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Virginia Administrative Code
Title 23. Taxation
Agency 10. Department of Taxation
Chapter 120. Corporation Income Tax
1/27/2023

23VAC10-120-160. Property factor.

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.

Statutory Authority

§§ 58.1-203 and 58.1-409 of the Code of Virginia.

Historical Notes

Derived from VR630-3-409, eff. January 1, 1985.

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