94-357 | Virginia Tax

Tax Type

Corporation Income Tax

Description

Alternate method of allocation and apportionment; Income from operational function

Topic

Allocation and Apportionment

Date Issued

11-23-1994

November 23, 1994

Re: .§58.1-1821 Application: Corporate income taxes

Dear**********

This will reply to your letter of May 20, 1994, in which you apply for correction of an assessment of additional corporate income taxes to ********* (the "Taxpayer") for the 1993 taxable year.

FACTS

The Taxpayer was the subject of an audit, and an adjustment was made to disallow a subtraction for nonbusiness income. You contest the adjustment, and believe that such income is allocable investment function income.

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 Code of Virginia §§ 58.1-402 and 58.1-403, less allocable dividends is subject to apportionment. The Taxpayer's protest has been treated as a request for an alternative method of allocation and apportionment pursuant to Code of Virginia §58.1-421.

The Taxpayer received interest income from cash investments and contends that such income was from the investment of passive funds. The Taxpayer also earned discounts from prompt payment, which the Taxpayer believes is outside of its regular business activities. The Taxpayer believes that this income should be allocated to its state of commercial domicile, and not subject to tax by Virginia.

The fact that income appears to be of a passive nature does not by itself bar Virginia from apportioning and taxing that same income. The Taxpayer has not furnished any substantive documentation to refute the statutory method, other than a general statement that Virginia should not be entitled to tax such income.

In this particular matter, the Taxpayer must bear the heavy burden of demonstrating that the imposition of Virginia's statute is a violation of the standards enunciated by the United States Supreme Court in Allied-Signal. Inc. v. Director, Division of Taxation,112 S. Ct. 2251 (1992) . In Allied-Signal, the court stated:

- The existence of a unitary relation between payee and payor is one justification for apportionment, but not the only one. Hence, for example, a State may include within the apportionable income of a nondomiciliary corporation the interest earned on short-term deposits in a bank located in another state if that income forms a part of the working capital of the corporation's unitary business, notwithstanding the absence of a unitary relationship between the corporation and the bank.
  
  We agree that the payee and the payor need not be engaged in the same unitary business as a prerequisite to apportionment in all cases. Container Corp. says as much. What is required instead is that the capital transaction serve an operational rather than an investment function.

The real question therefore, is whether the interest income and prompt payment discounts arise from an operational function. The income in question arises from the utilization of cash, and purchases of goods through normal operations, both of which generally constitute operational functions.

In any proceeding relating to the interpretation of the tax laws of the Commonwealth of Virginia, the burden of proof is on the taxpayer. Based upon the information provided, the Taxpayer has not met the burden of proof. Accordingly, permission to use an alternative method of allocation and apportionment for interest income earned and prompt payment discounts is hereby denied.

Accordingly, the assessment as reflected on the attached schedules is upheld. 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

OTP8084M

Rulings of the Tax Commissioner