Tax Type
Corporation Income Tax
Description
Separate entity, Foreign source income subtraction
Topic
Computation of Tax
Date Issued
05-26-2000
May 26, 2000
Re: Sec. 58.1-1821 Application: Corporate Income Taxation
Dear ****
This will reply to your letters in which you contest the assessment of tax and interest assessed against the ***** (the ``Taxpayer') for the taxable year ended December 31, 1995.
FACTS
The Taxpayer claimed a foreign source income subtraction on its 1995 separate Virginia corporate income tax return. This return was audited and an adjustment was made to recompute the foreign source income subtraction using amounts reported on the Taxpayer's consolidated federal Form 1118 (Foreign Tax Credit - Corporations) for the 1995 taxable year.
The Taxpayer contests this adjustment claiming the consolidated Form 1118 is inappropriate for computing amounts for a separate entity. The Taxpayer has provided additional information showing the foreign source income for the separate company and requests that the department adjust the foreign source subtraction based on its revised calculation.
DETERMINATION
It has been the department's long standing policy that the computation of the Virginia subtraction for foreign source income (considering expenses related to the income) be determined in accordance with Internal Revenue Code (``IRC') Sec.861 through Sec.863. See Public Document (P.D.) 91-229 (9/30/91), copy enclosed. Virginia law requires the use of the federal sourcing rules of IRC Sec.861 et seq. whether or not a taxpayer believes that certain expenses have any connection to income from foreign sources and regardless of what expenses would be under generally accepted accounting principles.
The purpose of Form 1118 is to compute the limitation on the amount of foreign taxes which can be claimed as a credit against federal tax liability. When the procedures of the IRC Sec.861 et seq. are used to complete Form 1118, the information reported on this form is considered useful and presumed correct and accurate. Such information is an appropriate starting point for computing the foreign source income subtraction allowed on the Taxpayer's Virginia return. The auditor was unable to substantiate that the separate company information concerning foreign source income was accurate. As such, the auditor used the total deductions reported on the consolidated Form 1118 to compute the expenses related to Virginia foreign source income.
The Taxpayer has provided additional information to substantiate foreign source income and expenses on a separate entity basis. However, the department disagrees with the Taxpayer's revised calculation. The Taxpayer removed foreign expenses attributed to United States (``U.S.') income under IRC Sec.863(b) but did not remove foreign income attributed to the U.S. P.D. 99-180 (6/30/99), copy enclosed, provides that income and expenses attributable to U.S. source IRC Sec.863(b) income be removed in determining the foreign source income subtraction.
Accordingly the audit assessment for the 1995 taxable year has been adjusted pursuant to the enclosed schedules. Please remit the balance due to *****, Office of Tax Policy, Virginia Department of Taxation, P. O. Box 1880, Richmond, Virginia 23218-1880 within 30 days to avoid the accrual of additional interest. If you have any questions regarding this determination, you may contact ***** at *****
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/26558B
Re: Sec. 58.1-1821 Application: Corporate Income Taxation
Dear ****
This will reply to your letters in which you contest the assessment of tax and interest assessed against the ***** (the ``Taxpayer') for the taxable year ended December 31, 1995.
FACTS
The Taxpayer claimed a foreign source income subtraction on its 1995 separate Virginia corporate income tax return. This return was audited and an adjustment was made to recompute the foreign source income subtraction using amounts reported on the Taxpayer's consolidated federal Form 1118 (Foreign Tax Credit - Corporations) for the 1995 taxable year.
The Taxpayer contests this adjustment claiming the consolidated Form 1118 is inappropriate for computing amounts for a separate entity. The Taxpayer has provided additional information showing the foreign source income for the separate company and requests that the department adjust the foreign source subtraction based on its revised calculation.
DETERMINATION
It has been the department's long standing policy that the computation of the Virginia subtraction for foreign source income (considering expenses related to the income) be determined in accordance with Internal Revenue Code (``IRC') Sec.861 through Sec.863. See Public Document (P.D.) 91-229 (9/30/91), copy enclosed. Virginia law requires the use of the federal sourcing rules of IRC Sec.861 et seq. whether or not a taxpayer believes that certain expenses have any connection to income from foreign sources and regardless of what expenses would be under generally accepted accounting principles.
The purpose of Form 1118 is to compute the limitation on the amount of foreign taxes which can be claimed as a credit against federal tax liability. When the procedures of the IRC Sec.861 et seq. are used to complete Form 1118, the information reported on this form is considered useful and presumed correct and accurate. Such information is an appropriate starting point for computing the foreign source income subtraction allowed on the Taxpayer's Virginia return. The auditor was unable to substantiate that the separate company information concerning foreign source income was accurate. As such, the auditor used the total deductions reported on the consolidated Form 1118 to compute the expenses related to Virginia foreign source income.
The Taxpayer has provided additional information to substantiate foreign source income and expenses on a separate entity basis. However, the department disagrees with the Taxpayer's revised calculation. The Taxpayer removed foreign expenses attributed to United States (``U.S.') income under IRC Sec.863(b) but did not remove foreign income attributed to the U.S. P.D. 99-180 (6/30/99), copy enclosed, provides that income and expenses attributable to U.S. source IRC Sec.863(b) income be removed in determining the foreign source income subtraction.
Accordingly the audit assessment for the 1995 taxable year has been adjusted pursuant to the enclosed schedules. Please remit the balance due to *****, Office of Tax Policy, Virginia Department of Taxation, P. O. Box 1880, Richmond, Virginia 23218-1880 within 30 days to avoid the accrual of additional interest. If you have any questions regarding this determination, you may contact ***** at *****
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/26558B
Rulings of the Tax Commissioner