Tax Type
Corporation Income Tax
Description
Sales Factor; Repurchase Agreements
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 March 27, 1991, in which you seek refunds of corporation income tax for *****************(the "Taxpayer").
FACTS
The taxpayer filed amended returns claiming refunds for the taxable years ended September 30, 1986 through September 30, 1988. On the amended returns the taxpayer added gross proceeds from the sale of certain "securities" to the sales factor. The proceeds were from time deposits, repurchase agreements and commercial paper. The department permitted the inclusion of proceeds from commercial paper, but disallowed proceeds from time deposits and repurchase agreements. The taxpayer is appealing the decision to exclude from the sales factor the gross proceeds from repurchase agreements.
DETERMINATION
You base your amended returns and the inclusion in the sales factor of the gross proceeds from repurchase agreements on the department's previous ruling which permitted the gross proceeds from the sale of marketable securities in the sales factor. P.D. 89-155 (5/11/89).
The department does not consider a repurchase agreement to be a true purchase and sale. As you point out in your letter, in a repurchase agreement the investor lends money to a dealer, who gives securities as collateral. Specifically, on the day the transaction is initiated, securities are "sold" against money. When the transaction is terminated, the money and the securities are returned to their original holders, and the lender receives interest for the use of its money during the term of the transaction. The lender does not take title to the securities during the term of the transaction; therefore, when the term of the transaction ends, there is not a true purchase and sale because the lender never had title to sell. Furthermore, upon redemption the lender does not have a gain or loss from the purchase and resale of the securities, but only interest for the use of the money for the term of the transaction.
A repurchase agreement is a secured loan, and the gross proceeds represent the repayment of funds lent to the borrower. The repayment of funds lent to a borrower is not a "gross receipt" for purposes of the sales factor. Therefore, the gross proceeds from a repurchase agreement are not included in the sales factor; only the interest income from a repurchase agreement is included in the sales factor.
Accordingly, gross proceeds from repurchase agreements should be excluded from the sales factor. The amended returns are not accepted as filed. The sales factors for the years in question will be revised to include the gross proceeds from the sale of commercial paper, and refunds based on the revised apportionment factors will be issued.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner