Tax Type
Individual Income Tax
Description
Foreign source income from prior periods; Residency
Topic
Subtractions and Exclusions
Taxpayers
Date Issued
05-12-2000
May 12, 2000
Re: § 58.1-1821 Application: Individual Income Tax
Dear ****
This will reply to your letter in which you request a refund of individual income tax paid by ***** collectively, (the "Taxpayers") for the 1995 taxable year.
FACTS
The Taxpayers changed their domicile from a territory (the "Territory") of the Untied States ("U.S.") to Virginia during the 1992 calendar year. The Taxpayers' 1995 federal adjusted gross income ("FAGI") included back pay for services performed while residing in the Territory during the 1988 through 1991 taxable years pursuant to a legal settlement.
The Taxpayers subtracted the back pay as foreign source income ("FSI") on their 1995 Virginia individual income tax return. The department disallowed the subtraction and assessed additional tax and interest. The Taxpayers have paid the assessment but contend that the settlement income constitutes FSI which should be subtracted from FAGI for Virginia income tax purposes.
DETERMINATION
Virginia's conformity to federal law is set forth in Code of Virginia § 58.1-301, which provides the terms used in the Virginia income tax statutes will have the same meaning as used in the Internal Revenue Code ("IRC"). Therefore, FAGI, which is the starting point for determining Virginia taxable income form individuals, is identical to that as defined by the IRC.
The Virginia taxable income of a resident individual equals FAGI along with the modifications enumerated in Code of Virginia § 58.1-322. The Taxpayers contend that the settlement income represents FSI subject to a subtraction from Virginia taxable income under Code of Virginia § 58.1-322(C)(7). Code of Virginia § 58.1-322(C)(7) provides a subtraction from FAGI for "any amount included therein which is [FSI] as defined in Code of Virginia § 58.1-302." Code of Virginia § 58.1-302, in pertinent part, defines foreign source income as:
Rents, royalties, license, and technical fees from property located or services performed without the United States or from any interest in such property, including rents, royalties, or fees for the use of or the privilege of using without the United States any patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other like properties.
The department has previously ruled that these words cannot be taken out of context to create a subtraction for income earned from outside the U.S. for any service. See Public Document ("P.D.") 86-209 (11/3/86), P.D. 92-44 (4/27/92), and P.D. 97-12 (1/17/97), copies enclosed. These words are incorporated in a subsection dealing with passive income from the rental of real estate and with income from patents, copy rights, and other intangible property, and do not stand alone as a separate FSI subtraction.
In the instant case, the income in question is not from "Rents, royalties, license, and technical fees from property located or services performed without the United States....". Instead, the income was attributable to salary resulting from personal services. As such, the income does not qualify as FSI eligible for the Virginia subtraction. See P.D. 99-128 (5/28/99), copy enclosed.
Accordingly, the FSI subtraction cannot be allowed because the income resulted from compensation for personal services. As a result, the individual income tax assessment for the 1995 taxable year is correct and your request for a refund is denied. If you have any questions regarding this determination, you may contact **** at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/25920B
Re: § 58.1-1821 Application: Individual Income Tax
Dear ****
This will reply to your letter in which you request a refund of individual income tax paid by ***** collectively, (the "Taxpayers") for the 1995 taxable year.
FACTS
The Taxpayers changed their domicile from a territory (the "Territory") of the Untied States ("U.S.") to Virginia during the 1992 calendar year. The Taxpayers' 1995 federal adjusted gross income ("FAGI") included back pay for services performed while residing in the Territory during the 1988 through 1991 taxable years pursuant to a legal settlement.
The Taxpayers subtracted the back pay as foreign source income ("FSI") on their 1995 Virginia individual income tax return. The department disallowed the subtraction and assessed additional tax and interest. The Taxpayers have paid the assessment but contend that the settlement income constitutes FSI which should be subtracted from FAGI for Virginia income tax purposes.
DETERMINATION
Virginia's conformity to federal law is set forth in Code of Virginia § 58.1-301, which provides the terms used in the Virginia income tax statutes will have the same meaning as used in the Internal Revenue Code ("IRC"). Therefore, FAGI, which is the starting point for determining Virginia taxable income form individuals, is identical to that as defined by the IRC.
The Virginia taxable income of a resident individual equals FAGI along with the modifications enumerated in Code of Virginia § 58.1-322. The Taxpayers contend that the settlement income represents FSI subject to a subtraction from Virginia taxable income under Code of Virginia § 58.1-322(C)(7). Code of Virginia § 58.1-322(C)(7) provides a subtraction from FAGI for "any amount included therein which is [FSI] as defined in Code of Virginia § 58.1-302." Code of Virginia § 58.1-302, in pertinent part, defines foreign source income as:
Rents, royalties, license, and technical fees from property located or services performed without the United States or from any interest in such property, including rents, royalties, or fees for the use of or the privilege of using without the United States any patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other like properties.
The department has previously ruled that these words cannot be taken out of context to create a subtraction for income earned from outside the U.S. for any service. See Public Document ("P.D.") 86-209 (11/3/86), P.D. 92-44 (4/27/92), and P.D. 97-12 (1/17/97), copies enclosed. These words are incorporated in a subsection dealing with passive income from the rental of real estate and with income from patents, copy rights, and other intangible property, and do not stand alone as a separate FSI subtraction.
In the instant case, the income in question is not from "Rents, royalties, license, and technical fees from property located or services performed without the United States....". Instead, the income was attributable to salary resulting from personal services. As such, the income does not qualify as FSI eligible for the Virginia subtraction. See P.D. 99-128 (5/28/99), copy enclosed.
Accordingly, the FSI subtraction cannot be allowed because the income resulted from compensation for personal services. As a result, the individual income tax assessment for the 1995 taxable year is correct and your request for a refund is denied. If you have any questions regarding this determination, you may contact **** at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/25920B
Rulings of the Tax Commissioner