Tax Type
Corporation Income Tax
Description
Alternative method of allocation and apportionment is denied
Topic
Allocation and Apportionment
Date Issued
09-18-1986
September 18, 1986
Re: §58.1-421 Request for Alternative Method of Allocation and Apportionment; Corporation Income Tax: FYE
Dear ************************
This will reply to your letter of April 16, 1986 requesting permission to use an alternative method of allocation and apportionment.
Facts
Taxpayer, a foreign corporation whose principal business activity is mortgage issuance, was acquired by a new parent on **************. Its old parent followed the statutory method of allocation and apportionment in computing Taxpayer's income tax liability. Taxpayer requests permission to use an alternative method of allocation and apportionment to reflect revenues and expenses for business offices operated within Virginia.
Determination
Any corporation subject to taxation in Virginia and at least one other state is required by §58.1-406 of the Code of Virginia to allocate and apportion its Virginia taxable income. Dividends are required to be allocated to the commercial domicile of the corporation. Va. Code §58.1-408 provides that all other Virginia taxable income is apportioned to Virginia by a three-factor formula. 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).
With respect to the alternative method authorized by Va. Code §58.1-421, the Department is not permitted to grant an alternative method which will result in a tax greater than that resulting from using the statutory method. Therefore, this section is not intended to allow taxpayers to use an alternative method merely because they believe some other method is more accurate or more equitable than the statutory method. Rather, use of the alternative method is allowed 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). I have considered the nature of your business and the portion of it conducted in Virginia and I find that the statutory method is rationally related to the business conducted in Virginia for the taxable year.
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. Virginia's method is internally consistent, that is, the method, if applied by every jurisdiction, would result in no more than all of the taxpayer's income being taxed. See
Container Corp. of America v. Franchise Tax Board, 463 U.S. 159, 103 S.Ct. 2933 (1983). I do not find that, as a whole, the Virginia corporate income tax structure is the cause of any inequity in this case.
Accordingly, permission to use an alternative method of allocation and apportionment is denied.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner