Tax Type
Corporation Income Tax
Description
Residency
Topic
Taxpayers
Date Issued
08-27-1999
August 27, 1999
Re: Sec. 58.1-1821 Application: Corporate Income Tax
Dear****
This will respond to your letter in which you protest the adjustment of the taxable income of ***** (the "Taxpayer') for the taxable year ended June 30, 1993. I apologize for the delay in responding.
FACTS
In 1965, the Taxpayer and an unrelated corporation ("Corporation A') located in a foreign country formed another corporation ("Corporation B') to be a European distributor of the products manufactured separately by the Taxpayer and Corporation A. The Taxpayer held a 49% interest in Corporation B and Corporation A held a 51% interest. Corporation B distributed various product lines of the Taxpayer and its subsidiaries.
Over the years, Corporation B began developing its own product lines. As a result of this, the number of the Taxpayer's product lines distributed by Corporation B was reduced to one by the 1980's. The Taxpayer never distributed any of Corporation B's products in the United States. The Taxpayer claims that it never took part in any of the day to day management of Corporation B, never had knowledge or any interest in the business conditions of the market in which Corporation B was located, and never gained expertise in the product line that Corporation B was producing.
In 1993, the Taxpayer sold its 49% interest in Corporation B to Corporation A. On its Virginia Corporate Income Tax Return for the year ended June 30, 1993, the Taxpayer subtracted the proceeds from the sale of its interest in Corporation B from federal taxable income. Pursuant to an audit, this subtraction was disallowed. The Taxpayer has paid the additional liability found under the audit but has contested the adjustment.
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 subtraction of the non-business income 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 decision of the U. S. Supreme Court in Allied-Signal, Inc. v. Director, Div. of Taxation, 112 S.Ct. 2551 (1992), 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 investment serves an operational rather than a passive investment function. The Court also made it clear that the test is fact sensitive.
The department has examined the evidence provided by the Taxpayer in order to determine if a unitary relationship existed between the Taxpayer and Corporation B, and to determine if the Taxpayer's activities related to the Corporation B were in any way connected to the Taxpayer's operational activities.
In considering the existence of a unitary relationship, the Supreme Court has focused on three objective factors: (1) functional integration; (2) centralization of management; and (3) economies of scale. (See Mobil Oil Corp. v Commissioner of Taxes, 445 U.S., 425 (1980); F. W. Woolworth Co. v. Taxation and Revenue Dept. of N.M., 458 U.S., 352 (1982); and Allied-Signal.) Evidence regarding these factors was presented by the Taxpayer in clear and objective terms. Based on the information provided to the department, it does not appear that a unitary relationship existed between the Taxpayer and Corporation B.
However, the Taxpayer must do more than show that a unitary relationship does not exist. The determining issue in this case, therefore, centers upon whether the Taxpayer's investment fulfilled an operational function rather than a passive investment function.
In examining the functional aspects of the investment, the department considered the evidence provided to support the Taxpayer's position. The evidence indicated that the Taxpayer's operations benefited from its relationship with Corporation B. The Taxpayer had continually distributed its products through Corporation B since 1965. Clearly, the Taxpayer's operations benefited from the investment by allowing the Taxpayer ready access to the European market. In addition, the Taxpayer has failed to show that this investment was part of separate and distinct investment function.
In any proceeding relating to the interpretation of the tax laws of the Commonwealth of Virginia, the burden of proof is on the taxpayer. In this particular matter, the Taxpayer must show that the imposition of 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 the Allied-Signal case. Based upon the information provided, I do not find that the Taxpayer has met the burden of proof with respect to its claim.
Accordingly, permission to use an alternative method of allocation and apportionment is hereby denied. As such, your request for a refund will not be granted. If you have any questions about this ruling, you may contact ***** in the Office of Tax Policy at ******.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/18421G
Re: Sec. 58.1-1821 Application: Corporate Income Tax
Dear****
This will respond to your letter in which you protest the adjustment of the taxable income of ***** (the "Taxpayer') for the taxable year ended June 30, 1993. I apologize for the delay in responding.
FACTS
In 1965, the Taxpayer and an unrelated corporation ("Corporation A') located in a foreign country formed another corporation ("Corporation B') to be a European distributor of the products manufactured separately by the Taxpayer and Corporation A. The Taxpayer held a 49% interest in Corporation B and Corporation A held a 51% interest. Corporation B distributed various product lines of the Taxpayer and its subsidiaries.
Over the years, Corporation B began developing its own product lines. As a result of this, the number of the Taxpayer's product lines distributed by Corporation B was reduced to one by the 1980's. The Taxpayer never distributed any of Corporation B's products in the United States. The Taxpayer claims that it never took part in any of the day to day management of Corporation B, never had knowledge or any interest in the business conditions of the market in which Corporation B was located, and never gained expertise in the product line that Corporation B was producing.
In 1993, the Taxpayer sold its 49% interest in Corporation B to Corporation A. On its Virginia Corporate Income Tax Return for the year ended June 30, 1993, the Taxpayer subtracted the proceeds from the sale of its interest in Corporation B from federal taxable income. Pursuant to an audit, this subtraction was disallowed. The Taxpayer has paid the additional liability found under the audit but has contested the adjustment.
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 subtraction of the non-business income 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 decision of the U. S. Supreme Court in Allied-Signal, Inc. v. Director, Div. of Taxation, 112 S.Ct. 2551 (1992), 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 investment serves an operational rather than a passive investment function. The Court also made it clear that the test is fact sensitive.
The department has examined the evidence provided by the Taxpayer in order to determine if a unitary relationship existed between the Taxpayer and Corporation B, and to determine if the Taxpayer's activities related to the Corporation B were in any way connected to the Taxpayer's operational activities.
In considering the existence of a unitary relationship, the Supreme Court has focused on three objective factors: (1) functional integration; (2) centralization of management; and (3) economies of scale. (See Mobil Oil Corp. v Commissioner of Taxes, 445 U.S., 425 (1980); F. W. Woolworth Co. v. Taxation and Revenue Dept. of N.M., 458 U.S., 352 (1982); and Allied-Signal.) Evidence regarding these factors was presented by the Taxpayer in clear and objective terms. Based on the information provided to the department, it does not appear that a unitary relationship existed between the Taxpayer and Corporation B.
However, the Taxpayer must do more than show that a unitary relationship does not exist. The determining issue in this case, therefore, centers upon whether the Taxpayer's investment fulfilled an operational function rather than a passive investment function.
In examining the functional aspects of the investment, the department considered the evidence provided to support the Taxpayer's position. The evidence indicated that the Taxpayer's operations benefited from its relationship with Corporation B. The Taxpayer had continually distributed its products through Corporation B since 1965. Clearly, the Taxpayer's operations benefited from the investment by allowing the Taxpayer ready access to the European market. In addition, the Taxpayer has failed to show that this investment was part of separate and distinct investment function.
In any proceeding relating to the interpretation of the tax laws of the Commonwealth of Virginia, the burden of proof is on the taxpayer. In this particular matter, the Taxpayer must show that the imposition of 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 the Allied-Signal case. Based upon the information provided, I do not find that the Taxpayer has met the burden of proof with respect to its claim.
Accordingly, permission to use an alternative method of allocation and apportionment is hereby denied. As such, your request for a refund will not be granted. If you have any questions about this ruling, you may contact ***** in the Office of Tax Policy at ******.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/18421G
Rulings of the Tax Commissioner