Document Number
24-29
Tax Type
Corporation Income Tax
Description
Allocation and Apportionment: Alternative Method - Unrelated Business Taxable Income (UBTI), Passive Investment Income of Commercially Domiciled Pass Through Entity
Topic
Appeals
Date Issued
03-20-2024

March 20, 2024

Re: § 58.1-1821 Application: Corporate Income Tax

Dear *****:

This will respond to your letter in which you seek reconsideration of the Department’s determination letter issued to you on behalf of your client, ***** (the “Taxpayer”), as Public Document (P.D.) 22-32 (2/15/2022).

FACTS

In P.D. 22-32, the Department determined that the Taxpayer was not entitled to an alternative method of allocating and apportioning income. The Taxpayer seeks reconsideration of that determination, contending the Department erred in its application of existing case law to the facts of the case. In the alternative, the Taxpayer points out that the determination misstated certain facts in that the Taxpayer owned a greater than 10% limited partnership interest in at least one investment partnership (the “Partnership”). The Taxpayer therefore requests that it be allowed to apportion its income for the taxable years at issue using the general statutory apportionment method.

DETERMINATION

Reconsideration

Title 23 of the Virginia Administrative Code (VAC) 10-20-165 F provides that a taxpayer who disagrees with the Department’s final determination issued pursuant to Virginia Code § 58.1-1822 may request a reconsideration of the determination. In order to grant a request for reconsideration, the request must be received by the Department no later than 45 days after the date of the determination letter, and a taxpayer must meet one of four specific requirements set forth in that section:

1. The facts upon which the original determination is based are misstated by the Tax Commissioner or are inaccurate, and the determination would have a different result based on a correction of the Tax Commissioner’s misstatement of the facts presented or a clarification of the original facts presented in the taxpayer’s administrative appeal; 

2. The law upon which the original determination is based has been changed by legislation, court decision or other authority effective for the tax period(s) at issue;
 
3. The policy upon which the original determination is based is misapplied, and the determination would have a different result based on the application of the proper policy; or
 
4. The taxpayer has discovered additional evidence or documentation that was not available to the taxpayer at the time the original administrative appeal was filed with the Department, and the additional evidence or documentation could produce a result different from the original determination.

Misapplication of Case Law

The Taxpayer has provided no new information or analysis regarding how the Department erred in applying the principles surrounding the allocation of non-unitary investment income. In the absence of additional facts or analyses provided by the Taxpayer, I find that the determination was not based on a misapplication of the relevant case law. 

New Facts

Partnership Apportionment Factors

In P.D. 22-32, the Department noted that the Taxpayer did not own any more than 10% limited partner interests in its partnerships. With its reconsideration request, the Taxpayer provided evidence that this was a misstatement of the facts with respect to its interest in the Partnership. The Taxpayer submitted apportionment factors for the Partnership and proposed including its share of those factors in determining its income subject to tax in Virginia. As a general rule, taxpayers that own a greater than 10% limited partnership interest in a pass-through entity (PTE) are required to include their share of the PTE’s apportionment factors when determining their own Virginia apportionment factors. See P.D. 95-19 (2/13/1995). 

Virginia Code § 58.1-408 generally provides that Virginia taxable income is apportioned by multiplying such income by a fraction that is determined based on a ratio of Virginia source property, payroll, and sales to total property, payroll, and sales. Importantly, property, payroll, and sales can only be included in this calculation to the extent that such property, payroll, or sales are used to produce Virginia taxable income and are effectively connected with the conduct of a trade or business within the United States and income therefrom is includable in federal taxable income. See Title 23 VAC 10-120-150 B.

When a nonprofit institution is subject to tax only on its unrelated business taxable income (UBTI), only property, payroll, and sales that produce UBTI can be taken into account for apportionment purposes because only items that produce UBTI are included in federal taxable income. The factors submitted for the Partnership, however, related to the Partnership’s entire business and not just that portion of the business that produced UBTI. The Taxpayer admits that it is unable to determine the Partnership’s property, payroll, or sales factors that would reflect only the UBTI produced by the Partnership. 

Apportionment of Other UBTI

Apart from its UBTI derived from interests in partnerships, the Taxpayer reported UBTI from operating a bookstore and a museum shop, hosting conferences and summer camps, and providing catering services. All this business activity takes place in Virginia, except that a portion of the Taxpayer’s bookstore sales are made online and shipped to purchasers in other states.  

Virginia Code § 58.1-405 provides that:

[I]f the entire business of the corporation is transacted or conducted within the commonwealth, the tax imposed by this chapter shall be upon the entire Virginia taxable income of such corporation for each taxable year . . . . The entire business of the corporation shall be deemed to have been transacted or conducted within the Commonwealth if such corporation is not subject in any other state to a net income tax, a franchise tax measured by net income, or a franchise tax for the privilege of doing business.

The Taxpayer submitted state tax returns for several other jurisdictions. A review of the returns indicates that the Taxpayer did not pay tax based on its entire net income because it merely allocated to those states its share of UBTI from partnerships that the partnerships determined was allocable to those states. Under general partnership principles, however, the Department regards PTE owners as having the attributes and conducting the activities of the PTE, including any which may create nexus in a taxing jurisdiction. See P.D. 99-174 (6/30/1999), P.D. 06-85 (8/25/2006), P.D. 07-50 (4/26/2007), and P.D. 08-123 (6/26/2008). Because the investment partnerships appear to have had nexus in other states, the Taxpayer is also regarded as having nexus in such other states. Thus, it appears, the Taxpayer was subject to tax in other states within the meaning of Virginia Code § 58.1-405. See Title 23 VAC 10-120-120.

With its reconsideration request, the Taxpayer proposed apportioning its income by removing sales of tangible personal property that were shipped to other states from the numerator of its sales factor. As discussed above, because the Taxpayer was subject to tax in other states, I agree that it is entitled to apportion its income to Virginia.

CONCLUSION

The Taxpayer had a greater than 10% ownership interest in the Partnership and would normally be able to include its share of the Partnership’s apportionment factors in its own apportionment factors for purposes of determining its Virginia taxable income. See P.D. 95-19. In this case, however, the Taxpayer cannot use the apportionment factors from the Partnership to apportion its Virginia taxable income because it is unable to determine what portion of the Partnership’s apportionment factors produced UBTI. 

The Taxpayer may, however, still apportion its income as it was subject to a net income tax in another state. Accordingly, the Taxpayer’s refund requests for the taxable years at issue will be granted to the extent attributable to the adjustment of the Taxpayer’s sales factor to reflect destination sales from the bookstore because it likely had nexus for income tax purposes in other states. The Taxpayer should submit information concerning its sales factors for the taxable years at issue within 60 days of the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attention: *****. Upon receipt, the information will be reviewed, and a refund will be issued to the extent warranted.

The Code of Virginia sections, regulations, and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at (804) *****.

Sincerely,

 

Craig M. Burns
Tax Commissioner

                        

AR/4138.X
 

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Last Updated 05/06/2024 10:23