Tax Type
Corporation Income Tax
Description
Sales factor; Sale of securities
Topic
Allocation and Apportionment
Date Issued
05-02-1988
May 2, 1988
Re: §58.1-1821 Application; Corporation Income Tax
§58.1-416 Sales Factor, Sales of Securities
Dear******************
This is in response to your letter of April 3, 1987, and a conference held on September 17, 1987, in which you requested reconsideration of our ruling letter dated February 27, 1987.
Facts
The taxpayer, a corporation headquartered in Virginia, engaged in a program of dividend capturing. For a few months during the fiscal year ending March 31, 1982, a stockbroker in New York was given authority to select and acquire stocks shortly before declaration of a dividend which would qualify for the 85% special dividend deduction from federal taxable income. The securities were sold within sixty days.
As a result of these transactions the taxpayer received dividend income, 85% of which was excluded from federal and Virginia taxable income. The 15%-that remained in Virginia taxable income was allocated to Virginia where the commercial domicile is located.
The transactions also resulted in capital gains and losses which were included in apportionable income. Because the sales resulted in apportionable income the auditor included the gross receipts from the stock sales in the numerator and denominator of the sales factor. You protest the inclusion on the grounds that:
- The purpose of the stock sales was to produce dividends allocable under §58.1-407, therefore the proceeds are excludable under the definition of "sales" in §58.1-302.
- For purposes of determining if the sales belong in the numerator, the income producing activity should include the "costs of performance" associated with the New York stockbroker which acted as the taxpayer's agent in selecting, purchasing, holding, and selling the stock.
Discussion
In the letter dated February 27, 1987, the definition of the term "sales" in §58.1-302 was held to include the gross proceeds from the stock sales. The primary purpose of these transactions was to generate two types of income: allocable dividends, only 15% of which were includible in taxable income, and fully deductible and apportionable capital gains or losses. It appears that substantially all of the income or loss included in taxable income was apportionable, and that this result was consistent with the primary purpose- of the transactions. Therefore, the gross proceeds were properly included in the sales factor. See VR 630-3-416 C.3.d.
The previous letter also stated that the gross proceeds were properly included in the numerator of the sales factor because income producing activity associated with an independent agent or contractor was ignored. If the New York stockbroker's activities were ignored. the only remaining income producing activities associated with the transactions were treasury, accounting and management oversight functions which were performed in the taxpayer's commercial domicile.
You request reconsideration of this holding on the grounds that the stockbroker was acting as the taxpayer's agent, not as an independent contractor. Although there is a legal difference between an agent and an independent contractor, that does not affect the determination that the income producing activity of the stockbroker is not taken into consideration. Virginia regulation VR 630-3-416 states that:
-
- The term "income producing activity" means the act or acts directly engaged in by the taxpayer for the ultimate purpose of producing the sale to be apportioned by this section. Such activity does not include activities performed on behalf of a taxpayer, such as those conducted on its behalf by an independent contractor. (Emphasis added.)
- The term "income producing activity" means the act or acts directly engaged in by the taxpayer for the ultimate purpose of producing the sale to be apportioned by this section. Such activity does not include activities performed on behalf of a taxpayer, such as those conducted on its behalf by an independent contractor. (Emphasis added.)
Determination
Accordingly, the assessment was 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.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner