Tax Type
Corporation Income Tax
Description
Returns of affiliated corporations; Nexus
Topic
Returns and Payments
Date Issued
05-11-1995
May 11, 1995
Re: §58.1-1821 Application: Corporation Income Tax
Dear**********
This will reply to your letter of January 31, 1994, in which you request the department to consider additional information concerning a corporation income tax assessment against**********(the "Holding Company"). You also ask that the department allow a subtraction for foreign source income of******** (the "Subsidiary"), an affiliated corporation added to the Virginia consolidated income tax return pursuant to a prior Code of Virginia §58.1-1821 application .
FACTS
The Holding Company filed as part of a Virginia consolidated return for-the 1987 taxable year. As the result of an audit, the Holding Company (and its loss) was removed from the consolidated return, resulting in the assessment of additional tax. The assessment has been paid and you request that it be refunded. The request for refund was timely filed. You maintain that the Holding Company had nexus in Virginia and should be included in the consolidated return. You also bring up a new issue not included in the original protest, the removal of foreign source income belonging to the Subsidiary.
DETERMINATION
The department has previously ruled that the Holding Company was not includable in the consolidated return. See P.D. 91-257 (10-8-91). Your request for a redetermination is based on the fact that the Holding Company paid an independent contractor to perform certain tax and financial services with respect to the affiliates of the Holding Company. You suggest that services by the independent contractor create sufficient nexus by the Holding Company to subject it to Virginia tax.
Virginia Regulation (VR) 630-3-416 C.3.c. addresses the activities of independent contractors as they relate to the apportionment of income to Virginia. It is clear from this regulation that activities performed by an independent contractor are not to be considered in the apportionment of income. Therefore, any remuneration paid to this person would not be considered as payroll for Virginia tax purposes.
Virginia Regulation (VR) 630-3-442 provides that in order to be included in a Virginia consolidated return, a corporation must be subject to Virginia tax if a separate return was filed. Generally, a corporation must have sufficient business activity within Virginia to make one or more of the applicable apportionment factors positive, (see P.D. 92-238 (11/16/92), copy attached.) The existence of Virginia apportionment factors clearly establishes income from Virginia sources, but the lack thereof does not preclude a corporation from having income from Virginia sources. It excludes the Virginia source income from taxation in Virginia.
There is no evidence in this case that the Holding Company had sufficient activities to generate income from Virginia sources or to create positive apportionment factors. Accordingly, the auditor's adjustment to exclude the Holding Company from the consolidated return must be upheld.
As to the foreign source income subtraction you proposed for the Subsidiary we have reviewed your computations and agree with the subtraction as adjusted to reflect related expenses. A refund based on the "net" foreign source income subtraction will be issued shortly.
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- Sincerely,
Danny M. Payne
Tax Commissioner
- Sincerely,
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Rulings of the Tax Commissioner