Iowa Administrative Code › Agency 701 - Revenue Department › Title VII - Franchise Tax › Chapter 602 - Determination of Net Income › Rule 701-602.29 - Allocation and Apportionment of Income in Special Cases

Current through Register Vol. 47, No. 3, July 24, 2024
If a taxpayer feels that the allocation and apportionment
				  method as prescribed by rule
				  701-59.28 (422) in the
				  taxpayer's case results in an injustice, the taxpayer may petition the
				  department for permission to determine the taxable net income, both allocable
				  and apportionable, to the state on some other basis.
The taxpayer must first file the return as prescribed by rule
				  701-59.28 (422) and pay the tax
				  shown due thereon. If a change to some other method is desired, a statement of
				  objections and schedules detailing the alternative method shall be submitted to
				  the department. The department shall require detail and proof within the time
				  as the department may reasonably prescribe. In addition, the alternative method
				  of allocation and apportionment will not be allowed where the taxpayer fails to
				  produce, upon request of the department, any information the department deems
				  necessary to analyze the request for an alternative method of allocation and
				  apportionment. The petition must be in writing and shall set forth in detail
				  the facts upon which the petition is based. The burden of proof will be on the
				  taxpayer as to the validity of the method and its results. The mere fact that
				  an alternative method of apportionment or allocation produces a lesser amount
				  of income attributable to Iowa is, per se, insufficient proof that the
				  statutory method of allocation and apportionment is invalid.
Moorman
				  Manufacturing Company v. Bair,
437 U.S.
				  267,
				  57 L.Ed.2d 197 (1978). In
				  essence, a comparison of the statutory method of apportionment with another
				  formulary apportionment method is insufficient to prove that the taxpayer would
				  be entitled to the alternative formulary apportionment method.
Moorman
				  Manufacturing Company v. Bair,
supra.
One of the possible alternative methods of allocation and
				  apportionment is separate accounting provided the taxpayer's activities in Iowa
				  are not unitary with the taxpayer's activities outside Iowa. Any corporation
				  deriving income from business operations partly within and partly without Iowa
				  must determine that net business income attributable to this state by the
				  prescribed formula for apportioning net income, unless the taxpayer proved by
				  clear and cogent evidence that the statutory formula apportions income to Iowa
				  out of all reasonable proportion to the business transacted within Iowa.
Moorman Manufacturing Company v. Bair,
supra.
Separate accounting is not allowable for a unitary business
				  where the separate accounting method fails to consider factors of profitability
				  resulting from functional integration, centralization of management, and
				  economics of scale.
Shell Oil Company v. Iowa Department of
				  Revenue,
414 N.W.2d 113 (Iowa 1987).
The burden of proof that the statutory method of
				  apportionment attributes to Iowa income out of all reasonable proportion to the
				  business transacted within Iowa is on the taxpayer. In order to utilize
				  separate accounting, the taxpayer's books and records must be kept in a manner
				  that accurately depicts the exact geographical source of profits. In any
				  petition to utilize separate accounting, the taxpayer must submit schedules
				  which accurately depict net income by division or product line and the amount
				  of income earned within Iowa.
There are alternative methods of separate accounting
				  utilizing different accounting principles. A mere showing that one separate
				  accounting method produces a result substantially different than the statutory
				  method of apportionment is not sufficient to justify the granting of the
				  separate accounting method shown. The taxpayer must not only show that the
				  separate accounting method advocated by the taxpayer in comparison with the
				  statutory method of apportionment produces a result which, if the statutory
				  method of apportionment were used, would be out of all reasonable proportion to
				  the business transacted within Iowa. The taxpayer must also show that all other
				  conceivable reasonable separate accounting methods would show, when compared
				  with the statutory method of apportionment, that the statutory method of
				  apportionment substantially produces a distorted result.
As used in this rule, "statutory method of apportionment"
				  means the apportionment factor set forth in rule
				  701-59.28 (422).
All requests to use an alternative method of allocation and
				  apportionment submitted to the department will be considered by the compliance
				  division if the request is the result of an audit or by the taxpayer services
				  and policy division if the request is received prior to audit. If the
				  department concludes that the statutory method of allocation and apportionment
				  is, in fact, both inapplicable and inequitable, the department shall prescribe
				  a special method. The special method of allocation and apportionment prescribed
				  by the department may be that requested by the taxpayer or some other method of
				  allocation and apportionment which the department deems to equitably attribute
				  income to business activities carried on within Iowa.
If the taxpayer disagrees with the determination of the
				  department, the taxpayer may file a protest within 60 days of the date of the
				  letter setting forth the department's determination and the reasons therefor in
				  accordance with rule 701-7.8 (17A). The department's
				  determination letter shall set forth the taxpayer's rights to protest the
				  department's determination.
If no protest is filed within the 60-day period, then no
				  hearing will be granted on the department's determination under this rule.
				  However, this does not preclude the taxpayer from subsequently raising this
				  question in the event that the taxpayer protests an assessment or denial of a
				  timely refund claim, but this issue will only be dealt with for the years
				  involved in the assessment or timely refund claim.
The use of an alternative method of allocation and
				  apportionment would only be applicable to the years under consideration at the
				  time the special method of allocation and apportionment is prescribed. The
				  taxpayer's continued use of a prescribed method of allocation and apportionment
				  will be subject to review and change within the statutory, or legally extended
				  period(s).
If there is a material change in the business operations or
				  accounting procedures from those in existence at the time the taxpayer was
				  permitted to determine the net income earned within Iowa by an alternative
				  method of allocation and apportionment, the taxpayer shall apprise the
				  department of such changes prior to filing the taxpayer's return for the
				  current year. After reviewing the information submitted, along with any other
				  information the department deems necessary, the department will notify the
				  taxpayer if the alternative method of allocation and apportionment is deemed
				  applicable.
This rule is intended to implement Iowa Code section
				  422.63.