Tax Type
Corporation Income Tax
Description
Taxation by two states
Topic
Allocation and Apportionment
Date Issued
12-27-1995
December 27, 1995
Re: Request for Ruling: Corporate Income Tax
Dear*****************:
This will reply to your letter of October 9, 1995, in which you request permission to use an alternative method of allocation and apportionment on behalf of***************(the "Taxpayer").
FACTS
The Taxpayer is headquartered in Virginia, and conducted all of its business in Virginia during its initial years of operation. Prior to 1993, the Taxpayer incurred federal net operating losses which were carried forward and deducted on the Taxpayer's 1993 federal return. During 1993 the Taxpayer became subject to tax in California and Virginia. The 1993 federal net operating loss carryforward originated in a year in which the Taxpayer was not subject to California tax. Because the Taxpayer was not subject to California tax in the year the losses were generated, the net operating loss deductions were not allowed on the California return.
The Taxpayer requests to use an alternative method of allocation and apportionment to account for the pre-1993 net operating losses which are "apportioned" to California in 1993, and therefore lost.
RULING
The policies which apply to requests for an alternative method of allocation and apportionment pursuant to Code of Virginia § 58.1-421 are well established. See Virginia Regulation (VR) 630-3-421 (copy enclosed). The Taxpayer has not furnished any substantive documentation to refute the statutory method, other than a general statement that the interaction of California and Virginia law may result in double taxation.
The situation which affects your client is the result of California's net operating loss policy. Whereas Virginia permits net operating losses to be deducted to the extent allowed on the federal return, California has its own net operating loss. Were the transaction reversed, and the losses incurred in California before beginning business in Virginia, Virginia would allow the losses, resulting in double benefit.
The department has previously ruled that merely being subject to different methods of taxation by two or more states is not unconstitutional, and does not constitute extraordinary circumstances justifying a departure from the statutory three factor formula. See Public Document 94-346 (11/18/94), copy attached.
The use of an alternative method is allowed only in extraordinary circumstances where the need for relief has been demonstrated by clear and cogent evidence. After considering the facts set forth, the department does not find you have demonstrated that the statutory method is unconstitutional or inapplicable as applied to the Taxpayer. Accordingly, your request for use of an alternative method of allocation and apportionment must be denied.
It is noted that you requested a conference to discuss this matter further should the Taxpayer's amended return be denied. Since the department's long-standing policy is clear on this issue, this ruling has been issued without a conference. Should you have any additional questions regarding this matter, or still desire to schedule a conference, please contact ********at***********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10422P
Rulings of the Tax Commissioner