Tax Type
Corporation Income Tax
Description
Apportionment of Income
Topic
Allocation and Apportionment
Date Issued
04-06-1999
April 6, 1999
Re: §58.1-1821 Application: Corporate Income Tax
Dear**********************
This will respond to your letter in which you make application for correction of assessments of corporate income taxes for ***** (the "Taxpayer'), for the taxable years ending December 31, 1994, 1995 and 1996.
FACTS
The Taxpayer is a financial corporation required to apportion income based on cost of performance in Virginia over the cost of performance everywhere. On field audit, changes were made to the Taxpayer's cost of performance factor which resulted in additional tax due for two years and a refund for the third year. The auditor segregated the costs he believed did not fall within the definition of costs to be included in the factor and removed these costs. The Taxpayer contests these adjustments contending that Virginia law does not preclude the inclusion of these costs and therefore the adjustments have no basis in law.
DETERMINATION
Financial corporations apportion their income, less allocable dividends, based solely on cost of performance. The cost of performance factor is a one factor formula based on the ratio of cost of performance in Virginia to cost of performance everywhere. Cost of performance is defined in Title 23 of the Virginia Administrative Code (VAC) 10-120-250 as "the cost of all activities performed by the taxpayer for the ultimate purpose of obtaining gains or profit except activities directly performed by the taxpayer for the ultimate purpose of obtaining dividends....'. The cost of funds (interest) and activities performed on behalf of the taxpayer by independent contractors are not includable. In Public Document (P.D.) 94-84 (3-25-94), copy enclosed, the department ruled that cost of performance includes all costs directly related to income producing activity to the extent that the location of the costs can be ascertained.
In the instant case, the auditor made a distinction between certain costs he considered not directly related to the Taxpayer's income producing activity. The department has previously ruled that there is no distinction between direct and indirect costs for purposes of the financial apportionment factor. See P.D. 96-345 (11-22-96), copy enclosed. As such, direct and indirect costs that are directly related to the income producing activities of the Taxpayer are properly included in the apportionment factor.
Accordingly, the apportionment factors will be adjusted to include the expenses removed by the auditor. Because these were the only adjustments made of audit, the assessments will be abated and the refund nullified. If you have any questions regarding this determination, please contact ***** of the Office of Tax Policy at*****
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/20790P
Rulings of the Tax Commissioner