Iowa Administrative Code › Agency 701 - Revenue Department › Title I - Administration › Chapter 54 - Allocation and Apportionment › Rule 701-54.9 - 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 Iowa Code subsection
				  42233(2).,
				  or 701-Chapter 54, 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 Iowa
				  Code subsection
				  42233(2).,
				  and pay the tax shown due thereon. If a change to some other method is desired,
				  a statement of objections and schedules detailing such alternative method shall
				  be submitted to the department. The department shall require detail and proof
				  within such 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. Such 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.
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.
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).
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 Iowa single sales factor formula set forth in Iowa Code section
				  42233.,
				  subsection 2, paragraph
"b, "
and the apportionment methods set
				  forth in 701-Chapter 54.
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
				  701-78. (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 its 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
				  42233..