Tax Type
Corporation Income Tax
Description
Interest income; Apportionment
Topic
Allocation and Apportionment
Date Issued
10-15-1991
October 15, 1991
Re: §58.1-1821 Application; Corporation Income Tax
Dear*****************
This will reply to your letter of June 11, 1991, in which you seek correction of assessments of corporation income tax on behalf of *********** (the "Taxpayer").
FACTS
For the years under review, the taxpayer filed combined Virginia corporation income tax returns with its affiliates doing business in Virginia. The returns were audited, and an adjustment was made to the sales factor to include in the denominator interest income received by the taxpayer. You assert that investment interest is taxable in Virginia only if the taxpayer was engaged in a unitary business with the corporation from which it received the interest income, citing Corning Glass Works, Inc. v. Virginia Department of Taxation. You contend that no such unitary business existed with respect to the income at issue; therefore, the interest income should not be included in the calculation of the taxpayer's Virginia taxable income and should not be included in the denominator of the sales factor.
DETERMINATION
Virginia law does not require or permit the allocation or subtraction of interest 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). On the combined Virginia return, the interest income was properly included in apportionable income as required under Virginia law.
For purposes of the Virginia sales factor, the term "sales" means the gross receipts of the corporation from all sources (except dividends, which are allocated), whether or not such gross receipts are generally considered sales. Sales are to be included in the sales factor if the gross receipts are included in Virginia taxable income and are connected with the conduct of the taxpayer's trade or business within the United States
The interest income in question was included in Virginia taxable income and was connected with the conduct of the taxpayer's business in the United States; therefore, it must also be included in the denominator of the sales factor. Va. Code §58.1-414. Accordingly, the auditor's adjustment to include the interest income in the denominator of the sales factor is correct.
Your letter has also been treated as a request to use an alternative method of allocation and apportionment that would reduce the taxpayer's tax pursuant to Va. Code §58.1-421. However, I find that you have not demonstrated that the inclusion of the income in question in apportionable income produces an unconstitutional or inequitable result. See Virginia Regulation (VR) 630-3-421 and P.D. 86-184 (9/18/86) (copies enclosed). 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 Virginia Department of Taxation v. Corning, Inc., Docket No. 90-1852, 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.
Although you requested a conference, this ruling has been issued without one. If you still desire a conference, please contact the department within 30 days.
Sincerely,
W. H. Forst
Tax Commissioner
TPD/5277F
Rulings of the Tax Commissioner