Tax Type
Corporation Income Tax
Description
Subtraction disallowed
Topic
Computation of Income
Date Issued
06-25-1986
June 25, 1986
Re: §58.1-1821 Application: Corporation Income Tax
Dear ********************
This will reply to ************** letters of January 10, 1986 requesting relief from an assessment of corporation income tax and interest for calendar years 1981 and 1982 against ********** (together, the "Taxpayer").
Facts
Taxpayer underwent a field audit in which Taxpayer's subtraction of certain nonbusiness income in arriving at Virginia taxable income was disallowed. The nonbusiness income consisted of interest and of gain from sale of a long-term lease. Taxpayer alleges that the Due Process Clause of the U. S. Constitution prohibits a state from imposing a tax on unrelated income earned outside the state, and that such income should be allocable only to the state in which the income was derived, that is, the taxpayer's state of domicile.
The assessments against Taxpayer for calendar years 1981 and 1982 were assessed October 16, 1985.
Determination
The Virginia corporation law makes no distinction between business and nonbusiness income. Commonwealth v. Champion Int. Corp., 220 Va. 981 (1980). Moreover, the General Assembly has provided a statutory method of allocation and apportionment that applies to all corporations. That method requires dividends to be allocated to the commercial domicile of the corporation. All other income is apportioned. I construe § 58.1-421 as authorizing me to allow use of an alternative method only in extraordinary circumstances where the need for relief has been demonstrated by clear and cogent evidence. The policy applicable to requests for an alternative method is set forth in Virginia Regulation VR630-3-421 (copy enclosed).
The Taxpayer has not shown that the statutory method of allocation and apportionment produces an unconstitutional result. The United States Supreme Court has recognized that allocation and apportionment of income is an arbitrary process designed to approximate the income from business transactions within a state. As long as each state's method of allocation and apportionment is rationally related to the business transacted within a state, then each state's tax is constitutionally valid even though there may be some overlap. See Mooreman Manufacturing Company v. Bair. 437 U. S. 279, 98 S. Ct. 2340 (1978). Moreover, a previous ruling of October 31, 1984 explained why Virginia's statutory apportionment method could withstand a challenge brought pursuant to ASARCO Inc. v. Idaho State Tax Commissioner 458 U. S. 307 (1982) or F. W. Woolworth Co. v. Taxation and Revenue Dept. of N. M.458 U. S. 354 (1982).
The regulations also provide that relief may be granted if the statutory method of allocation and apportionment produces a tax that is inequitable and that the inequity is attributable to Virginia. However, in determining whether inequity exists that is attributable to Virginia, I must consider the whole statutory structure under which the Virginia tax is computed, and not solely how a corporation's income is divided by Virginia versus another state. Each state's tax structure contains its particular method of determining the definition of "income," for dividing that income among the states and for applying a rate of tax, as well as credits against the tax. I do not find that, as a whole, the Virginia corporate income tax structure is the cause of any inequity in this ease.
Accordingly, I find that the assessment of additional tax was correct in every respect for 1982. However, with respect to the assessments for 1981, I find that they were barred by the statute of limitations of Va. Code § 58.1-312. The assessments will be adjusted in accordance with this determination letter.
Because there were no facts in dispute and the application of Virginia law was clear, I have issued this determination letter without a conference. However, if you continue to desire a conference, you must request one within 30 days of the date of this letter or the letter will be final and the assessments, as adjusted, will be due and payable.
Sincerely,
W. Forst
Tax Commissioner
Rulings of the Tax Commissioner