Tax Type
Corporation Income Tax
Description
Nonapportionable investment function income not subject
Topic
Allocation and Apportionment
Penalties and Interest
Property Subject to Tax
Date Issued
04-29-2002
April 29, 2002
Re: § 58.1-1821 Application: Corporate Income Tax
Dear ***********:
This will respond to your letter in which you seek correction of an assessment of corporate income tax issued to ***** (the "Taxpayer") for the taxable year ended June 30, 1999. I apologize for the delay in the department's response.
FACTS
The Taxpayer is a Virginia domiciled corporation that conducts all of its business in Virginia. The Taxpayer owned a less than 10% limited partnership interest in real property located in another state ("State A"). On its Virginia corporate income tax return for the taxable year in question, the Taxpayer took a subtraction for a capital gain from the sale of the real property located in State A as nonapportionable investment function income not subject to taxation in Virginia. On audit, this subtraction was disallowed and the Taxpayer was assessed additional tax. The Taxpayer has paid the assessment under protest on the grounds that the real estate was located outside Virginia and the applicable return was filed and the tax paid to State A. The Taxpayer is requesting a refund of the tax and interest assessed.
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 §§ 58.1-402 and 58.1-403, less dividends allocated pursuant to Code of Virginia § 58.1-407, is subject to apportionment.
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- Code of Virginia § 58.1-402 does not provide for the subtraction of the income at issue. However, to the extent that income is derived from an investment function as set forth in the United States ("U.S.") Supreme Court decision in Allied-Signal, Inc. v. Director, Division of Taxation, 112 S. Ct. 2551 (1992), an alternative method of allocation and apportionment under Code of Virginia § 58-421 may be appropriate. To facilitate this, the department permits an adjustment on the Virginia corporation income tax return if a taxpayer can demonstrate that the application of Virginia's statutory apportionment factor for the taxable year would be contrary to the principles established in Allied-Signal.
The Taxpayer asserts that the income in question is from an investment function unrelated to its operational activities within Virginia and, therefore, should be allowed as a subtraction on its Virginia return. However, the decision of the U.S. Supreme Court in Allied-Signal made it clear that in order for a state to tax a nondomicillary corporation, certain minimal connections had to exist between the interstate activities and the taxing state. Because the Taxpayer is domiciled in Virginia, the judicial doctrines controlling Allied-Signal and prior cases do not apply to this situation. See Public Document ("P.D.") 97-285 (6/25/97).
The gain from the sale of real estate in State A is passed through from a limited partnership. However, the Taxpayer was not a general partner and its interest in the limited partnership was less than 10%. Other than the limited partnership interest, the Taxpayer conducted its business entirely within Virginia and, therefore, did not apportion its income between Virginia and other states. Because the real estate was located in State A, the Taxpayer filed a State A income tax return and paid tax related to the sale.
Pursuant to Code of Virginia § 58.1-405, if a corporation is not subject to taxation in another state, it will be considered to have transacted all of its business within Virginia and all of its income will be subject to the Virginia tax. Taxpayers subject to tax in Virginia and at least one other state may allocate and apportion income in accordance with Code of Virginia § 58.1-406, et seq.
The Taxpayer now asserts that its interest in the real estate held by the State A limited partnership made it subject to State A income tax. Under such circumstances, the Taxpayer would have to apportion income between Virginia and State A. However, none of the limited partnership's apportionment data could be included in the Taxpayer's apportionment formula.
In P.D. 88-235 (8/10/88), the department ruled that a corporation's proportionate share of assets, payroll expense, and sales of a limited partnership interest are not included in a corporation's apportionment formula. P.D. 95-19 (2/23/95) further clarified this ruling by setting forth a standard whereby a corporate limited partner would not be required to include its proportionate share of the partnership's property, payroll and sales with its own property, payroll and sales for determining its Virginia apportionment factor provided the corporation meets all of the following:
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- (1) A corporation holds a limited partnership interest;
(2) all general partners are unrelated third parties;
(3) the combined partnership interests held by the corporation and related parties constitute 10% or less of the profit and capital interest of the limited partnership; and
(4) the structure is not a device primarily designed to avoid Virginia taxation of the limited partnership's income.
- (1) A corporation holds a limited partnership interest;
Based on the foregoing, all of the Taxpayer's income would be apportioned to Virginia. Accordingly, the assessment for the taxable year ended June 30, 1999 is correct and there is no statutory basis to refund any tax and interest associated with this assessment.
Copies of the public documents cited are included for reference purposes. These and other documents are also available online in the Tax Policy Library section of the department's web site, located at www.tax.state.va.us. If you have any questions regarding this determination, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
AP/33535P
Rulings of the Tax Commissioner