Tax Type
Corporation Income Tax
Description
Sale of securities and limited partnership interests
Topic
Allocation and Apportionment
Date Issued
06-29-1988
June 29, 1988
Re: §58.1-1821 Application; Corporation Income Tax
§58.1-414 Property Factor; Partnership Interests
§58.1-416 Sales Factor; Sale of Securities
Dear**************
This is in response to your letter of May 2, 1988, in which you applied for correction of an assessment of corporation income tax
Facts
The taxpayer is a corporation with its commercial domicile in Virginia. After a field audit a number of adjustments were made and additional tax was assessed. The taxpayer protests two adjustments to the property factor and the sales factor.
Property Factor
The taxpayer owns several limited partnership interests in hotel properties. The auditor included in the numerator and-denominator of the property factor the proportionate value of limited Partnership Property.
Virginia regulation VR 630-3-409 A.2.b. provides, in part: "For purposes of the property factor each item of partnership property shall have the same character for a corporate general partner as if direct corporate ownership of the property existed." (Emphasis added.) No similar provision exists relating to a limited partnership interest.
Therefore, the property factor should not have included the property of the limited partnership interests.
Sale of Virginia Obligations
During the years audited the taxpayer disposed of a significant amount of debt obligations of Virginia and its political subdivisions. The interest on these obligations is exempt from both federal and Virginia income tax. Capital gain or loss arising from the sale of these obligations is not exempt from federal income tax and thus is included in federal taxable income.
Virginia does not have a general exemption from income tax for gain or loss on the sale of debt obligations of Virginia and its political subdivisions. The exemption in §58.1-402 C.2. applies only to interest income, not to gain or loss on the sale of the obligation. However, some of the enabling statutes which authorize various political subdivisions to issue debt contain a specific tax exemption which includes gain on the sale of the obligation. See, for example, §§15.1-1284 and 15.1-1383.
From examination of your returns, it appears that some of the sales reported on Schedule D may involve debt obligations of Virginia and its political subdivisions for which there exist specific statutory exemptions of gain on a sale from Virginia taxation. If you wish to claim these exemptions you should determine which obligations are exempt and provide the necessary information to: *********Supervisor, Technical Services Section, Virginia Department of Taxation, P. O. Box 6-L, Richmond, VA 23282. Upon receipt of the necessary information the audit report will be revised to allow a subtraction of the exempt gain and the sales factor will be adjusted to exclude gross receipts producing exempt gains.
Sales Factor
The auditor included in the sales factor the gross receipts from all sales of securities (including obligations of Virginia and its political subdivisions discussed above). Because the taxpayer's commercial domicile is in Virginia, the auditor determined that substantially all of the income producing activity occurred in Virginia and also included the gross receipts in the numerator of the factor.
You protest the inclusion on two grounds:
- First, that the sale or redemption of a debt obligation is not a "gross receipt" within the meaning of the definition of "sales" in §58.1-302.
- Second, you contend that the 1981 amendments which included capital gains in apportionable income were not intended to expand the definition of "sales" to include gross receipts which produced apportionable gains and losses.
In 1981 the definition of "sales" in §58-151.034 (recodified as part of §58.1-302) was amended to read as follows:
-
- Before 1981 amendment "Sales" means all gross receipts of the corporation not allocated under §§58-151.037 through 58-151.040.
After 1981 amendment "Sales" means all gross receipts of the corporation not allocated under §58-151.037.
After 1984 recodification "Sales" means all gross receipts of the corporation not allocated under §58.1-407.
- Before 1981 amendment "Sales" means all gross receipts of the corporation not allocated under §§58-151.037 through 58-151.040.
Virginia income tax law does not contain a definition of "gross receipts." However, the definition you cite, I.R.C. §927(b) r is not used in a comparable context. See Va. Code §58.1-301. The federal definition is used as part of the process of determining "exempt foreign trade income" of a Foreign Sales Corporation qualifying for exemption from federal income tax. The limitation to property sale receipts in the ordinary course of business may be appropriate when defining income exempt from federal tax, but is not necessarily appropriate in apportioning income for state tax purposes.
Determination
Accordingly, the audit report and assessment will be revised to remove from the property factor property in which the taxpayer had only a limited partnership interest. The adjustments made to the sales factor are correct. However, if you determine that some of the gain on sales of marketable debt obligations of Virginia and its political subdivisions is exempt from Virginia income tax under one or more specific statutory exemptions, you may submit the information within thirty days. Upon receipt of the necessary information the audit report will be revised to remove the gains from taxable income and to remove the sales proceeds producing exempt gains from the sales factor.
You will receive an updated bill after the audit report is revised with interest accrued to date. The bill should be paid within thirty days to avoid the accrual of additional interest. Although you requested a conference, this letter has been issued without one because the application of the law is clear. If you still desire a conference you should request one within thirty days.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner