Tax Type
Corporation Income Tax
Description
Financial institution; Apportionment factors
Topic
Allocation and Apportionment
Date Issued
03-25-1994
March 25, 1994
Re: §58.1-1821 Application; Corporation Income Tax
Dear**************
This will reply to your letter of December 2, 1993, in which you seek correction of corporate income tax assessments for *********************(the "Taxpayer").
FACTS
The taxpayer is a financial corporation required to use a single factor apportionment formula based on cost of performance. The taxpayer, a member of an affiliated group for federal income tax purposes, files a separate Virginia income tax return. The taxpayer was audited and assessed additional corporate income tax for taxable years 1990 and 1991. For taxable years 1990 and 1991, the taxpayer protests certain audit adjustments to the apportionment factors and requests that consideration be given to other items for inclusion in the apportionment factors. In addition, the taxpayer protests the disallowance of a 1989 net operating loss carryforward on the 1990 Virginia corporate income tax return.
The issues you raise will be addressed separately.
DETERMINATION
Amounts considered as Costs of Performance: For taxable years 1990 and 1991, the auditor adjusted the numerator of the taxpayer's apportionment factor to reflect the cost of employee benefits attributable to Virginia. The taxpayer asserts that no corresponding adjustment was made to the denominator of the factor to account for overall employee benefits for the taxable periods. Furthermore, the taxpayer contends that costs associated with travel and entertainment are bona fide costs of performance and thus qualify for inclusion in the apportionment factor. These travel and entertainment expenses were omitted by the taxpayer from the original return filings.
Va. Code §58.1-418 requires financial corporations to apportion income based on cost of performance. The term "cost of performance" means all costs directly related to income producing activity, to the extent that the location of costs can be ascertained. Virginia Regulation (VR) 630-3-418 attributes costs to the location of property and employees.
Based on the facts and circumstances and the additional information provided, the costs described in your protest qualify for inclusion in the apportionment factors. Therefore, the apportionment factors will be adjusted accordingly.
Disallowance of the net operating loss carryforward: The taxpayer, as a member of an affiliated group for federal income tax purposes, determined a net operating loss in accordance with VR 630-3-402 A 2 e (v) for the 1990 separate Virginia corporate income tax filing. On audit, this 1989 loss carryforward and related subtraction modification were disallowed. Examination of the audit report produces no apparent basis for this adjustment.
Accordingly, the requested relief is hereby granted. The assessments for taxable years 1990 and 1991 will be abated in full.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/7557L
Rulings of the Tax Commissioner