Tax Type
Corporation Income Tax
Description
Alternate method of allocation and apportionment; Investment income.
Topic
Allocation and Apportionment
Date Issued
03-25-1998
March 25, 1998
Dear**********
This will reply to your letter in which you are requesting a redetermination of the department's ruling previously issued to ***** (the ``Taxpayer') for the taxable years ended February 28, 1992 and 1993. A copy of this ruling, Public Document (``P.D.') 97-187, (4/18/97), is attached.
FACTS
In 1989 and 1990, the Taxpayer raised capital through public common stock offerings. A portion of the proceeds were invested and have been subsequently managed by the Taxpayer's treasury manager. The funds have been predominantly invested in mid-term municipal securities. None of the funds have been utilized to acquire fixed assets or augment normal working capital requirements.
In taxable years ended February 28, 1992 and 1993, the Taxpayer realized interest income from these investments. The Taxpayer treated this income as nonapportionable nonbusiness income.
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 paid the assessments and later filed amended returns requesting a refund for the portion of the assessments related to the nonbusiness income. The Taxpayer failed to show the department 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. Accordingly, permission to use an alternative method of allocation and apportionment for non-business income was denied in P.D. 97-187.
You maintain that the interest income from municipal bonds should be excluded from Virginia apportionable income as allocable non-business income and have provided additional evidence to support your position.
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 Secs. 58.1-402 and 58.1-403, less dividends allocable pursuant to Code of Virginia Sec. 58.1-407, is subject to apportionment. The Taxpayer's protest has been treated as a request for an alternative method of allocation and apportionment in accordance with Code of Virginia Sec. 58.1-421.
The Taxpayer's protest is based on the claim that the imposition of Virginia statute violates the standards enunciated by the U.S. Supreme Court in Allied-Signal, Inc. v. Director, Division of Taxation, 112 S.Ct. 2251 (1992). In Allied-Signal, the [C]ourt stated:
In the instant case, the Taxpayer had no long-term debt during the taxable years under audit. Cash (excluding investments) and accounts receivable at the conclusion of 1990, 1991, and 1992 were sufficient to cover total current liabilities. Cash provided by operating activities was significantly positive during the audit period. The Taxpayer's increasing investment in fixed assets was financed by operations as evidenced by the Taxpayer's financial statements, which exhibited increasing sales and operating income.
The facts and circumstances surrounding the Taxpayer's investment income resemble those described in P.D. 94-178, (6/8/94), copy enclosed, in which the department granted a taxpayer permission to use an alternative method of allocation and apportionment. In the instant case, as in P.D. 94-178, the investment was financed through the issuance of stock, maintained in a segregated fund, and not relied upon to supplement operations. The department concluded that the investment in P.D. 94-178 constituted one which was conducted independently from the management and investment of necessary working capital balances.
The evidence provided by the Taxpayer supports the contention that the income in question was generated through a passive investment with non-unitary payers and therefore is not subject to apportionment under the guidelines established in Allied-Signal. Accordingly, permission is hereby granted to allocate the investment income out of Virginia apportionable income for the taxable years ended February 28, 1992 and 1993. Refunds will be issued described herein and on the enclosed schedules.
This ruling is limited to the activity described herein for the 1992 and 1993 taxable years, and shall not be considered as pertaining to any other taxable year or transaction. If you have any questions regarding this ruling, you may contact ***** at *****.
Dear**********
This will reply to your letter in which you are requesting a redetermination of the department's ruling previously issued to ***** (the ``Taxpayer') for the taxable years ended February 28, 1992 and 1993. A copy of this ruling, Public Document (``P.D.') 97-187, (4/18/97), is attached.
FACTS
In 1989 and 1990, the Taxpayer raised capital through public common stock offerings. A portion of the proceeds were invested and have been subsequently managed by the Taxpayer's treasury manager. The funds have been predominantly invested in mid-term municipal securities. None of the funds have been utilized to acquire fixed assets or augment normal working capital requirements.
In taxable years ended February 28, 1992 and 1993, the Taxpayer realized interest income from these investments. The Taxpayer treated this income as nonapportionable nonbusiness income.
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 paid the assessments and later filed amended returns requesting a refund for the portion of the assessments related to the nonbusiness income. The Taxpayer failed to show the department 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. Accordingly, permission to use an alternative method of allocation and apportionment for non-business income was denied in P.D. 97-187.
You maintain that the interest income from municipal bonds should be excluded from Virginia apportionable income as allocable non-business income and have provided additional evidence to support your position.
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 Secs. 58.1-402 and 58.1-403, less dividends allocable pursuant to Code of Virginia Sec. 58.1-407, is subject to apportionment. The Taxpayer's protest has been treated as a request for an alternative method of allocation and apportionment in accordance with Code of Virginia Sec. 58.1-421.
The Taxpayer's protest is based on the claim that the imposition of Virginia statute violates the standards enunciated by the U.S. Supreme Court in Allied-Signal, Inc. v. Director, Division of Taxation, 112 S.Ct. 2251 (1992). In Allied-Signal, the [C]ourt stated:
-
- "The existence of a unitary relation between payee and payor is one justification for apportionment, but not the only one. Hence, for example, a State may include within the apportionable income of a nondomiciliary corporation the interest earned on short-term deposits in a bank located in another state if that income forms a part of the working capital of the corporation's unitary business, notwithstanding the absence of a unitary relationship between the corporation and the bank.'
``We agree that the payee and the payor need not be engaged in the same unitary business as a prerequisite to apportionment in all cases. Container Corp. says as much. What is required instead is that the capital transaction serve an operational rather than an investment function.'
- "The existence of a unitary relation between payee and payor is one justification for apportionment, but not the only one. Hence, for example, a State may include within the apportionable income of a nondomiciliary corporation the interest earned on short-term deposits in a bank located in another state if that income forms a part of the working capital of the corporation's unitary business, notwithstanding the absence of a unitary relationship between the corporation and the bank.'
In the instant case, the Taxpayer had no long-term debt during the taxable years under audit. Cash (excluding investments) and accounts receivable at the conclusion of 1990, 1991, and 1992 were sufficient to cover total current liabilities. Cash provided by operating activities was significantly positive during the audit period. The Taxpayer's increasing investment in fixed assets was financed by operations as evidenced by the Taxpayer's financial statements, which exhibited increasing sales and operating income.
The facts and circumstances surrounding the Taxpayer's investment income resemble those described in P.D. 94-178, (6/8/94), copy enclosed, in which the department granted a taxpayer permission to use an alternative method of allocation and apportionment. In the instant case, as in P.D. 94-178, the investment was financed through the issuance of stock, maintained in a segregated fund, and not relied upon to supplement operations. The department concluded that the investment in P.D. 94-178 constituted one which was conducted independently from the management and investment of necessary working capital balances.
The evidence provided by the Taxpayer supports the contention that the income in question was generated through a passive investment with non-unitary payers and therefore is not subject to apportionment under the guidelines established in Allied-Signal. Accordingly, permission is hereby granted to allocate the investment income out of Virginia apportionable income for the taxable years ended February 28, 1992 and 1993. Refunds will be issued described herein and on the enclosed schedules.
This ruling is limited to the activity described herein for the 1992 and 1993 taxable years, and shall not be considered as pertaining to any other taxable year or transaction. If you have any questions regarding this ruling, you may contact ***** at *****.
Rulings of the Tax Commissioner