Current through Register Vol. 41, No. 3, September 23, 2024
A. In general. The taxpayer shall be
consistent in the valuation of property and in excluding or including property
in the property factor in filing returns or reports to all income tax states to
which the taxpayer reports to the extent that the laws of the other states are
similar to Virginia's laws. In the event the taxpayer is not consistent in its
reporting it shall disclose in its return to Virginia the nature and extent of
the inconsistency.
B. Owned
property.
1. Property owned by the taxpayer
shall be valued at its original cost. As a general rule, "original cost" is
deemed to be the basis of the property for federal income tax purposes at the
time of acquisition by the corporation and adjusted by subsequent capital
additions and improvements thereto and partial disposition thereof, by reason
of sale, exchange, abandonment, etc. The original cost shall not be reduced by
amounts allowed or allowable for depreciation, amortization, depletion,
accelerated cost recovery or similar allowances.
2. Inventory of stock of goods shall be
included in the factor in accordance with the valuation method used for federal
income tax purposes.
3. Property
acquired by gift or inheritance shall be included in the property factor at its
basis for determining depreciation for federal income tax purposes.
C. Rental property.
1. The property factor includes the average
value of property rented by the taxpayer valued at eight times the net annual
rental rate. Net annual rental rate is the annual rental rate paid by the
corporation.
2. Annual rental rate.
a. The "annual rental rate" is the amount
paid as rental for the property for a 12-month period, or the "annual
rent."
b. Where property is rented
for less than a 12-month period, the net rent paid for the actual period of
rental shall be annualized to determine the annual rental rate. For example, if
equipment is rented for 3 months at $100 per month the annual rental rate is
$1,200.
c. "Annual rent" is the
actual sum of money or other consideration payable, directly or indirectly, by
the taxpayer or for its benefit for the use of the property and includes any
amount payable for the use of real or tangible personal property, or any part
thereof, whether designated as a fixed sum of money or as a percentage of
sales, profits, or otherwise and any amount payable as additional rent or in
lieu of rents, such as interest, taxes, insurance, repairs or any other items
which are required to be paid by the terms of the lease or other arrangement.
However, rent does not include amounts paid as service charges, such as
utilities, janitor services, etc. If a payment includes rent and other charges
unsegregated, the amount of rent shall be determined by consideration of the
relative values of the rent and other items.
d. "Annual rent" does not include incidental
day-to-day expenses such as hotel or motel accommodations, daily rental of
automobiles, etc.
3.
Leasehold improvements shall, for the purpose of the property factor, be
treated as property owned by the lessee regardless of whether the lessee is
entitled to remove the improvements or the improvements revert to the lessor
upon expiration of the lease. Hence, the original cost of leasehold
improvements shall be included in the factor of the lessee.
D. Movable tangible personal
property.
1. The value of movable tangible
personal property shall be included in the numerator to the extent of its
utilization in this state. The extent of such utilization shall be determined
by multiplying the total value of such property by a fraction, the numerator of
which is the number of days of physical location of the property in Virginia
during the taxable period and the denominator is the number of days of physical
location of the property everywhere during the taxable period.
2. An automobile assigned to a traveling
employee may be included in the numerator of the property factor of the state
to which the employee's compensation is assigned under the payroll
factor.
3. Motor carriers apportion
income entirely by vehicle miles. Va. Code § 58.1-417.
4. In the case of a contractor who has
elected to use the completed contract method of accounting for Federal income
tax purposes the contractor shall apportion income in accordance with Va. Code
§ 58.1-419.
E.
Mineral rights.
1. Mineral rights involve
ownership of less than the entire fee simple interest in land. If the mineral
rights consist of ownership of all minerals in place with no payments in the
nature of rents or royalties required and no time limitations imposed then the
mineral rights will be valued as owned property.
2. Most mineral rights involve several types
of expenditures variously called "bonus," "rental," "delay rental," "royalty,"
etc. The value of such mineral rights is the sum of:
a. Acquisition cost, bonus payments and other
substantial, nonrecurring items valued at original cost, and
b. Exploration and development costs and
other leasehold improvements valued at original cost.
F. Examples. The principles of
this section are illustrated by the following examples.
Example 1: On January 1, 1970 X corporation acquired a
factory building in this State at a cost of $500,000 and on July 1, 1971,
expended $100,000 for major remodeling of the building. The book value of the
building on December 31, 1982 is $456,000 (cost less accumulated depreciation).
The value of the building for purposes of the numerator and denominator of the
property factor is $600,000.
Example 2: In 1980, X corporation is merged into Y
corporation in a tax free reorganization under the Internal Revenue Code. At
the time of merger, X corporation owns a factory which X built in 1975 at a
cost of $1,000,000. X has been depreciating the factory at the rate of two
percent per year, and its adjusted basis (cost less depreciation) in X's hands
at the time of merger is $900,000. The property is acquired by Y in a
transaction in which, under the Internal Revenue Code, its basis in Y's hands
is the same as its basis in X's. Y includes the property in its property factor
at X's original cost, without adjustment for depreciation, i.e.,
$1,000,000.
Example 3: Corporation Y acquires the assets of corporation X
in liquidation by which Y is entitled to use its stock cost as the basis of the
X assets. Under these circumstances, Y's cost of the assets is the purchase
price of the X stock, prorated to the assets acquired in the liquidation of
X.
Example 4: A taxpayer, pursuant to the terms of a lease, pays
a lessor $1,000 per month as a base rental and at the end of the year pays the
lessor one percent of its gross sales of $100,000. The annual rent is $13,000
($12,000 plus one percent of $100,000 or $1,000).
Example 5: A taxpayer, pursuant to the terms of a lease, pays
the lessor $12,000 a year rent plus taxes in the amount of $2,000 and interest
on a mortgage in the amount of $1,000. The annual rent is $15,000.
Example 6: Taxpayer leases a 40,000 sq. ft. warehouse for 5
years but only uses 20,000 sq. ft. in its operations. The lease provides for an
annual rental of $200,000 and taxpayer is to pay utilities and taxes. The local
taxes are $12,000 per year. Within a few months taxpayer subleases 10,000 sq.
ft. to another corporation for the remainder of the 5 years at an annual rental
of $75,000 but taxpayer will furnish utilities and pay the taxes. The balance
of the warehouse space is rented to various businesses and individuals on a
month-to-month basis. The annual rental rate for the warehouse is $212,000
(200,000 rent plus 12,000 taxes). The entire property is included in the
property factor because the entire warehouse is actually used or available for
use on short notice or used to produce rental income.
