How did Virginia include an out-of-state corporation's share of joint-venture satellite sales in its 2001 sales factor?

Subject

Out-of-state corporation participated in joint ventures operated commercial satellites

Plain-English summary

An out-of-state corporation participated in two joint ventures that sold commercial satellites in September 2001. An IRS audit increased the corporation's federal taxable income for those sales, and the corporation accepted that adjustment but argued that the sales also had to enter Virginia's apportionment formula.

Virginia agreed on the sales factor. A joint venture was treated as a partnership, so the corporation's proportionate share of partnership sales belonged in its sales factor. Because the satellites were not transferred in Virginia, the sales went into the denominator but not the Virginia numerator. The Department revised the audit on that basis.

What this means for you

• A corporate joint venturer includes its ownership share of partnership sales in its apportionment factor under the rule applied here.
• For tangible property, the destination or receipt location determined whether a sale entered Virginia's numerator.
• An income adjustment and the related apportionment-factor adjustment must both be considered.

Citations and references

• I.R.C. § 761, partnership definition including a joint venture.
• Va. Code § 58.1-415, Virginia sourcing of tangible-personal-property sales.
• P.D. 92-57 and P.D. 95-19, proportionate partnership sales in a corporation's apportionment formula.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-80

Original ruling text

May 18, 2007

Re: § 58.1-1821 Application: Corporate Income Tax

Dear *:

This will reply to your letter in which you seek correction of the corporate income tax assessment issued to * (the "Taxpayer") for the taxable year ended December 31, 2001.

FACTS

The Taxpayer is an out-of-state corporation that participated in two joint ventures that operated commercial satellites. In September 2001, the joint ventures sold some of their satellites. The Taxpayer was audited by the Internal Revenue Service (I.R.S.) and its federal taxable income (FTI) was increased pursuant to an RAR adjustment to reflect the sale of the satellites. Under audit, the Department increased the Taxpayer's FTI to reflect the RAR adjustments. The Taxpayer concurs with the increase in FTI, but contends that the sales of the satellites must be included in the apportionment formula.

DETERMINATION

Internal Revenue Code (I.R.C.) § 761 defines a partnership as "a syndicate, group, pool, joint venture, or other unincorporated organization" which is not a trust, estate, or corporation. Because Virginia is a federal conformity state, a joint venture is also a partnership for Virginia tax purposes.

In general, the sales of a partnership will generally be included in the numerator and denominator of the corporation's apportionment formula in proportion to the corporation's ownership interest in the partnership. See Public Document (P.D.) 92-57 (4/29/1992) and P.D. 95-19 (2/13/1995). The Taxpayer's proportionate share of joint venture sales is therefore required to be included in the sales factor.

Under Va. Code § 58.1-415, tangible personal property received in Virginia as a result of a sales transaction is considered a Virginia sale. In the instant case, the satellites were not transferred in Virginia. As such, the proportionate amount of the satellite sales would be reported in the denominator of the sales factor for the 2001 taxable year, but not in the numerator.

The audit report has been revised in accordance with this determination. A revised bill, with interest accrued to date, will be sent to the Taxpayer. No additional interest will accrue provided the outstanding balance in paid within 30 days from the date of the revised bill. The Taxpayer should remit its payment 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 sections and regulation cited are available on-line at www.tax.virginia.gov. If you have any questions regarding this determination, please contact * in the Department's Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-797507823B