Tax Type
Corporation Income Tax
Description
Capital gain
Topic
Allocation and Apportionment
Date Issued
01-04-1988
January 4, 1988
Dear**********************
This is in response to your letter of May 20, 1987, in which you applied for correction of assessments of corporation income tax.
Facts
The taxpayer acquired a block of shares in an unrelated Corporation A with the intention of eventually acquiring a controlling interest. Instead, Corporation B acquired a controlling interest in Corporation A and A was merged into B. As a result of this transaction the taxpayer received a minority interest in Corporation B.
In 1983 the taxpayer sold a major portion of the stock of Corporation B that it received in the transaction and recognized a substantial capital gain on its return the taxpayer treated the capital gain as allocable income. The auditor included the capital gain in apportionable income and assessed additional tax.
Discussion
Under §58.1-408 of the Code of Virginia, all income other than dividends is included in apportionable income. There is no provision in Virginia law allowing a subtraction or permitting allocation of the type of income involved in this application.
In your application you acknowledge that Virginia law requires that the capital gain be included in apportionable income. You contend that this is unconstitutional on the grounds that the capital gain was "not related to the conduct of Taxpayer's operations in Virginia, that such capital gain did not constitute business income of Taxpayer, that Taxpayer was not unitary with either [Corporations A or B], that Taxpayer was not in the business of buying and selling companies, and that the Commonwealth of Virginia offered no protection, opportunity or benefit with respect to the . . . transaction which would give it the right to levy a tax on" the transaction.
Throughout the entire transaction the expenses of the taxpayer in acquiring, holding, and selling the stock have been deductible in computing federal and Virginia taxable income. In order to permit the taxpayer to remove the capital gain from apportionable income some formula or other means must be developed to determine the amount of expenses associated with the transaction such as legal fees, interest and other carrying costs, salary and other expenses related to the time of the taxpayer's Board of Directors, executive officers and treasury staff involved in the transaction. The determination of the amount of expenses would be complicated by the fact that some of the expenses related to the transaction have been deducted over many taxable years. The department does not believe that any arbitrary formula or other means of identifying such expenses is preferable to the statutory apportionment formula or required by the U. S. Constitution.
Foreign Source Income
In your application you stated that you could not reconcile the department's adjustment relating to the subtraction for foreign source income. The adjustment was based on information furnished to the auditor at the time of the field audit. If this information was incorrect you should furnish the correct information to:*******Supervisor, Technical Services Section, O.S.D., Department of Taxation, P. O. Box 6-L, Richmond, VA 23282.
Determination
Accordingly, the assessment is correct as made and is now due and payable. You will shortly receive an updated bill with interest accrued to date. The bill should be paid within thirty days to avoid the accrual of additional interest. Although you requested an oral hearing, this letter has been issued without one. If you still desire a conference you should request one within thirty days.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner