Tax Type
Corporation Income Tax
Description
Alternate method of allocation and apportionment
Topic
Allocation and Apportionment
Date Issued
03-31-1986
March 31, 1986
Re: §58.1-421 Request for Alternative Method of Allocation and Apportionment: Corporation
Dear ***************************
This will reply to Taxpayer's request for permission to use an alternative method of allocation and apportionment for calendar year 1984.
Facts
Taxpayer, an insurance brokerage agency in Washington, D.C., owns rental real property in D.C. and in Virginia. Taxpayer asserts that only the net income from the Virginia rental property should be subject to Virginia tax in that the Virginia rent is not part of the insurance agency and ought to be allocated, not apportioned, to Virginia. Taxpayer notes that the tax of ************* computed under the statutory method greatly exceeds the Virginia net income of
Determination
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 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 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, permission to use an alternative method of allocation and apportionment is denied.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner