Was a subsidiary's capital gain from selling stock included in the Virginia numerator of its 1999 sales factor?

Plain-English summary

Virginia required the subsidiary's capital gain from a stock sale to be included in the Virginia numerator of its sales factor. The auditor had removed the gain because the subsidiary was headquartered outside Virginia, but the Commissioner found that headquarters location did not match the actual income-producing activity.

The subsidiary performed its day-to-day work and decisions involving management of foreign affiliates at its Virginia corporate office. In 1999, all of its property and about 90% of its payroll were in Virginia. Under the cited cost-of-performance rule, those facts placed the income-producing activity in Virginia.

The Department adjusted the audit accordingly.

What this means for you

• Under the rule applied for 1999, non-tangible sales were sourced by income-producing activity and cost of performance.
• A formal headquarters location did not control when the operative property, payroll, and management work were in Virginia.
• Apportionment follows the taxpayer-specific activities that produced the income.
• The ruling concerns the law and facts for the 1999 tax year.

Citations and references

• Va. Code § 58.1-416.
• 23 VAC 10-120-230.

Subject

Capital gain income included in the numerator of the sales factor

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 06-130

Original ruling text

October 25, 2006

Re: § 58.1-1821 Application: Corporate Income Tax

Dear *:

This will reply to the letter in which you seek correction of the corporation income tax assessments issued to * (the "Taxpayer") and affiliates for the taxable year ended December 31, 1999. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer and its affiliates filed a combined Virginia corporate income tax return for the 1999 taxable year. The Taxpayer was audited for the taxable year at issue and a number of adjustments were made. An adjustment was made to a wholly owned subsidiary, * (the "Affiliate"), to remove the net amount of a capital gain from the sale of stock from the numerator of the sales factor when the auditor determined that the Affiliate was headquartered outside Virginia. The Taxpayer contends that the income producing activity that resulted in the capital gain occurred in Virginia and, therefore, the capital gain income at issue should properly be included in the numerator of the sales factor.

DETERMINATION

Virginia Code § 58.1-416 provides that sales, other than sales of tangible personal property, are deemed in Virginia if:

1. The income-producing activity is performed in Virginia; or

2. The income-producing activity is performed both in and outside Virginia and a greater proportion of the income-producing activity is performed in Virginia than in any other state, based on costs of performance.

The term "cost of performance" is defined in Title 23 of the Virginia Administrative Code (VAC) 10-120-230 as "the cost of all activities directly performed by the taxpayer for the ultimate purpose of producing the sale to be apportioned."

The Taxpayer asserts that the Affiliate performed its day-to-day activities, as well as decision-making involving the management of foreign affiliates, at its corporate office in Virginia. For the 1999 taxable year, all the Affiliate's property and approximately 90% of its payroll were in Virginia. It is clear from the evidence provided that the Affiliate's income producing activity resulting in the capital gain occurred in Virginia. As such, the capital gain must be included in the numerator of the Affiliate's sales factor.

The audit has been adjusted to reflect this determination, a copy of which is enclosed along with an assessment schedule. No additional interest will accrue provided the outstanding balance is paid within 30 days from the date of this letter. The balance due should be remitted to: Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attention: *. If you have any questions concerning payment of the assessment, you may contact at **.

The Code of Virginia and regulation sections cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact * in the Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/52856E