Tax Type
Corporation Income Tax
Description
Apportionment of Income; Subtraction of not to compete covenant
Topic
Allocation and Apportionment
Date Issued
09-06-1991
September 6, 1991
Re: §58.1-1821 Application; Corporation Income Tax
Dear ******************
This will reply to your letter of August 20, 1990, in which you seek correction of a corporation income tax assessment for***************(the "Taxpayer").
FACTS
The taxpayer sold all the stock of its wholly owned subsidiary. The sales price included an amount for a covenant by the taxpayer not to compete in the business of the subsidiary. On its Virginia return, the taxpayer claimed a subtraction for the amount of income attributable to the covenant not to compete, asserting the income had nothing to do with the taxpayer's activities in Virginia; therefore, it is not subject to Virginia income tax. The auditor disallowed the subtraction and included the income in apportionable income.
DETERMINATION
Virginia law does not require or permit the subtraction or allocation of "nonbusiness" income; all income (other than dividends) is apportionable. See P.D. 84-210 (10/31/84); P.D. 87-104 (3/27/87); and P.D. 87-224 (10/14/87) (copies enclosed). However, under Va. Code §58.1-421 a corporation is permitted to request an alternative method of allocation and apportionment that would reduce its tax if it can show by clear and cogent evidence that the statutory method is unconstitutional or inequitable as applied to its situation. See Virginia Regulation (VR) 630-3-421 and P.D. 86-184 (9/18/86) (copies enclosed).
Treating your letter as a request to use an alternative method, I find that you have not demonstrated that the inclusion of the income in question in apportionable income produces an unconstitutional or inequitable result. You have provided no details as to the taxpayer's corporate and operating structure that would prove that the disputed income did not arise from a unitary business. In particular, you have not shown that the activities or investments which generated the disputed income have been consistently treated as not part of a unitary business in the current or prior returns of Virginia and other states. For example, if apportionable income for any taxable year included deductions for wages, stewardship expenses, carrying costs and other expenses related to an activity or investment, then the apportionment of any gain, profit, and other income generated by the activity or investment would be consistent with the taxpayer's treatment.
The department is currently in litigation involving the unitary business principle. This case may or may not have relevance to your factual situation. You may wish to file a protective claim for refund pursuant to Va. Code §58.1-1824 (after paying the assessment) and request that the department hold it without action pending a final decision in Corning Glass Works, Inc. v. Virginia Department of Taxation in the United States Supreme Court. This procedure will allow the department to investigate and ascertain the pertinent facts and apply the relevant principles, if any, of the final decision to the facts of your protective claim.
Accordingly, the assessment is correct and is now due and payable. You will receive an updated bill with interest accrued to date. The bill should be paid within 30 days to avoid the accrual of additional interest.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner