Document Number
01-220
Tax Type
Corporation Income Tax
Description
Foreign source income
Topic
Computation of Income
Subtractions and Exclusions
Date Issued
12-20-2001
December 20, 2001

Re: § 58.1-1821 Application: Corporate Income Tax

Dear *****

This will reply to your letter in which you seek correction of the corporate income tax assessment issued to ***** (the "Taxpayer") for the 1996 taxable year. I apologize for the delay in the department's response.
FACTS

The Taxpayer entered into a technical fee agreement that required it to provide the rights to its intellectual property and supportive technical services to a corporation ("FC") located in a foreign country in exchange for a percentage of FC's gross revenues. The Taxpayer subtracted these gross revenues as foreign source income revenues on its 1996 Virginia corporate income tax return. The department's auditor disallowed this subtraction and assessed additional income tax and interest. The auditor took the position that the technical services were not incidental to the contract relating to the use of the intellectual property and, therefore, did not qualify for the foreign source income subtraction. The Taxpayer has paid the assessment and requests a refund.
DETERMINATION

For corporate income tax purposes, Code of Virginia § 58.1-402(C)(8) provides a subtraction to the extent included in federal taxable income for foreign source income as defined in § 58.1-302. Code of Virginia § 58.1-302 defines foreign source income to include:
    • 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 words "technical fees from . . . services performed" cannot be taken out of their context to create a subtraction for income earned from the performance outside the United States of any service which can be characterized as technical in nature. The words are incorporated in a subsection dealing with passive income from the rental of real estate and with income from patents, copyrights and other intangible property. See Public Document ("P.D.") 86-209 (11/3/86), copy enclosed.

A review of the technical fee contract indicates that the primary purpose of the contract was to allow FC to use the Taxpayer's intellectual property in order to fulfill FC's business purpose. Any technical services performed by the Taxpayer are incidental to FC's use of the intellectual property. Accordingly, the Taxpayer was entitled to a foreign source income subtraction on its 1996 return. However, the foreign source technical fees must be reduced by the appropriate related expenses. You have provided a schedule reflecting the foreign source income subtraction amounts and the appropriate related expense to exclude.

The audit has been adjusted in accordance with this determination. A refund of ***** will be issued for the 1996 taxable year, along with appropriate refund interest. If you have any questions about this determination, you may contact ***** in the department's Office of Policy and Administration, Appeals and Rulings, at *****.

Sincerely,

Danny M. Payne
Tax Commissioner

AR/32162B

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46