Tax Type
Corporation Income Tax
Description
Partnership interests, NOLD, Property factor
Topic
Allocation and Apportionment
Appropriateness of Audit Methodology
Date Issued
10-08-1991
October 8, 1991
Re: §58.1-1821 Application; Corporation Income Tax
Dear***************
This will reply to your letter of January 18, 1991, in which you seek correction of corporation income tax assessments for *************(the "Taxpayer").
FACTS
The taxpayer was audited and numerous adjustments were made, resulting in the assessment of additional tax. The taxpayer objects to adjustments made to its apportionment factors for partnership interests, subtractions from federal taxable income, and a net operating loss deduction calculation. The issues you raise will be addressed separately.
DETERMINATION
Partnership interests: On its return, the taxpayer included partnership apportionment items in the denominators ("everywhere" amounts) of its apportionment factors. The auditor adjusted the taxpayer's apportionment factors (property, payroll and sales) by including 100% of the partnership's payroll expense, sales, and assets in the numerators (Virginia amounts). You object to these adjustments. Furthermore, you contend that the adjustment to the payroll factor is incorrect because the partnership had no employees. Therefore, there were no partnership wages to be included in the numerator of the taxpayer's payroll factor.
Detailed partnership apportionment information was requested by the auditor on several occasions but none was provided. Consequently, the auditor determined that the partnership's apportionment items should be included in the numerator of the taxpayer's apportionment factors because the partnership was based in Virginia, and there was no state apportionment data to indicate that any of the partnership assets were allocated to another state.
In regard to the payroll factor, the taxpayer included a total (everywhere) partnership payroll expense in the denominator of the payroll factor. This indicates that the partnership did have employees. This amount was verified to the taxpayer's apportionment workpapers, which did not apportion any of the payroll amount to Virginia or to any other taxing jurisdiction. The auditor again requested the taxpayer to provide detailed apportionment data regarding the partnership, but no information was provided to indicate that any of the wages were allocated to any other state. Because the partnership was based in Virginia, the auditor attributed all the partnership's wages to Virginia.
The auditor's adjustments to the apportionment factors were based on the best information available and are presumed to be correct. However, the department will allow you to submit detailed apportionment data for the partnership interest. The information must include the correct apportionment figures for the partnership along with substantiation of the amounts. If the taxpayer cannot furnish this information, then the auditor's adjustments will be upheld.
Property factor: The taxpayer asserts that the property factor was incorrectly calculated by the auditor.
A review of the audit report and workpapers reveals that the method of calculation used by the auditor is an acceptable method which incorporated amounts provided by the taxpayer during the audit. Undocumented amounts were properly removed from the property factor. Without a detailed explanation of the calculations you find erroneous and absent an acceptable alternate method of calculation for the property factor, I find the auditor's calculation is correct.
Subtractions from federal taxable income: The auditor made adjustments to subtractions reported by the taxpayer. The taxpayer, while providing no specific details, claims that the adjustments were incorrectly calculated.
The taxpayer included all income from sources without the United States in its computation of the foreign source income subtraction and did not apply expenses. The auditor's adjustment involved limiting foreign source income to those types of income specified in Virginia Regulation (VR) 630-3-302 (copy enclosed). Expenses were then applied to the foreign source income to compute the subtraction. The information for the adjustment was obtained from the taxpayer's federal Form 1120 and supporting schedules, and federal Form 1118 (Computation of Foreign Tax Credit Corporations). The adjustment is in accordance with Virginia law and is correct.
The subtraction for dividends was disallowed by the auditor. A review of the auditor's report and workpapers reveals that the auditor reconciled the relevant Virginia modifications to the federal Schedule C. It appears that the dividends in question were subtracted twice. The auditor's adjustment is correct.
NOLD calculation: The taxpayer maintains that the auditor's net operating loss deduction (NOLD) calculation is incorrect
Virginia law has no separate provision for a NOLD. Therefore, an NOLD is allowable for Virginia purposes only to the extent that the NOLD is allowable as a deduction in computing federal taxable income for Virginia purposes.
At the time the audit was conducted, documentation of federal taxable income for taxable years prior to 1982 was not available. The auditor was justified in disallowing the NOLD carryforwards because the taxpayer's lack of supporting documentation made it impossible to verify previous net operating losses and their utilization.
The department will allow you to submit information to substantiate NOLD amounts prior to 1982. The information must show how the losses were utilized from the year of the loss through the final year of the audit period (1985). The information must be sufficiently detailed and reconcile back to the federal returns.
Additional information: In an application for correction of an erroneous assessment under Va. Code §58.1-1821, the taxpayer has the burden of proving that the assessment is erroneous by showing what the correct assessment should be. This burden cannot be met if necessary documentation and supporting detail is not furnished. Although you stated that you planned to supply additional information, none has been supplied in the nine months since the application was filed.
Your letter also stated that you "reserved the right to raise additional issues at a hearing." Virginia's administrative appeal of assessments is an informal proceeding. No formal hearings are required or held. The department occasionally offers an informal conference with taxpayers when substantial policy issues are involved and such a conference would be helpful. However, based on the limited information available at this time, it appears that all of the disputed adjustments involve merely factual issues that would have been resolved by the auditor if the requested documentation had been provided in a timely manner. It should be noted that the auditor delayed the assessment for several months waiting for the requested information.
Accordingly, the auditor's adjustments to the subtractions from federal taxable and to the property factor are correct. If you choose to submit apportionment data for the partnership interest and the NOLD information, please send it to the department's Technical Services Section, P.O. Box 6-L, Richmond, Virginia 23282. The information must be received by the department within 30 days.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner