Tax Type
Corporation Income Tax
Description
Interest income from invested proceeds of sale of subsidiary
Topic
Allocation and Apportionment
Date Issued
11-15-1984
November 15, 1984
Re: §58-1118 Application: Corporate Income Tax
Dear **************
This is in response to your letter of May 1, 1984 in which you make application for correction of the department's assessment for taxable Year 1981.
FACTS
***** (Taxpayer) timely filed its 1981 calendar year income tax return. Taxpayer is a multistate corporation that conducts business both within and without Virginia. In arriving at the amount or income subject to Virginia income tax, the entire amount of interest income was classified as allocable income. The Department of Taxation removed the amount of interest income from allocable income, included it in apportionable income and assessed additional tax.
Taxpayer derived this interest income from two different sources. One portion of the interest income was earned on short term deposits of excess working capital that is generally maintained for operating purposes. Taxpayer does not object to the inclusion of this item in apportionable income. The taxpayer does object to the inclusion of the interest income that was earned on funds generated from the sale of capital stock in one of Taxpayer's subsidiary corporations.
Taxpayer states that the subsidiary corporation that was sold operated as a "discrete business" independent of the taxpayer. The taxpayer asserts that there is no connection between the income earned in its normal course of business and the interest income earned or the investment of the proceeds of the sale of the capital stock of its subsidiary corporation. The taxpayer cites ASARCO Inc. v. Idaho State Tax Commissioner, 458 U. S. 307 (1982) and Mobil Oil Corporation v. Commissioner of Taxes of Vermont, 444 U.S. 923 (1980) in support of its position that the department's assessments are in violation of the due process clause of the Fourteenth Amendment of the U. S. Constitution.
DETERMINATION
The Code of Virginia was amended in 1981 to change and to limit the classes of income that could be classified as allocable income. Virginia Code §58-151.037 prescribes that effective for taxable years beginning on or after January 1, 1981, only dividend income is to be classified as allocable income. Dividend income is to be allocated to the state of commercial domicile. There is no provision in Virginia law for the allocation of any interest income. It is classified as apportionable income and is used in the computation of the sales factor.
As already stated, Virginia law clearly requires that the income in dispute be included in apportionable income. I am not persuaded that ASARCO renders Virginia's apportionment laws unconstitutional. All of the income in dispute in Mobil and most of the income in ASARCO involved dividends which are allocated to the state of commercial domicile under Virginia law. ASARCO also involved some capital gains and interest income arising from the sale of stock in some subsidiaries.
Idaho and ASARCO agreed that interest and capital gain arising from the sale of stock should be treated in the same manner as dividend income from such stock. Because of this agreement the only discussion of the treatment of interest and capital gains in the Court's opinion occurred in a single paragraph in which the Court recited the agreement and ratified it.
Mobil and ASARCO involved income that was generated by the operations of the subsidiary corporations. The income involved in this application was not generated by the subsidiary corporation. The source of the capital that the taxpayer invested does not control the taxability of the resulting income from the investment. This interest income resulted from an investment decision made directly by the taxpayer.
In this case the taxpayer had total control over the disposition of the proceeds from the sale of the subsidiary's stock and made the decision to invest these proceeds. It is inconceivable to me that any court would hold that Virginia's apportionment of such income is unconstitutional. Accordingly, I must deny your application for correction and affirm the assessment.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner