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Apportionment can be first used on amended tax return

Virginia Lawyers Weekly//June 5, 2023

Apportionment can be first used on amended tax return

Virginia Lawyers Weekly//June 5, 2023

A taxpayer may elect to use the manufacturer’s income apportionment method contained in Code § 58.1-422 for the first time in an amended tax return.

The Department of Taxation and the tax commissioner erred by concluding otherwise.


“Virginia law requires that ‘multistate businesses … apportion their income to determine the amount of their income [that] is taxable in Virginia.’ … The Code provides a standard formula for determining corporate income for state tax purposes. …

“However, manufacturers that meet certain requirements may utilize an alternative apportionment method to determine taxable income. … This alternative method is considered advantageous for eligible taxpayer companies. …

“This appeal stems from the Department’s audit of the income tax returns that 1887 Holdings [the appellee in this case] filed for the years 2014 and 2015.

“During the audit process, 1887 Holdings advised the Department that it wished to elect the manufacturer’s apportionment method permitted under Code § 58.1-422. After review, the Department denied the request.

“It based the denial on its conclusion that a corporation cannot make such an election in an amended return. The Department assessed the 2014 and 2015 tax liabilities for 1887 Holdings using the standard apportionment method.”

The tax commissioner upheld the department’s assessments. “After a hearing, the circuit court concluded that 1887 Holdings was entitled to elect the manufacturer’s apportionment method in an amended return.”

The department appeals.

‘Plain language’

“The straightforward issue presented here is whether a taxpayer company can elect the manufacturer’s apportionment method in an amended return or whether it can do so only when filing an original return.

“The tax code liberally permits the filing of amended income tax returns after the filing deadline, generally allowing them within certain time periods. …

“Although the Code broadly permits amended returns, it does have some limitations on what elections can be made in them. For example, Code §§ 58.1-322.04(4) and -402(F) specify that elections to ‘recognize[]’ income from certain dispositions of real property under the installment method must be ‘made on or before the due date prescribed by law (including extensions).’

“The statutory requirement that these installment elections be made on or before the due date excludes the possibility of making them in amended returns filed after the due date.

“The statutory language in Code § 58.1-422 at issue here, by contrast, does not require that the election of the manufacturer’s apportionment method be made on or before the due date or otherwise bar a taxpayer from electing this alternative apportionment method in an amended return. It does contain specific related limitations.

“For example, the statute expressly commits a taxpayer company electing the method to adhere to that choice for a period of three taxable years. … It also accounts for the possibility that a company may elect to use the manufacturer’s apportionment method but fail to meet the requirements over the mandatory three-year period. …

“Notably, the statute does not address the converse circumstance in which a company uses the standard apportionment method in the original return but later realizes that it meets the thresholds for the alternative manufacturer’s apportionment method and wishes to make that election retroactively in an amended tax return. …

“[T]he plain language of Code § 58.1-422 does not prevent a company from electing to use the manufacturer’s apportionment method through an amended return, and it is not the role of the reviewing court to add such a restriction.”

Other code sections

“[I]t is useful to reference other parts of Virginia’s tax code. … Code §§ 58.1-322.04(4) and -402(F) require certain elections to be ‘made on or before the due date prescribed by law (including extensions) for filing’ the tax return. Code § 58.1-442(A) allows affiliated corporations to elect ‘to file on a separate, consolidated or combined basis.’

“But, it mandates that all future returns be filed ‘upon the same basis unless permission to change is granted by the Department.’ These examples illustrate that the General Assembly knows how to limit a company’s ability to make or change elections for tax purposes.

“The legislature did not include language in Code § 58.1-422 limiting a company’s ability to elect to use the manufacturer’s apportionment method in an amended return.”

Agency’s interpretation

“The Department … urges this Court to afford weight to its interpretation of the statutory scheme because it is the agency tasked with administering the tax laws of the Commonwealth. As such, the Department claims that it has the authority to determine how the election is made.

“It is true that ‘in certain situations a court may afford greater weight than normal to an agency’s position.’ … When a statute is ambiguous, ‘the practical construction given to a statute by public officials charged with its enforcement is entitled to great weight by the courts.’ …

“Here, however, the statute is not ambiguous. … The plain language of Code § 58.1-422 simply does not prevent a taxpayer company from electing to use the manufacturer’s apportionment method in a timely amended return.

“This omission is not ambiguous in light of the legislature’s liberal acceptance of amended returns generally elsewhere in the tax code. Since the statute is not ambiguous, we do not weigh the Department’s interpretation any differently than that of any other litigant. …

“[T]he Department also cites its own guidelines. As noted by the guidelines themselves, they ‘represent the Department’s interpretation of the relevant laws’ and ‘do not have the force and effect of … [a] regulation.’ …

“The Department’s guidelines on this issue simply represent its interpretation of the statute and, based on the de novo standard of review, do not control our analysis.”


Dep’t of Taxation v. 1887 Holdings, Inc., Record No. 0598-22-2, May 23, 2023. CAV (published opinion) (Decker) From the Circuit Court of the City of Richmond (Richmond Sr.) Flora T. Hezel, Senior Assistant Attorney General (Jason S. Miyares, Attorney General; Charles H. Slemp, III, Chief Deputy Attorney General; Leslie A.T. Haley, Deputy Attorney General; Joshua N. Lief, Senior Assistant Attorney General & Section Chief, on briefs), for appellant. Craig D. Bell (Robert W. Loftin; Alec V. Sauble; McGuireWoods LLP, on brief), for appellee. VLW 023-7-178, 12 pp.

Editor’s note: A version of this digest that appeared in the June 5, 2023, print issue misidentified the case as VLW No. 023-7-168.

VLW 023-7-178

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