As a combined Virginia filer, can I keep a large one-time gain from selling Virginia assets out of my apportionment factor by consolidating accounts or using an alternative apportionment method?

Plain-English summary

A multinational corporation that files its Virginia corporate income tax return on a combined basis sold the U.S. fixed assets — including Virginia assets — of a subsidiary ("Corporation A") in 2021. For federal purposes the gain was deferred under consolidated-return rules, but on a Virginia combined return each member computes its income as if it filed a separate federal return, so the gain was recognized in 2021 and sharply increased Corporation A's Virginia taxable income and its sales-factor apportionment. The company paid the tax, then filed an amended return seeking a refund two different ways. The Tax Commissioner denied both and denied the refund.

1. The filing-method election drove the result (§ 58.1-442; 23 VAC 10-120-320). A group can elect to file Virginia returns on a separate, combined, or consolidated basis and must keep that basis unless the Department grants permission to change. Because this group elected combined, each member computes federal taxable income as though it filed separately — so the asset-sale gain was taxable in 2021 and belonged in Corporation A's sales factor (the full gain in the denominator, the Virginia-asset portion in the numerator). "This result was dictated by the filing method elected by the Taxpayer."

2. Consolidation of accounts (§ 58.1-445) — denied. This provision lets the Department (and, on a taxpayer's request, requires it to) consolidate related businesses' accounts to accurately apportion Virginia income — but only where the federal taxable income is accurate yet the Virginia-source income is not. Here the federal incomes were accurately stated; the spike was a timing difference, not a distortion. Gain attributable to Virginia-located property is Virginia-source income (§ 58.1-302), and federal deferral does not change that character. Consolidating the accounts would also be a backdoor to consolidated-return benefits and would circumvent the filing-election rules.

3. Alternative apportionment (§ 58.1-421; 23 VAC 10-120-280) — denied. The Department grants an alternative method only if the statutory method (1) is unconstitutional as applied, or (2) is inequitable because it causes double taxation attributable to Virginia. The company argued only unconstitutionality. Under Moorman Mfg. Co. v. Bair and related cases, a taxpayer must prove by "clear and cogent evidence" that the income attributed to Virginia is "out of all reasonable proportion" (Hans Rees' Sons v. North Carolina) or "grossly distorted" (Norfolk & Western v. Missouri). A merely larger tax bill under the statutory method is not an "extraordinary circumstance" (Dept. of Taxation v. Lucky Stores). Here the higher sales factor came directly from selling Virginia-located assets — income properly sourced to Virginia — so the statutory method was not unconstitutional as applied.

What this means for you

Multistate corporations filing combined Virginia returns

Your filing-method election has real consequences. On a Virginia combined return each member is computed as if it filed a separate federal return, so items the IRS lets you defer (like intercompany asset-sale gains) can be currently taxable in Virginia and land in that member's apportionment factor. Model these differences before you elect — you generally cannot change your filing basis without the Department's permission.

Companies facing a one-time gain that spikes the apportionment factor

A large, unusual gain that inflates your Virginia factor is not, by itself, grounds for relief. Section 58.1-445 consolidation won't help if your federal income is accurately stated and the issue is timing; alternative apportionment won't help unless you prove the statutory result is unconstitutional (grossly distorted / out of all reasonable proportion) or causes Virginia-attributable double taxation. A higher tax bill alone is not enough.

Buyers and sellers of Virginia business assets

Gain tied to Virginia real or tangible personal property is Virginia-source income even if it is deferred federally. Expect Virginia to tax and apportion it in the year it is recognized on the Virginia return.

Common questions

Q: I file combined in Virginia — why is a federally deferred gain taxed now?
A: On a Virginia combined return each member is computed as if it filed a separate federal return, so the federal deferral doesn't carry over; the gain is recognized and apportioned that year.

Q: Can I use § 58.1-445 to consolidate accounts and dilute the gain?
A: Not where your federal income is accurately stated and the problem is merely timing. Consolidation fixes inaccurate Virginia-source income, not a filing-election preference — and the Department won't let it become a backdoor consolidated return.

Q: When will Virginia grant alternative apportionment?
A: Only in extraordinary circumstances proven by clear and cogent evidence — the statutory method is unconstitutional as applied (grossly distorted / out of all reasonable proportion), or it causes double taxation attributable to Virginia. A bigger tax bill isn't enough.

Q: Is gain on selling my Virginia assets Virginia income?
A: Yes. Gain attributable to Virginia real or tangible personal property is Virginia-source income under § 58.1-302, regardless of federal deferral.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-442 — election to file separate, combined, or consolidated Virginia returns
• Va. Code § 58.1-445 — consolidation of the accounts of related trades or businesses
• Va. Code § 58.1-421 — alternative method of allocation and apportionment
• Va. Code § 58.1-302 — definition of Virginia source income (includes gain from Virginia property)
• 23 VAC 10-120-320 — electing and changing the combined/consolidated filing method
• 23 VAC 10-120-280 — standard for granting an alternative apportionment method

Cases cited:

• Moorman Mfg. Co. v. Bair, 437 U.S. 279 (1978)
• Hans Rees' Sons, Inc. v. North Carolina, 283 U.S. 123 (1931)
• Norfolk & Western R. Co. v. Missouri State Tax Commission, 390 U.S. 317 (1968)
• Department of Taxation v. Lucky Stores, Inc., 217 Va. 121 (1976)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 26-29

Original ruling text

May 19, 2026

Re: § 58.1-1821 Application: Corporate Income Tax

Dear *:

This will respond to your letter in which you seek a refund of corporate income tax paid by your client, * (the “Taxpayer”), for the taxable year ended December 31, 2021.

FACTS

The Taxpayer, a multinational corporation with numerous subsidiaries, acquired * (“Corporation A”) in 2013. In 2021, the Taxpayer purchased Corporation A’s fixed assets located in the United States, including assets located in Virginia. The gain from the sale was deferred for federal income tax purposes pursuant to certain consolidation rules of the Internal Revenue Code (IRC). However, the gain was recognized on the combined filing group’s 2021 Virginia return because federal taxable income is computed on a separate company basis on combined Virginia returns. Recognition of the gain resulted in a significant increase to both Corporation A’s Virginia taxable income and apportionment factor compared to prior taxable years.

The Taxpayer paid the full amount of tax due and subsequently filed an amended return, requesting a refund on the basis that it was entitled to consolidate the accounts of the Taxpayer and Corporation A pursuant to Virginia Code § 58.1-445. In the alternative, the Taxpayer requested that it be allowed to use an alternative method of apportionment pursuant to Virginia Code § 58.1-421 to exclude the gain from its apportionment factor calculation. Under review, the Department denied the refund, and the Taxpayer filed an application for correction contending that the denial was improper.

DETERMINATION

Filing Method

Virginia Code § 58.1-442 allows corporations to elect to file returns as separate, combined, or consolidated entities regardless of how the corporations file their federal income tax returns. Title 23 of the Virginia Administrative Code (VAC) 10-120-320 provides that, in the first full taxable year two or more members of a group of corporations affiliated pursuant to Virginia Code § 58.1-302 are required to file Virginia returns, the group may elect to file separate returns, a combined return, or a consolidated return. All returns for subsequent years must be filed on the same basis unless permission to change is granted by the Department.

In this case, the Taxpayer elected to file its Virginia returns on a combined basis. Title 23 VAC 10-120-320 D 1 b provides that if an affiliated group of companies files a combined return, then each member of the group will compute its federal taxable income as though each member of the group filed separate federal returns. When Corporation A’s income was computed as if separate federal returns were filed, the gain attributable to the asset sale was taxable in the 2021 taxable year. In addition, when determining its Virginia apportionment factor, Corporation A’s sales factor included the full asset sale gain in the denominator and the portion of such gain attributable to assets located in Virginia in the numerator. This result was dictated by the filing method elected by the Taxpayer.

Consolidation of Accounts

Virginia Code § 58.1-445 provides that:

In any case of two or more related trades or businesses liable to taxation under this chapter owned or controlled directly or indirectly by the same interests, the Department may, and at the request of the taxpayer shall, if necessary in order to make an accurate distribution or apportionment of gains, profits, income, deductions or capital between or among such related trades or businesses, consolidate the accounts of such related trades or businesses.

The purpose of Virginia Code § 58.1-445 is to assure that items of income, gain, profit, deduction, and capital are properly distributed or apportioned between taxpayers who may be taxable at different rates, by different methods, or in different states. This section applies to situations in which the federal taxable income is accurately stated, but the income from Virginia sources taxable by Virginia is inaccurate.

The Taxpayer argues that consolidation is necessary because the increase in Virginia corporate income tax paid for the 2021 taxable year did not accurately reflect the income of Corporation A and the Taxpayer that was earned from sources within Virginia. Gain attributable to the ownership of real or tangible personal property in Virginia, however, is considered income from Virginia sources. See Virginia Code § 58.1-302. The fact that such income was deferred for federal tax purposes does not change the character of the income as Virginia source income.

In this case, the Department finds that it would be inappropriate to apply the provisions of Virginia Code § 58.1-445. The federal taxable incomes of the Taxpayer and Corporation A are accurately stated on their separate federal returns. Further, the increase in federal taxable income on Corporation A’s separate return is simply a timing difference rather than a distortion of the income from Virginia sources taxable by Virginia. See Public Document (P.D.) 94-114 (4/15/1994).

