Tax Type
Corporation Income Tax
Description
Unitary relationship
Topic
Allocation and Apportionment
Date Issued
07-28-1995
July 28, 1995
Re: §58.1-1821 Application: Corporate Income Tax
Dear*****************
This will reply to your letter of January 6,1995, in which you contest the 1990 and 1992 corporate income tax assessments to*************(the "Taxpayer").
FACTS
The Taxpayer is a corporation headquartered outside of Virginia which invests in other corporations and partnerships with the intention of selling them at a profit. The Taxpayer's only business activity conducted in Virginia was the result of the acquisition of a company in 1987 that was engaged in commercial management and procurement services. This company was operated as a division of the Taxpayer from 1987 through its sale in 1993. The Taxpayer's investment activities were conducted at its headquarters and were unrelated to the management and procurement division which conducted part of its business in Virginia.
The Taxpayer owned approximately fifteen percent of the stock in Company A, which engaged in producing minerals and related products outside of Virginia. The remaining shareholders of Company A were not related to the Taxpayer. One seat of Company A's Board of Directors was given to the Taxpayer to protect its financial interest. Other than this representation on Company A's Board of Directors, the Taxpayer's relationship with Company A was that of a minority shareholder.
The Taxpayer also invested in three limited partnerships located outside of Virginia. Two of the partnerships were venture capital in nature and invested in corporations before they were publicly traded. The third partnership was a portfolio investment company that periodically sold early-issue stock acquired from certain corporations.
The Taxpayer had minority representation in the partnerships in order to protect its investments. The Taxpayer, Company A, and the partnerships did not share officers or employees; had no intercompany sales, loans, or other transactions; had no common purchases, services, compensation or benefit plans, banking arrangements, or overhead allocations; and were not represented to the public as integrally related.
During 1990 and 1992, the taxpayer sold its investments in Company A and the partnerships, respectively, at a gain. For state income tax purposes, the Taxpayer allocated the gains from the sale of these investments to its state of commercial domicile. As a result of a field audit, the gains were included in Virginia taxable income subject to apportionment, and an assessment was issued. You contend that the Taxpayer properly allocated the gains out of Virginia taxable income, therefore, the assessment should be appropriately adjusted. The Taxpayer's treatment of the capital gains has been treated as a request for an alternative method of allocation and apportionment in accordance with Code of Virginia §58.1-421.
The Taxpayer has provided evidence demonstrating that its relationship with Company A and the partnerships is similar to the fact patterns in Public Document 94-93 (3/29/94), copy enclosed.
DETERMINATION
The department has examined the evidence provided by the Taxpayer in order to determine if a unitary relationship existed between the Taxpayer and Company A, or between the Taxpayer and the partnerships, and to determine if the Taxpayer's activities related to the investment in Company A and the partnerships were in any way connected to the Taxpayer's operational activities carried on in Virginia.
In considering the existence of a unitary relationship, the Supreme Court has focused on three objective factors: (1) functional integration; (2) centralization of management; and (3) economies of scale. Evidence affecting these factors was provided by the Taxpayer in clear and objective terms. There was no indication of a flow of goods or of a flow of values between the Taxpayer, Company A, or the partnerships. Based on the information provided to the department, it does not appear that a unitary relationship existed between the Taxpayer and Company A or between the Taxpayer and the partnerships.
In considering the operational aspects of the investment, the department considered the evidence provided to support the Taxpayer's position. This evidence indicated that: the businesses did not complement the Taxpayer's operational activities carried on in Virginia before or after the acquisition; no integration of the businesses ever occurred; no economies were achieved; the businesses were engaged in unrelated industries; the management of Company A and the partnerships were at all times separate and distinct from the Taxpayer; there was no attempt to take advantage of the fact that common ownership existed; and no business transactions of any type occurred between the companies.
In light of the information provided, it does not appear that the Taxpayer used its own operational activities carried on in Virginia to enhance the value of its investment in Company A or the partnerships, nor does it appear that the ownership of the Company A and the partnerships enhanced the operational activity of the Taxpayer. Accordingly, it is possible to conclude that the Taxpayer's investment in Company A and the partnerships did not relate to the Taxpayer's operational business carried on in Virginia.
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 prove by clear and cogent evidence that Virginia's statutory method of allocation and apportionment would result in a tax on income derived from a discrete investment function having no connection with Virginia in violation of the principles set forth in Allied-Signal. Inc. v. Director, Div. of Taxation, 112 S. Ct. 2251 (1992). Based upon the information provided, the Taxpayer has demonstrated that an alternative method of allocation and apportionment is appropriate. Because of the extraordinary circumstances surrounding the relationship between the Taxpayer and Company A, and between the Taxpayer and the partnerships, permission is hereby granted to allocate the capital gain recognized by the Taxpayer on the sale of the Company A stock in 1990 and the partnerships in 1992 out of Virginia apportionable income. The sales factor for each taxable year will also be adjusted to remove allocable income from the denominator.
All other aspects of the Taxpayer's 1990 and 1992 allocation and apportionment shall be determined in accordance with Code of Virginia §§58.1 406 through 58.1-420. The Taxpayer's 1990 assessment will be abated in accordance with this ruling. Additionally, this ruling is limited to taxable years 1990 and 1992, the transaction described herein, and shall not be considered as pertaining to any other taxable year or transaction. This case will be forwarded to the Interstate Audit Section for adjustment, and revised audit reports will be sent to you as soon as practical.
Sincerely,
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner