Tax Type
Corporation Income Tax
Description
Capital gains
Topic
Allocation and Apportionment
Subtractions and Exclusions
Taxable Income
Date Issued
02-27-1987
February 27, 1987
Re: Section 58.1-1821 Application: Corporate
Dear ****************
This will reply to ********** letter of November 26, 1936 requesting relief from an assessment for corporate income tax and interest for the period February through December 1983 against the Taxpayer.
Facts
The Taxpayer, a manufacturer and seller of********* parts, underwent an office audit in which the Taxpayer's subtraction from apportionable income of certain capital gains was disallowed. The capital gains consisted of gains from the sale of investment securities, which the Taxpayer says were unrelated to its business.
The Taxpayer alleges that the assessment was invalid in that the capital gains represented nonbusiness income and, as such, cannot be apportioned to Virginia under Virginia law. The Taxpayer further argues that there was no unitary relationship between it and the companies whose stock it held and, therefore, the U. S. Constitution prohibits taxation of the investment income. In the alternative, the Taxpayer seeks permission to use an alternative method of allocation and apportionment.
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).
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. 267, 98 S. Ct. 2340 (1978). Moreover, a previous ruling of October 31, 1984 (copy enclosed) explained why Virginia's statutory apportionment method could withstand a challenge brought pursuant to ASARCO Inc. v. Idaho State Tax Commission, 458 U.S. 307 (1982) or F. W. Woolworth Co. v. Taxation and Revenue Dept. of N. M., 458 U.S. 354 (1982). The Taxpayer received the capital gains as a direct result of its decisions and activity. After having considered the nature of such income and the Taxpayer's business, 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, I find that the assessment of additional tax was correct for the period February through December 1983. In your letter you requested a hearing if relief could not be granted on the basis of your written application. If you still desire a conference, please let us know within 30 days and one will be scheduled. If we do not hear from you within 30 days, this letter will be considered final and the assessments will then be due and payable.
Sincerely.
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner