Tax Type
Corporation Income Tax
Description
Alternate methods; Allocation of rental income
Topic
Allocation and Apportionment
Date Issued
06-25-1997
June 25, 1997
Re: § 58.1-1821 Application: Corporate Income Tax
Dear*************
This will respond to your letter of April 24, 1997, in which you protest the assessment of corporate income tax against ********** (the "Taxpayer").
FACTS
The Taxpayer is a Virginia domiciled corporation. During 1981, the Taxpayer acquired a 28% undivided interest in real property located in Washington, D.C., through a tax free exchange of other real properties located in the District and Virginia. On the Taxpayer's 1995 Virginia corporation income tax return, the Taxpayer took a subtraction for rental income from the District property as nonapportionable investment function income. This subtraction was disallowed on office audit and the Taxpayer was assessed additional tax and interest. The Taxpayer's representative disputes the assessment and cites Allied-Signal, Inc. v. Director, Division of Taxation 112 S. Ct. 2551 (1992) as the basis.
DETERMINATION
The Code of Virginia does not provide for the direct assignment of income, whether through allocation or subtraction, other than for certain dividends. Accordingly, a taxpayer's entire federal taxable income, adjusted and modified as provided in Code of Virginia §§ 58.1-402 and 58.1-403, less dividends allocable pursuant to Code of Virginia § 58.1-407, is subject to apportionment.
Code of Virginia § 58.1-402 does not provide for the subtraction of this type of income. However, to the extent that it is derived from an investment function as set forth in Allied-Signal, an alternative method of allocation and apportionment under Code of Virginia § 58.1-421 may be appropriate.
The decision of the U.S. Supreme Court in Allied-Signal made it clear that in order for a state to tax a nondomicillary corporation, certain minimal connections had to exist between the interstate activities and the taxing state. However, the Taxpayer is domiciled in Virginia. Accordingly, Allied-Signal and prior cases are not applicable to this situation.
Because the Taxpayer is domiciled in Virginia, the statutory method of allocation and apportionment should result in the proper determination of income from Virginia sources and an alternative method of allocation and apportionment is not required. To the extent that the District property and rental income are not included in the apportionment factors, the factors may be adjusted for the inclusion of these items to properly apportion income and determine the correct amount of Virginia tax due.
Accordingly, the Taxpayer may amend the 1995 return and any other returns in statute in accordance with this determination to adjust its Virginia tax liability to the statutory amount. The 1995 assessment will be held 90 days contingent on the Taxpayer filing any amended returns. Please forward any returns to Office of Tax Policy, Department of Taxation, Post Office Box 1880, Richmond, Virginia 23218-1880.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12504P
Rulings of the Tax Commissioner