Tax Type
Corporation Income Tax
Description
Allocation of passive income
Topic
Allocation and Apportionment
Date Issued
03-31-1994
March 31, 1994
Re: §58.1-1821 Application: Corporate Income Taxes
Dear***********
This will reply to your letter of September 9, 1993, in which you have applied for correction of assessments of additional corporate income taxes to ****** (the "Taxpayer") for the taxable years ended December 31, 1990, 1991, and 1992.
FACTS
The Taxpayer was the subject of an office audit for the 1990, 1991 and 1992 taxable years, and assessments were made as a result of that audit. The Taxpayer has contested the department's right to apportion and tax certain passive income. The Taxpayer believes that such income is allocable to its state of commercial domicile.
RULING
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 Taxpayer received rental income from third parties, and contends that because such property is located outside Virginia, income arising from such property should be allocated to the state in which such real property is located. The Taxpayer also claims that interest income received from banking institutions located in its state of commercial domicile should not be subjected to apportioned taxation by Virginia. The Taxpayer believes that because this income is allocated to its state of commercial domicile, Virginia is not entitled to tax this income as well.
The fact that income is allocated or apportioned to another state 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 income allocated to another state. The Taxpayer has not shown that the statutory method of apportionment produces an unconstitutional result. The United States Supreme Court has recognized that allocation and apportionment of income is an arbitrary process designed to approximate income from business transactions within a state. As long as each state's method of allocation and apportionment is rationally related to the business transacted within a state, then each state's tax is constitutionally valid even though there may be some overlap. See Mooreman Manufacturing Company v. Bair, 437 U.S. 279, 98 S.Ct. 2340 (1978).
The Taxpayer has not demonstrated that its real estate holdings are not operational assets involved in a unitary business, or that the interest income is other than a short-term deposit in a bank located outside Virginia. In this particular matter, the Taxpayer must do more than show that the payors of the rents are unrelated third parties, or that the real property is located outside Virginia. Rather, 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 rental and interest income arises from an operational function. The income in question arises from the utilization of land holdings and cash, both of which generally constitute operational assets. As the U. S. Supreme court made clear in Corn Products Co. v. Commissioner, 350 U. S. 46, 50-53 (1955), capital transactions can serve either an investment function or operational function.
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 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. Based upon the information provided, I do not find that the Taxpayer met the burden of proof. Accordingly, permission to use an alternative method of allocation and apportionment for rents and interest income earned is hereby denied The assessments are upheld, and are now due and payable as reflected on the attached schedules. The balance due including interest, **** must be paid within 30 days to prevent the accrual of additional interest.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/7390M
Rulings of the Tax Commissioner