Rulings of the Tax Commissioner

October 23, 1981

Corporation Income Tax--FYE 5/31/77

Construing: Section 58-151.050:1
                   Corporation Income Tax Circular No. 5
                  (Financial Corporations)

This ruling is made in response to your application for correction of an erroneous assessment made on October 30, 1980, a taxpayer conference held May 5, 1981 and supplemental information submitted May 11, 1981.

FACTS

Taxpayer is a mortgage banker with offices in several states, including Virginia and its headquarters in a state other than Virginia. Taxpayer's income consists of interest, service fees for acting as a collection agent, origination and other fees connected with the making of loans, rent and other miscellaneous income.

For its fiscal year ending May 31, 1977 taxpayer filed as a normal corporation allocating its interest and rents to the headquarters state and apportioning income using the three factor formula. The Department assessed additional taxes based on finding taxpayer to be a financial corporation subject the Section 58-151.050:1 within 90 days of the assessment taxpayer applied to the Commissioner under Section 58-1118 protesting its status as a financial corporation, the Department's computation of allocable income and the apportionment factor.

DETERMINATION

Taxpayer is a financial corporation and must apportion all business income. However certain adjustments must be made to the apportionment factor.

Financial Corporation Status

Section 58-151.050:1 was enacted in 1976 effective for taxable years beginning after January 1, 1976. As enacted the section defined financial corporations as a corporation "...which derives more than fifty per centum of its gross income from the sources enumerated-in l through 5 above...."  The enumerated sources include:  "3.  Interest and dividends received within this State."

Taxpayer construes the term "sources" to refer to both the type of income (i.e. interest and dividends) and the geographic origin (i.e. received within this State). Taxpayer points out that a substantial portion of its income is interest, all of which is received at its non-Virginia headquarters. If this interest is removed from the qualifying percentage, less than 50% of its gross income is from the enumerated sources.

The Department construes "sources" to refer only to the type of income. This interpretation was promulgated in Corporation Income Tax Circular No. 5. Although this interpretation was not published until September 1, 1978, almost one year after the return for the taxable year in question was filed, this was the first published interpretation of this section. Under these circumstances, the interpretation is effective from the effective date of the new section, for taxable years beginning after January 1, 1976. Manhattan General E. Co. v. Commissioner of Int. Rev., 297 U.S. 129. 56 S. Ct. 397 (1936).

In 1979 the legislature amended this section in several respects, among them clarifying and supporting the Department's interpretation promulgated in Circular No. 5. Taxpayer asserts that Virginia courts presume that an amendment is intended to change the law, not clarify it, citing Boyd v. Commonwealth, 216 Va. 16, 77 W.E. 470 (1913) and Commonwealth v. Champion Int. Corp. 220 Va. 981, 265 S.E. 2d 720 (1980).

The presumption, if it applies to this amendment at all, is only a presumption and may be rebutted. In the Boyd case the presumption was rebutted and many of the circumstances cited by the court in Boyd are present here. The amendment was proposed by the Department about 18 months after the first returns under the new law were filed. The intent and stated purpose of the Department in proposing the relevant portions of amendment was to clear up some confusion among taxpayers. Under these circumstances the 1979 amendment must be construed as a mere change in form intended to clarify the law and not as a change in substance.

Since virtually all of taxpayer's income consists of interest and fees connected with the making and servicing of loans, taxpayer is clearly a financial corporation as defined in Section 58-151.050:1(c). 

Allocation

Taxpayer contends that even if it is a financial corporation, it allocates income under Sections 58-151.037 through 58-151.040. If the interest received by taxpayer is allocated to the non-Virginia commercial domicile, then net apportionable income is a loss and no Virginia income tax is due.

Section 58-151.050:1 provides that "Business Income" is to be apportioned by the special one factor formula. Business income of a financial corporation includes interest. Compare this section with the other special factor definitions in Sections 58-151.050 and 58-151.050:3 which refer to "net apportionable income." Under the latter sections the regular allocation rules apply and the remainder, "net apportionable income," is apportioned using a special formula. Financial corporations apportion "business income" and allocate non-business income.  This is the only situation in which the legislature divides a multistate corporation's income along business/non-business lines. Champion, supra, at 993.

Although the Department has never promulgated a definition of "Business income" it generally follows the definitions in the Uniform Division of Income for Tax Purposes Act where not in conflict with Section 58-151.050:1. The auditor determined that certain dividends should be allocated, which determination has not been reviewed. Accordingly all remaining Virginia taxable income is apportionable.

Computation of the Apportionment Factor

Taxpayer contends that all interest received as part of these payments are received in the state where its headquarters are located. The assessment is based upon an apportionment factor which includes in the numerator interest on loans made through Virginia offices.

Analysis of Section 58-151.050:1, which defines business income from sources within this state, discloses five different types of income, each with its own rule for determining whether the source is within or without Virginia. The five situations are:

1. Fees, commissions or other compensation for financial services rendered within this State;
2. Gross profits from trading in stocks, bonds or other securities managed within this State;
3. Interest and dividends received within this State;
4. Interest charged to customers at places of business maintained within this State for carrying debit balances of margin accounts, without deduction of any costs incurred in carrying such accounts; and
5. Any other gross income resulting from the operation as a financial corporation within this State.

Accordingly all interest received by taxpayer at its headquarters located without Virginia must be excluded from the numerator of the apportionment factor.

In view of the determination above, taxpayer's other contentions regarding the computation of the apportionment factor need not be considered.

You will shortly receive a revised assessment calculated according to the principles set forth in this ruling.  The assessment should be paid upon receipt to avoid further interest charges.

Sincerely,

W.H. Forst
Tax Commissioner