Current through Register Vol. 41, No. 3, September 23, 2024
A. In general.
1. The property factor is a fraction. The
numerator is the average value of real and tangible personal property which is
used in Virginia. The denominator is the average value of real and tangible
personal property which is used everywhere. Property shall be included in the
property factor if it is:
a. owned or rented
by taxpayer, and
b. used by
taxpayer, and
c. effectively
connected with the taxpayer's trade or business within the United States and
the income from such trade or business is includible in both Virginia taxable
income and federal taxable income.
2. "Property."
a. "Property" means all real and tangible
personal property including land, mineral rights, buildings, machinery,
inventory and any other real or tangible personal property in which the
corporation has any right of use or possession. For valuation of property see
23VAC10-120-170. For explanation
of "average value" see
23VAC10-120-180.
b. Partnership property. For purposes of the
property factor each item of partnership property shall have the same character
for a corporate general partner as if direct corporate ownership of the
property existed. However, if the inclusion of partnership property in the
property factor does not materially affect the factor and information is
difficult to obtain then partnership property may be treated as intangible
property and excluded from the property factor provided that such treatment is
adequately disclosed. See
23VAC10-120-20.
c. Leasehold improvements. For purposes of
the property factor leasehold improvements are deemed to be owned by the lessee
of the property to which the improvements are made regardless of any right the
landlord may have to the improvements at the end of the lease term.
d. Mining property. A corporation engaged in
the business of mining mineral ore, oil, gas or other natural resources or
cutting timber may own or lease the real estate on which such operations are
conducted or it may own or lease only the mineral rights to such property or
some other interest in the operations. For purposes of the property factor the
corporation is deemed to own or lease the property, mineral rights or other
interest in such property and the value, as determined under
23VAC10-120-170, will be included
in the property factor.
3. "Owned or rented." Property will be
included in the property factor regardless of whether the corporation owns,
rents or leases the property. Ownership or rental affects only the method used
to determine the value of the property. See
23VAC10-120-170.
4. "Used."
a. Property held as reserves or standby
facilities or property held as a reserve source of materials shall be included
in the factor.
b. Property under
construction during the taxable year (except inventoriable goods in process)
shall be excluded from the factor until such property is actually used. If the
property is partially used while under construction, the value of the property
to the extent used shall be included in the property factor.
c. Mineral rights are used when placed in
production or developed to the point where they could be placed in production
but are held as reserves. Exploration and development do not place mineral
rights in use for the property factor. But see
23VAC10-120-170 for
valuation.
d. Once used or
available for use, property shall remain in the property factor until its
permanent withdrawal is established by an identifiable event such as its sale.
The fact that taxpayer ceases to actively use property does not, of itself,
remove the property from the property factor because it is still available to
be used.
e. Property is not
permanently withdrawn from use by merely offering it for sale. Property offered
for sale shall be deemed available for use unless other circumstances clearly
show that use of the property has been permanently abandoned.
f. Property which the corporation ceases to
actively use in its operations but leases to others is still being used by the
corporation to produce income and shall be included in the factor.
5. Property is effectively
connected with the taxpayer's business within the United States if it is
actually used or available to be used in taxpayer's trade or business.
Generally any use of property which produces income, including rental income,
is income from a trade or business. A taxpayer may have more than one trade or
business. See Treasury Reg. § 1.861-4 for definition of "effectively
connected. . . ."
6. Safe harbor
leases. The Economic Recovery Tax Act of 1981 (ERTA) allows corporations to
treat certain financial agreements concerning property as leases for federal
income tax purposes even though such agreements would not be recognized as
leases under the general property law of a state. Such agreements are treated
as leases for purposes of the Virginia income tax to the same extent that they
are treated as leases for federal income tax. Thus the "lessee" will be treated
as a corporation renting property, and the value of the property will be
included in the property factor. The "lessor" will be treated as a corporation
owning property and the value of the property will be included in the property
factor.
B. Examples.
These principles are illustrated by the following examples:
Example 1: On June 30, 1981, taxpayer shutdown its
manufacturing operations in State X and announced its intention to sell the
land, buildings and machinery. The property was sold on October 31, 1982. The
value of the manufacturing plant is included in the property factor until
November 1, 1982.
Example 2: Same as example 1 except that in addition to
closing the plant taxpayer removed all equipment from the plant, relocated key
employees and awarded severance pay to other employees. The plant is included
in the property factor until July 1, 1981.
Example 3: Same as example 1 except that the plant was rented
on a month to month basis until the plant was sold. The plant is included in
the property factor until November 1, 1982.
Example 4: On June 30, 1981, taxpayer closed its
manufacturing plant and leased the building under a 5-year lease on October 1,
1981. The plant is included in the property factor for all of 1981 and
subsequent years.
Example 5: The taxpayer operates a chain of retail grocery
stores. On June 30, 1981, taxpayer closes Store A which is then remodeled into
three small retail stores such as a dress shop, dry cleaner, and barber shop.
The new stores are advertised for lease on November 1, 1981. The property
remains in the property factor for all of 1981 and subsequent years.
Example 6: Taxpayer, a retailer, owns a 10 story building.
The first floor is used by taxpayer as a retail store. The remaining floors are
rented to various businesses as offices. The entire building is included in the
property factor.