In addition, the Taxpayer’s request to consolidate its account with Corporation A reflects an attempt to obtain some of the benefits of a consolidated return. Consolidating the accounts of these two corporations would act to circumvent the Department’s long-standing policy as it relates to the election of filing status and circumstances in which permission to change is allowed. See P.D. 90-119 (8/1/1990).

Alternative Method of Apportionment

Virginia Code § 58.1-421 sets forth the rules that apply to taxpayer requests for an alternative method of allocation and apportionment. First, the taxpayer must file the return using the statutory method and pay any tax due. Next, the taxpayer is required to file an amended return proposing an alternative method within the time prescribed for filing amended returns claiming refunds. The amended return must include a statement of why the statutory method is inapplicable or inequitable and an explanation of the proposed method of allocation and apportionment. The Taxpayer followed the proper procedures for requesting an alternative method of allocation and apportionment for the 2021 taxable year and, accordingly, the Department will consider such request.

The Department will not grant an alternative method of allocation and apportionment unless it determines that: (1) the statutory method produces an unconstitutional result under the particular facts and circumstances of the taxpayer’s situation; or (2) the statutory method is inequitable because it results in double taxation and the inequity is attributable to Virginia, rather than another state’s method of apportionment. See Title 23 VAC 10-120-280.

In this case, the Taxpayer has not alleged that using Virginia’s statutory apportionment method to include Corporation A’s gain on the intercompany asset sale in its sales factor resulted in double taxation. Rather, it asserts that such method produced an unconstitutional result.

The United States Supreme Court has recognized that allocation and apportionment of income is an arbitrary process designed to approximate income from business transactions within a state. As long as each state’s method of allocation and apportionment is rationally related to the business transacted within a state, then each state’s tax is constitutionally valid even though there may be some overlap. See Moorman Mfg. Co. v. Bair , 437 U.S. 279 (1978).

An apportionment formula used as an approximation of a corporation’s income reasonably related to the activities conducted within a taxing state will only be disturbed when the taxpayer has proved by “clear and cogent evidence” that the income attributed to the state is in fact “out of all reasonable proportion to the business transacted . . . in that state,” Hans Rees’ Sons, Inc. v. North Carolina , 283 U.S. 123, 135 (1931), or has “led to a grossly distorted result,” Norfolk & Western R. Co. v. Missouri State Tax Commission , 390 U.S. 317, 326 (1968).

The Taxpayer provided documentation clearly demonstrating that the inclusion of the gain from the asset sale in the sales factor significantly increased Corporation A’s apportionment factor and the amount of Corporation A’s income subject to Virginia tax as compared to previous years. The Taxpayer compared Corporation A’s Virginia 2021 taxable income and sales factor computed under the standard apportionment method with the income and sales factors from prior years to demonstrate the additional tax burden created by Virginia’s standard apportionment method. The Taxpayer states that the day-to-day business of Corporation A within Virginia had remained relatively constant and thus the increased sales factor determined using the statutory method bore no reasonable relation to the business conducted in the Commonwealth.

The fact that Virginia taxable income is greater under the statutory method than an alternative method does not constitute “extraordinary circumstances” sufficient to justify permission to use an alternative method. See Department of Taxation v. Lucky Stores, Inc ., 217 Va. 121 (1976). Further, in this case, the increase in the sales factor is directly attributable to the sale of assets located in Virginia and thus is directly related to income properly sourced within the Commonwealth.

The use of an alternative method is allowed only in extraordinary circumstances where the need for relief has been demonstrated by clear and cogent evidence. Based on the facts presented, the Taxpayer has not demonstrated that the statutory method is unconstitutional as applied to Corporation A.

CONCLUSION

For the reasons discussed above, in the Department’s opinion, the income resulting from the intercompany asset purchase was correctly reported on Corporation A’s separate federal income tax return and consolidation of accounts is not required. In addition, because the standard method of allocation and apportionment fairly reflects Corporation A’s income from sources within the Commonwealth and does not produce an unconstitutional result, the Taxpayer’s request for an alternative method of allocation and apportionment cannot be granted. Accordingly, the Taxpayer’s refund request is denied.

The Code of Virginia sections and regulations cited are available online at law.lis.virginia.gov. The public documents cited are available at tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy and Legal Affairs, Tax Adjudication and Resolution Division, at or **@tax.virginia.gov.

Sincerely,

Kristin L. Collins
Tax Commissioner
Commonwealth of Virginia

AR/4911.X

Related Documents

90-119

94-114