Administrative Code

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

23VAC10-120-170. Valuation of property owned or rented.

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.

Statutory Authority

§§ 58.1-203 and 58.1-410 of the Code of Virginia.

Historical Notes

Derived from VR630-3-410, eff. January 1, 1985.

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