Tax Type
Corporation Income Tax
Description
Alternative method of allocation
Topic
Allocation and Apportionment
Date Issued
01-14-1986
January 14, 1986
Re: Section 58.1-1821 Application: Corporation Income Tax
Dear ****************
This will reply to your letter of September 25, 1985 requesting relief from an assessment for calendar years 1983 and 1984 against ************** ("Taxpayer").
FACTS
Taxpayer underwent an office audit in which Taxpayer's separate accounting for income from brokerage operations and its allocation away from Virginia was disallowed. Tax and interest was assessed and has been paid in full.
Taxpayer lists its principal business activity on its 1983 and 1984 returns as "motor carrier-property & brokerage." Taxpayer asserts that the brokerage operations' income is nonbusiness income and that its inclusion results in double taxation.
DETERMINATION
The Virginia corporation law makes no distinction between business and nonbusiness income. Commonwealth v. Champion Int. Corp., 220 Va. 981 (1980). Moreover, use of separate accounting is held in disfavor. Department of Taxation v. Lucky Stores, 217 Va. 121 (1976).
The General Assembly has provided a statutory method of allocation and apportionment that applies to all corporations. Neither the taxpayer nor the Department may elect to use a different method. 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 §630-3-421 (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 8 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 Moorman Manufacturing Company v. Bair, 437 U.S. 279, 98 S. CT. 2340 (1978).
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 case.
Accordingly, I find that the assessment of additional tax was correct in every respect.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner