Tax Type
Corporation Income Tax
Description
Combined return; Nonbusiness income
Topic
Allocation and Apportionment
Date Issued
09-30-1991
September 30, 1991
Re: §58.1-1821 Application; Corporation Income Tax
Dear****************
This will reply to your letter of July 7, 1989, in which you seek correction of corporation income tax assessments for*************** (the "Taxpayer").
FACTS
The taxpayer is an out-of-state corporation. It filed a combined Virginia corporation income tax return for the years under review. The return was audited and numerous adjustments were made, resulting in the assessment of additional tax. You object to three adjustments. The issues you raise will be addressed separately.
DETERMINATION
Nonbusiness income: The taxpayer entered a contractual agreement to merge with another corporation. The proposed merger fell through, and the taxpayer received a lump sum payment from the other corporation in exchange for relinquishing the contractual right to merge. The taxpayer allocated the income to its state of commercial domicile, believing that the sale of rights under the merger contract was not subject to apportionment because it did not occur in the regular course of the taxpayer's business and was classified as "extraordinary gain" by the taxpayer's independent auditor. The auditor included the income in apportionable income and assessed additional tax
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). Therefore, the auditor correctly applied Virginia law and policy in making this adjustment.
Your letter has also been treated as a request to use an alternative method of allocation and apportionment that would reduce its tax, pursuant to Va. Code §58.1-421. However, I find that you have not shown 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).
Payroll factor: The auditor made an adjustment to the taxpayer's 1986 payroll factor. You contend that the auditor's computation includes payroll attributable to a prior taxable year.
A review of the taxpayer's return and the information supplied with your letter indicates that some of the 1984 payroll may have been included in the 1986 payroll factor. I will refer this issue back to the auditor for review of the payroll factor.
Nexus: The auditor removed one of the affiliates from the 1985 combined return. You assert that the affiliate had nexus with Virginia and, therefore, was properly included in the return. You base your assertion on the fact that the affiliate was headquartered in and paid salaries to officers located in Virginia.
Under paragraph 2.b. of the definition of "Income and deductions from Virginia sources" in VR 630-3-302, the applicable apportionment factors determine which activities are the most relevant for nexus purposes. The applicable apportionment formula for the affiliate is the three factor apportionment formula of property, payroll and sales. The information provided with your letter indicates that a portion of the affiliate's payroll was attributable to officers located in Virginia. This created a positive payroll factor for Virginia and is sufficient to establish nexus. Therefore, the affiliate should be included in the combined Virginia return.
Accordingly, the audit report will be revised to include the affiliate in the 1985 combined Virginia return. The payroll factor for 1986 will be reviewed and adjusted accordingly. In all other respects, the assessment is correct. You will shortly 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