Could a multistate bank replace Virginia's prescribed single-property-factor method with a method that included mortgage loans?

Plain-English summary

Virginia denied the bank's request to replace its already granted single-property-factor method with a loan-inclusive formula. The nationally chartered bank was headquartered elsewhere but maintained a Virginia mortgage-loan office. It had reported no Virginia capital because it accepted no deposits there.

Virginia's bank-franchise-tax chapter did not then contain a permanent multistate apportionment formula. The Department used a method developed after the 1994 interstate-banking legislation and treated deviations from that prescribed formula as alternative-apportionment requests.

An earlier determination had already found the ordinary method unconstitutional for this bank and required a single-property-factor alternative. The bank wanted to modify that factor to include loans, but loan origination, approval, and servicing could occur in multiple locations and the location of receivables could be difficult to determine or manipulate. Its own returns showed inconsistent Virginia loan balances across year ends.

Alternative relief required extraordinary circumstances supported by clear and cogent evidence. The bank did not prove that the granted method was unconstitutional or inapplicable and did not follow the procedure requiring a filed return, payment, and timely amended refund return explaining the proposed method. Virginia denied the request.

Common questions

Q: Did Virginia use the ordinary statutory bank formula without modification?
A: No. The Department had already granted a single-property-factor alternative because the ordinary method produced an unconstitutional result for this bank.

Q: Why were mortgage loans not added to the factor?
A: The ruling identified multi-location activity, uncertain asset location, manipulation risk, and inconsistent reporting.

Q: What procedure did the bank fail to follow?
A: The alternative-method procedure requiring the prescribed return and tax payment followed by a timely amended refund return with supporting explanation.

Citations and references

• 23 VAC 10-120-280.
• Virginia Public Documents 94-366, 11-182 (November 3, 2011), and 11-152 (July 6, 2011).
• Interstate Banking and Branching Efficiency Act of 1994, P.L. 103-328.

Subject

Taxpayer did not demonstrate that Virginia's factor formula produces an unreasonable or distorted result

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-157

Original ruling text

October 4, 2012

Re: Ruling Request: Bank Franchise Tax

Dear *:

This will respond to your letter in which you request that * (the "Taxpayer") be permitted to use an alternative method of apportionment for purposes of the Virginia Bank Franchise Tax.

FACTS

The Taxpayer is a nationally chartered bank headquartered in another state that maintains a mortgage loan office in Virginia. The Taxpayer filed its 2008 and 2009 bank franchise tax returns reporting no capital apportioned to Virginia. In Public Document (P.D.) 11-182 (11/3/2011), the Department ruled that the Taxpayer was subject to the bank franchise tax, but would be required to use an alternative method (a single property factor) to apportion its capital subject to tax.

The Taxpayer disagrees with the method established by the Department and filed its 2012 bank franchise tax return using a method that alters the single property method. It requests the Department permit the Taxpayer to rely on the statutory method of apportionment for banks or, in the alternative, to use an alternative method that includes loans in the single property factor.

RULING

Chapter 12 of the Code of Virginia does not currently permit the apportionment of the bank franchise tax between states. If the Department were to strictly apply Virginia's bank franchise tax statutes, all of the Taxpayer's capital, regardless of its location, would be subject to Virginia's bank franchise tax.

After the passage of the Interstate Banking and Branching Efficiency Act of 1994 (Public Law 103-328), the Department recognized the need for apportioning the net capital of a multi-state bank. See Complete Auto Transit v. Brady , 430 U.S. 274, 97 S.Ct. 1076 (1977). Based on the findings of a task force conducted by the Virginia Bankers Association, the Department prescribed the methodology for apportionment outlined in P.D. 94-366 as a temporary measure until such time as the General Assembly enacted a permanent solution. To date, the General Assembly has not enacted a method for apportioning a bank's capital between states.

Accordingly, the Department treats requests to use a formula other than that prescribed in P.D. 94-366 as permission to use an alternative method of apportionment. This authority was recently affirmed by the Circuit Court of the City of Norfolk in AMG National Trust Bank v. Commonwealth of Virginia , C.L. 10-3031 (July 6, 2011). Also see P. D. 11-152 (7/6/2011).

Although not formulated specifically for the bank franchise tax, Title 23 of the Virginia Administrative Code (VAC) 10-120-280 establishes the procedure for requesting an alternative apportionment method. In order for a taxpayer to request an alternative method of allocation and apportionment, the taxpayer must file the return using the statutory or prescribed 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 Department will not grant an alternative method of allocation and apportionment unless it determines: (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.

The Department followed this procedure when it issued P.D. 11-182. The Taxpayer had filed its 2008 and 2009 bank franchise tax returns reporting no capital apportioned to Virginia because it does not accept deposits at its Virginia office. Yet the Taxpayer clearly had capital in Virginia as of January 1 for both years. As such, the Department found that the prescribed method under P.D. 94-366 was, in fact, inapplicable because it produced an unconstitutional result and requested that the Taxpayer file amended bank franchise tax returns for the 2008 and 2009 tax years.

In the context of a ruling request, it is difficult for a taxpayer to demonstrate that Virginia's factor formula produces an unreasonable or distorted result. Further, the method requested by the Taxpayer was fully vetted by the task force in 1994. Because the origination, approval, and servicing of loans and lease financing receivables can take place at multiple locations, the exact location of these assets may be difficult to determine and easy to manipulate. The Taxpayer's return shows evidence of these issues by the fact that loan receivables in Virginia are included in total assets as of December 31, 2010, but no loan receivables are reported in Virginia as of December 31, 2011.

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, you have not demonstrated that the alternative method that has already been granted is unconstitutional or inapplicable as it would apply to the Taxpayer. Furthermore, the Taxpayer's request is not in accordance with the procedure for requesting an alternative method of allocation and apportionment outlined in Title 23 VAC 10-120-280. Based on the foregoing, I must deny the Taxpayer's request to use an alternative method of allocating and apportioning income.

This ruling is based on the facts presented as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections, regulation, and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this ruling, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5092576565.o