Tax Type
Corporation Income Tax
Description
Interest income; Virginia apportionable income
Topic
Returns/Payments/Records
Date Issued
04-18-1997
April 18, 1997
Re: § 58.1-1821 Application: Corporation Income Tax
**************
This will reply to your letter in which you are requesting a refund of corporation income tax for ***********(the "Taxpayer") for the taxable years ended February 28, 1992 and 1993. I apologize for the delay in responding.
FACTS
The department's auditor removed a subtraction for nonbusiness income from the Taxpayer's corporation income tax returns for the taxable years ended February 28, 1992 and 1993. The Taxpayer contends certain interest income from municipal bonds should be excluded from Virginia apportionable income as allocable non-business income.
DETERMINATION
The Code of Virginia does not provide for the allocation of income other than certain dividends. Accordingly, a taxpayer's entire federal taxable income, adjusted and modified as provided in Code of Virginia § 58.1-402 and § 58.1-403, less dividends allocable pursuant to Code of Virginia § 58.1-407, is subject to apportionment. We have treated the Taxpayer's protest as a request for an alternative method of allocation and apportionment pursuant to Code of Virginia § 58.1-421.
The Taxpayer has not furnished any substantive documentation to refute the statutory method other than general statements that an investment portfolio is maintained separate from its regular business operations. The Taxpayer must bear the heavy burden of showing that the imposition of Virginia's statute is a violation of the standards enunciated by the United States Supreme Court in Allied-Signal, Inc. v. Director, Division of Taxation,112 S. Ct. 2251 (1992).
The decision of the U.S. Supreme Court in Allied-Signal made it clear that the payee and payor need not be engaged in the same unitary business as a prerequisite to apportionment in all cases. In the absence of a unitary relationship, apportionment is permitted when the income results from an operational rather than a passive investment function. The Court also made it clear that the test is fact sensitive. Accordingly, the Taxpayer must do more than show that the payors are unrelated third parties.
The question, therefore, is whether the income arises from an operational function. The Taxpayer has not provided documentation that the proceeds from municipal bonds were part of a separate investment function unrelated to the Taxpayer's operational activities 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. As such, 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. Based upon the information provided, the Taxpayer has not met the burden of proof. Accordingly, permission to use an alternative method of allocation and apportionment for non-business income is denied.
As a result, we cannot grant your requests for refunds. The department requested additional information to substantiate your claim that the income in question represents income generated from a separate investment function by letter on November 26, 1996. In as much as you have not responded to our inquiry, we have made this determination based on the best available information. The department will, however, review any additional information you can provide which substantiates your claim, providing we receive it within 30 days of the date of this letter. Please send this additional information to*** at Office of Tax Policy, Department of Taxation, P. O. Box 1880, Richmond, Virginia 23218-1880. If we receive no response within 30 days, this case will be considered closed. If you have any questions, please call *** in the Office of Tax Policy at ***.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10980O
Rulings of the Tax Commissioner