Tax Type
Corporation Income Tax
Description
Apportionment of Income
Topic
Allocation and Apportionment
Date Issued
11-18-1999
November 18, 1999
Re: Sec. 58.1-1821 Application: Corporate Income Tax
Dear*****
This will reply to your letter in which you contest the assessment made against ***** (the "Taxpayer') for the taxable year ended December 31, 1997.
FACTS
The Taxpayer placed excess funds from operations into an account with an investment manager ("Manager'). For the taxable year of 1997, the Taxpayer characterized interest income earned on the funds held by the Manager as nonapportionable income. The Taxpayer allocated this income allocable to the its state of domicile. The department's auditor denied the subtraction asserting that the gains were operational in nature rather than an investment. The Taxpayer contends that the sale of the investments was purely investment in nature.
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 decision of the United States Supreme Court in Allied-Signal. Inc. v. Director, Div. of Taxation, 112 S. Ct. 2251 (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 foreign corporation, and to determine if the Taxpayer's activities related to the investments were in any way connected to the Taxpayer's operational activities.
Based on the information provided to the department, it is clear that no unitary relationship existed between the Taxpayer and any payor of investment income. As such, the determining issue in this case 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. The Taxpayer provided documentation to show that its operations provided cash in excess of operating needs. This excess was deposited into an account which the Manager could draw from for investment purposes. The Manager had full discretion to make decisions regarding which investments to make and the amounts of each investment, within certain guidelines of a contractual agreement. The contract between the Taxpayer and the Manager provides that all income from the investments is to be reinvested. During 1992, no funds were withdrawn from the account by the Taxpayer.
In light of the substantial evidence provided, the Taxpayer's investment activities were not related to its operational activities. Accordingly, the department concludes that the Manager's investment activities constitute a separate investment function making passive investments that are not of an operational nature.
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 find that the Taxpayer has demonstrated that an alternative method of allocation and apportionment is appropriate.
As such, the assessments against the Taxpayer have been abated. If you have any questions, please contact ***** in the Office of Tax Policy at *****
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/24609G
Re: Sec. 58.1-1821 Application: Corporate Income Tax
Dear*****
This will reply to your letter in which you contest the assessment made against ***** (the "Taxpayer') for the taxable year ended December 31, 1997.
FACTS
The Taxpayer placed excess funds from operations into an account with an investment manager ("Manager'). For the taxable year of 1997, the Taxpayer characterized interest income earned on the funds held by the Manager as nonapportionable income. The Taxpayer allocated this income allocable to the its state of domicile. The department's auditor denied the subtraction asserting that the gains were operational in nature rather than an investment. The Taxpayer contends that the sale of the investments was purely investment in nature.
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 decision of the United States Supreme Court in Allied-Signal. Inc. v. Director, Div. of Taxation, 112 S. Ct. 2251 (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 foreign corporation, and to determine if the Taxpayer's activities related to the investments were in any way connected to the Taxpayer's operational activities.
Based on the information provided to the department, it is clear that no unitary relationship existed between the Taxpayer and any payor of investment income. As such, the determining issue in this case 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. The Taxpayer provided documentation to show that its operations provided cash in excess of operating needs. This excess was deposited into an account which the Manager could draw from for investment purposes. The Manager had full discretion to make decisions regarding which investments to make and the amounts of each investment, within certain guidelines of a contractual agreement. The contract between the Taxpayer and the Manager provides that all income from the investments is to be reinvested. During 1992, no funds were withdrawn from the account by the Taxpayer.
In light of the substantial evidence provided, the Taxpayer's investment activities were not related to its operational activities. Accordingly, the department concludes that the Manager's investment activities constitute a separate investment function making passive investments that are not of an operational nature.
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 find that the Taxpayer has demonstrated that an alternative method of allocation and apportionment is appropriate.
As such, the assessments against the Taxpayer have been abated. If you have any questions, please contact ***** in the Office of Tax Policy at *****
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/24609G
Rulings of the Tax Commissioner