Tax Type
Corporation Income Tax
Description
Property factor; Valuation of property
Topic
Allocation and Apportionment
Date Issued
10-08-1996
October 8, 1996
Re: Ruling Request: Corporation Income Tax
Dear****************
This will reply to your letter which you request a ruling as to the proper application of corporate tax apportionment with respect to ********* (the "Taxpayer"). I apologize for the delay in responding to your letter.
FACTS
The Taxpayer constructed a new manufacturing facility in another state. The Taxpayer received various financial incentives from that state and the new locality as an inducement to locate within their borders. Many of the financial incentives received by the Taxpayer will be considered to be non-shareholder contributions to capital in accordance with Internal Revenue Code (IRC) § 118 and Treasury Regulation 1.118-1. Non-shareholder contributions to capital are excluded from federal taxable income; however, a corresponding reduction to the basis of the corporation's property is required by IRC § 362(c).
The Taxpayer has asked how property, the basis of which has been affected by IRC § 362(c), should be valued for purposes of determining the Virginia property apportionment factor.
RULING
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). Stated another way, the fundamental purpose of an apportionment formula is to rationally measure the amount of income derived in a state.
The department believes that using the rules under IRC § 362 pertaining to non-shareholder contributions to value property for the Virginia property apportionment factor would not accurately reflect business done in Virginia. Property subject to the rules of IRC § 362 would have a zero normal basis for federal income tax purposes. Using this approach to value property to be included in the property factor would ignore the contribution of the effected property to the company's income producing activity.
Virginia Regulation (VR) § 630-3-410(B)(1) provides, in pertinent part that "Property owned by the taxpayer shall be valued at its original cost. As a general rule, "original cost" is deemed to be the basis of the property for federal income tax purposes at the time of acquisition.... (Emphasis added)." The term "original cost" contemplates a transaction where tangible consideration was exchanged for the acquired property. In fact, "cost" is defined in United States Treasury Regulation § 1.1012-1(a) as "the amount paid for such property in cash or other property." In addition, VR § 630-3-410 makes specific exceptions to the general rule by separately addressing property acquired by gift or inheritance and inventory.
IRC § 1012 asserts, "The basis of property shall be the cost of such property, except as otherwise provided in this chapter and subchapters C...." IRC § 362(c)(2), which is located in IRC subchapter C, requires the basis of acquired property be reduced by non-shareholder contributions. IRC § 362 does not refer to any cost reductions. Thus, the Internal Revenue Service clearly contemplates that "cost" and "basis" are not the same. Also, in separately addressing property acquired by gift or inheritance and inventory, VR § 630-3-410 recognizes the difference between "cost" and "basis" .
The department has concluded that property received through incentives from state and local governments to locate a facility in a locality is not consistent with the general rule provided in VR § 630-3-410(B)(1). Accordingly, where real or tangible property is received as an incentive from a state of local government, the value of the property included in the property apportionment factor will be the fair market value on the date the property is transferred. In addition, where property is purchased with money received as a financial incentive from a state or local authority, the taxpayer must use the cost of acquiring the property for the purpose of determining the property apportionment factor.
If you have any additional questions regarding this ruling, please feel free to call ********** in the Office of Tax Policy at*****************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10188O
Rulings of the Tax Commissioner