95-148 | Virginia Tax

Tax Type

Corporation Income Tax

Description

Exemption for forecloser upon real property

Topic

Allocation and Apportionment

Date Issued

06-09-1995

June 9, 1995

Re: Request For Ruling; Corporation Income Tax

Dear***************

This is in response to your letter objecting to a request that****************** (hereafter, the Taxpayer) register for corporation income tax and file returns for 1992 and 1993. To date no returns have been filed and no assessments of corporation income tax have been made.

FACTS

The Taxpayer is a federally chartered savings bank that has no offices or employees in Virginia. It acquires loans from third party lenders that are secured by deeds of trust and other security interests in real estate located in Virginia. In 1992 the Taxpayer foreclosed on certain deeds of trust secured by real estate in Virginia and acquired the property at the foreclosure sale. The properties were disposed of in 1993. Relying on the provisions of subdivision B of the definition of "Income and deductions from Virginia sources" in Virginia Regulation 630-3-302 (copy enclosed), the department requested that the Taxpayer register for corporation income tax and file the appropriate returns.

You object to filing corporate income tax returns on the grounds that Code of Virginia §13.1-757 exempts the Taxpayer from obtaining a certificate of authority from the State Corporation Commission for the privilege of transacting business in the Commonwealth.

RULING

The certificate requirement referred to in §13.1-757 is tied to "transacting business" in Virginia. However, the income tax is "annually imposed on . . . every foreign corporation having income from Virginia sources." §58.1-400. One may receive income from Virginia sources without transacting business in Virginia. The regulations defining "income and deductions from Virginia sources" clearly state that a lender will not be deemed to have income from Virginia sources merely by holding a security interest in Virginia property, but if the lender acquires fee simple title to Virginia property by foreclosure or other means the lender will be deemed to have income from Virginia sources by virtue of the ownership of real or tangible property in Virginia. VR 630-3-302.

The Taxpayer uses the reserve method of accounting for bad debts as required by Internal Revenue Code (IRC) §593. Under federal law, any gain on the sale of foreclosed property is credited to the reserve for bad debts, not reported as taxable income. Furthermore, no depreciation is allowable on foreclosed property, and under federal law property acquired in foreclosure proceedings "shall be considered as property having the same characteristics as the indebtedness for which such property was security." IRC §595 (b). In other words, federal law treats the acquisition of secured property at foreclosure and its subsequent sale as steps in the collection of indebtedness, not the purchase and sale of real property. You contend that Virginia must conform to this federal treatment by virtue of Code of Virginia §58.1-301.

Virginia does conform to federal definitions and terms. Thus, Virginia starts with federal taxable income, which will not include any gain or loss from the foreclosure transactions at issue. Similarly, Virginia Regulation VR 630-3-409 expressly conforms to the federal characterization of property involved in safe harbor leases when computing the property factor component of the standard three-factor apportionment formula. However, as a savings and loan association, the Taxpayer would be expected to use the single factor "costs of performance" apportionment formula for financial corporations under Code of Virginia §58.1-418. Since the taxpayer has no offices or employees based in Virginia, its costs of performance would be very small, consisting primarily of employee travel expenses, legal fees, and other costs associated with the foreclosure, maintenance and sale of the secured property.

While Virginia law and regulations expressly state that the acquisition of property by foreclosure or other means creates "income from Virginia sources" and subjects a foreign corporation to income tax, there remains a de minimis exception for transactions which, taken as a whole, constitute a trivial additional connection with Virginia. Wisconsin Dept. of Revenue v. William Wrigley. Jr., 112 S. Ct. 2447 (1992). "Consideration is given to the nature, continuity, frequency, and regularity of the activities in Virginia, compared with the nature, continuity, frequency, and regularity of its activities elsewhere." VR 630-3-402. You have provided no facts concerning the nature, continuity, frequency, and regularity of the Taxpayer's foreclosure and other activities in Virginia compared to its activities elsewhere. Therefore, it is not possible to determine if the Taxpayer's foreclosure activities in 1992 and 1993 are exempt from Virginia tax as de minimis activities.

Therefore, the Taxpayer is required to file the enclosed form R-1 to register for the Virginia corporation income tax and file returns for 1992 and 1993 unless it is determined that the Taxpayer's Virginia activities qualify for the de minimis exception. If you have any questions about this ruling you may contact************* at the Office of Tax Policy.

- - - - Sincerely,
        
        Danny M. Payne
        Tax Commissioner

OTP/7569C

Rulings of the Tax Commissioner