply to your letter of February 27, 1992, and subsequent discussions with members of the Office of Tax Policy, in which you applied for correction of an assessment of additional corporate income taxes to******************(the "Taxpayer " ) for the 1989 taxable year. I apologize for the delay in responding.
FACTS
The Taxpayer, a Virginia domiciled corporation, was audited for 1989 and numerous adjustments were made. During 1989, the Taxpayer sold the stock of a subsidiary ("S"). The Taxpayer included the gross receipts from the sale of S in the denominator, but not the numerator, of the Virginia sales factor. The department's auditor made an adjustment to include the gross receipts from this sale in the numerator of the sales factor. You contest this adjustment, and believe that the entire gain should be excluded from Virginia apportionable income. Alternatively, you believe that the net gain from the sale of S should be used to determine the sales factor, in lieu of the gross receipts.
DETERMINATION
The Code of Virginia does not provide for the allocation of income other than certain dividends. Accordingly, a taxpayer's entire federal taxable income, adjusted and modified as provided in Va. Code §§ 58.1 -402 and 58.1 -403, less dividends allocable pursuant to Va. Code § 58.1-407 is subject to apportionment. The Taxpayer's protest has been treated as a request for an alternative method of allocation and apportionment in accordance with Va . Code §58.1 -421.
The decision of the U. S. Supreme Court in Allied-Signal, Inc. v. Director, Div. of Taxation, 112 S. Ct. 2251 (1992), made it clear that in order for a state to tax a nondomicillary corporation, certain minimal connections had to exist between the interstate activities and the taxing state. However, the Taxpayer is incorporated and domiciled in Virginia. Accordingly, the judicial doctrines controlling Allied-Signal and prior cases do not apply to this situation.
Although judicial law would permit the allocation of 100% of the gain realized on the sale of S into the state of domicile, the Code of Virginia only requires that an apportioned share of the gain be included in income subject to tax in Virginia. Accordingly, the inclusion of the gain realized on the sale of S in the Taxpayer's Virginia apportionable income is correct.
Because the Taxpayer is domiciled and headquartered in Virginia, the inclusion of the gross receipts of the sale of S in the numerator and the denominator of the sales factor is appropriate. With respect to the use of the gross receipts, VR 630-3-302 (effective 1/1/85), copy attached, provides in pertinent part:
In the case of a sale, assignment, or licensing of intangible property such as patents and copyrights, "sales' includes the gross receipts from such sales, assignment or licensing .
Code of Virginia §58.1-302 and VR 630-3-302 were amended, effective for taxable years beginning on or after January 1, 1990, to change the definition of "sales of intangibles" from gross receipts to net gain. However, for 1989 and earlier years, the sales factor must be determined using gross receipts from the sales of intangibles.
Accordingly, the assessment as reflected on the attached schedules is correct. The balance due, ********. should be paid within 30 days to prevent the accrual of additional interest. Your payment may be sent to Office of Tax Policy, Department of Taxation, P.O. Box 1880, Richmond, Virginia 23282-1880.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/6021M
Rulings of the Tax Commissioner