Tax Type
Corporation Income Tax
Description
Alternate method of allocation and apportionment; Limited liability company
Topic
Allocation and Apportionment
Date Issued
02-12-1997
February 12, 1997
Re: Request for Ruling: Individual Income Tax
Dear*************
This will respond to your letter on behalf of ********* (the "Taxpayer"), in which you request permission to use an alternative method of allocation and apportionment for the taxable year ended September 30, 1995 and all subsequent years. I apologize for the delay in responding to your request.
FACTS
The Taxpayer is a limited liability company ("LLC") which is treated as a partnership for federal tax purposes. Two other LLCs, A and B, hold 99% and 1% interests in the Taxpayer, respectively. A and the Taxpayer, in turn, hold 99% and 1% interests in B. You have represented that Virginia operations are conducted entirely by the Taxpayer, and that A and B are also treated as partnerships for federal tax purposes.
You request that the members of A be granted permission to compute their income from Virginia sources with reference to the Taxpayer's separate accounting of Virginia income and deductions. In the alternative, you request that the members of A calculate their distributive share of Virginia source income based solely on the Taxpayer's allocation and apportionment to Virginia of its own income according to an apportionment factor computed with reference to only the Taxpayer's property, payroll, and sales.
RULING
Virginia's tax treatment of limited liability companies conforms to the federal treatment of such entities. Consequently, the interrelationships among the Taxpayer, A, B and the individual members regarding the pass-through of income, deductions, and apportionment factors will be determined with reference to Virginia law regarding the taxation of partnerships and their partners.
Virginia Regulation (VR) 630-3-491, copy enclosed, provides that the Virginia taxable income of partnerships conducting business both within and without Virginia is calculated in accordance with the statutory three factor formula pursuant to Code of Virginia §§ 58.1-408 through 58.1-421. Your request to allocate and apportion income based on the separate accounting format disregards the preferred statutory method, and permission to use such a format is granted by the department only in extraordinary circumstances. A belief that Virginia taxable income may be greater under the statutory method than separate accounting does not constitute "extraordinary circumstances" sufficient to justify permission to use an alternative method. See Department of Taxation v. Lucky Stores. Inc., 217 Va 121. Accordingly, the department cannot grant your request for permission to apportion income to Virginia based on separate accounting.
Alternatively, you request that only the Taxpayer's income and property, payroll, and sales be used to calculate the Virginia taxable income which will be passed through to the nonresident members of A. The department also cannot agree with this request.
The department has previously ruled that if a partnership is carrying on a business, trade, profession or occupation in Virginia or is receiving income as a partner in a partnership which is carrying on a business, trade, profession or occupation in Virginia, the pass through of Virginia source income will continue until the income is passed through to a partner which is a taxable entity. See Public Document (P.D.) 88-165, (6/29/88), copy enclosed. In the instant case, both A and B receive Virginia source income by virtue of their ownership interest in the Taxpayer, yet neither are taxable entities. The alternative method of allocation and apportionment requested would circumvent the passing through of Virginia source income from the Taxpayer to A to the members of A, and would instead pass the income directly from the Taxpayer to the members of A.
Likewise, under the principles established in P.D. 88-165, the pass through of property, payroll, and sales attributable to both Virginia and everywhere must continue until a taxable entity is reached. Virginia taxable income is then computed by applying the statutory three factor formula to the total income passed through to the taxable entity. If the department permitted apportionment to occur at each partnership tier without a corresponding flow-through of property, payroll, and sales, significant income from Virginia sources passed through from intermediate levels could be eliminated simply by having an overall Virginia apportionment factor of zero in the final partnership tier. While the alternative you propose is different, it nonetheless deviates from the department's longstanding policy that pass-through items must be passed through until a taxable entity is reached.
The interrelationships among A, B, and the Taxpayer make a high degree of income and asset shifting possible among all parties. If the department limited the computation of Virginia taxable income in the manner you suggest, it would become exceedingly easy to manipulate items of income, expense, and apportionment to distort the income earned from business done in Virginia. The department feels that the statutory three factor formula applied in a manner consistent with established policy is the most equitable method of allocation and apportionment for both the Commonwealth and the taxpayer.
It is important to note that allocation and apportionment is only available to members who are nonresidents of Virginia. Virginia residents will include their entire distributive share of A's income in their Virginia taxable income. In lieu of allocation and apportionment, Virginia residents may claim a credit for taxes paid to other states pursuant to Code of Virginia § 58.1-332.
Accordingly, your request for permission to use an alternative method of allocation and apportionment is denied. If you should have any questions regarding this ruling, you may contact ******** at****************
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10665G
Rulings of the Tax Commissioner