Tax Type
Corporation Income Tax
Description
Property factor; Capitalized interest expense
Topic
Allocation and Apportionment
Date Issued
11-04-1996
November 4, 1996
Re: § 58.1-1821 Application: Corporate Income Tax
Dear********************
This will reply to your protest in which you applied for correction of assessments of additional corporate income tax for the ********* (the "Taxpayer") for the taxable years ended December 31, 1992 and 1993. I apologize for the delay in responding to your letter.
FACTS
During the course of a field audit, numerous adjustments were made. You contest three adjustments: the removal of the limited partnership attributes from the apportionment factors, the exclusion of certain receipts resulting from a covenant not to compete from the sales factor, and the removal of capitalized interest expense as part of buildings and other depreciable assets includable in the property factor.
DETERMINATION
Partnership Interests
The Taxpayer owns interests in several partnerships, both general and limited partnerships. The auditor removed from the apportionment factors all property, payroll and sales related to the limited partnership interests.
Virginia Regulation (VR) 630-3-409 A.2.b. provides, in part: "For purposes of the property factor each item of partnership property shall have the same character for a corporate general partner as if direct corporate ownership of the property existed." (Emphasis added.) The department has long held that the same application applies to payroll and sales of a general partner. No similar provision exists relating to limited partnership interests. See Public Document 88-235, (8/10/88), copy attached.
Accordingly, the auditor was correct in excluding limited partnership interests from the apportionment factors.
Sales Factor Exclusion
The auditor excluded gross receipts from a covenant not to compete from the sales factor under the assumption that they were not generally considered "sales".
Code of Virginia § 58.1-302 defines "sales" as:
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- All gross receipts of the corporation not allocated under § 58.1407, except the sale or other disposition of intangible property shall include only the net gain realized from the transaction.
The gross receipts from the covenant not to compete would fit the above definition of sales and therefore should be included in the denominator of the sales factor for 1992.
Property Factor
Capitalized interest expense was removed from the property factor for all years involved since the auditor considered this item to be an intangible and therefore not includable. For federal tax purposes, this interest was required to be capitalized as part of real and tangible personal property and depreciated over the life and rate of the asset for which it was capitalized.
VR 630-3-410 B.1. provides as follows:
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- 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 by the corporation and adjusted by subsequent capital additions and improvements thereto and partial disposition thereof....
Since capitalized interest becomes part of the basis of the assets for federal income tax purposes, and is treated as a depreciable asset, it is properly included in the computation of the property factor since the assets were in service during the years of the audit.
In summary, the apportionment factors for 1992 and 1993 and the assessments will be adjusted in accordance with this determination and as reflected on the enclosed schedule.
If you have any questions regarding this determination, please call **********at**********.
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Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10949P
Rulings of the Tax Commissioner