Bulletin Number
VTB 92-6
Tax Type
Corporation Income Tax
Description
Allied-Signal Decision with Virginia Corporate Income Taxes
Topic
Allocation and Apportionment
Reports
Date Issued
09-15-1992
Interaction of the Allied-Signal Decision
with Virginia Corporate Income Taxes
with Virginia Corporate Income Taxes
On June 15. 1992, the U.S. Supreme Court issued its opinion in Allied-Signal, Inc. v. Director, Division of Taxation. 60 USLW 4554, holding that income of a multistate corporation may be subject to apportionment even if there no unitary relationship between the taxpayer and the payer of the income. In order to exclude income from apportionable income in that circumstance, the Court reiterated that the taxpayer must prove that the income was earned in the course of activities unrelated to those carried out in the taxing state. In the case of investments, the taxpayer must prove that a capital transaction serves an investment function rather than an integral operational function. The inquiry must focus on the objective characteristics of the asset's use and its relation to the taxpayer and its operational business activities in Virginia.
The Allied-Signal decision supersedes the Virginia Supreme Court's opinion in Corning Glass v. Virginia Dept. of Taxation, 241 Va. 353 (1991), which focused exclusively on the lack of a unitary relationship between the taxpayer and the payer of the income. The Virginia Supreme Court did not consider whether the taxpayer's evidence demonstrated that the income at issue was unrelated to the taxpayer's Virginia operational activities.
If a unitary relationship exists between a taxpayer and the payer of the income at issue, the taxpayer may not exclude investment income other than dividends from Virginia apportionable income. However, if a unitary relationship does not exist between a taxpayer and payer of the income at issue, taxpayers may exclude non-dividend income from apportionable income only by demonstrating with clear and cogent evidence that the income is of a passive investment, and not of an integral operational, nature. Evidence hearing on the determination could include, in the case of a manufacturer, whether the transactions at issue constitute an integral part of a taxpayer's manufacturing process. For example, Income from an interim use of idle funds accumulated for future business operations use is sufficiently close to an "operational nature" to support the apportionment of income arising from the acquisition, ownership, sale, or exchange of assets purchased with such idle funds.
Taxpayers subtracting or allocating components of federal taxable income in determining Virginia taxable income must reduce the respective components by all related expenses incurred in the taxable year in which the excluded income is earned. In addition, the apportionment factors must exclude the property, payroll and sales producing the excluded gross income item. A taxpayer's failure to identify and account for all income and expenses attributable to a purported investment function in a separately identifiable manner, with respect to income and apportionment factor calculation, may indicate that the taxpayer's "investments" are operational in nature.
The department will closely scrutinize any claim that investment income should be excluded in determining apportionable income. Any such claim must include sufficient evidence proving (1) a lack of a unitary relationship between a taxpayer and the payer of the income, (2) that the income at issue is of an "investment" versus "operational" nature, and (3) that the income and relevant apportionment factors have been appropriately adjusted by related expenses and items used to produce the excluded income.
The department will be promulgating a regulation addressing these issues in more detail, and welcomes any comments and suggestions.
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