Document Number
21-34
Tax Type
Individual Income Tax
Description
Subtractions : Foreign Source Income - Tax Cuts and Jobs Act (TCJA)
Topic
Appeals
Date Issued
03-09-2021

March 9, 2021

Re:   Request for a Ruling: Individual Income Tax

Dear *****:

This will reply to your letter in which you seek correction of the individual income tax assessments issued to ***** (the “Taxpayer”) for the taxable year ended December 31, 2018.

FACTS

The Taxpayer, a Virginia resident, wholly owned three S corporations and two controlled foreign corporations (CFCs). The three S corporations in turn wholly owned four CFCs. The repatriation requirements of the Tax Cuts and Jobs Act (TCJA) resulted in the CFCs including additional foreign source income for the 2018 taxable year. Because the S corporations have elected to be treated as pass-through entities, the additional foreign source income was included in the Taxpayer’s federal adjusted gross income (FAGI). 

The Taxpayer claimed a foreign source income subtraction for the repatriated income passed-through the S corporations to him on his 2018 Virginia income tax return. The Department disallowed the subtraction. The Taxpayer does not appeal the denial of the subtraction, but contends that he should be allowed to pay the additional liability in installments pursuant to the TCJA. 

RULING

Virginia Code § 58.1-301 provides, with certain exceptions, that terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia. For Virginia, federal taxable income (FTI) and FAGI, the starting points for determining income taxable in Virginia for corporations and individuals, respectively, are identical to that as defined by the IRC.

S Corporations

In following federal tax policy with respect to S corporations, Virginia Code § 58.1-401 provides that such corporations are not subject to income tax in Virginia. Thus, Virginia has elected to treat S corporations in substantially the same manner as has the Internal Revenue Service (IRS), i.e. the corporate entity itself is not subject to taxation, but the shareholders will be taxed as individuals on their pro rata share of S corporation income to the extent includable in FAGI. See Title 23 of the Virginia Administrative Code (VAC) 10-120-90 E, Public Document (P.D.) 88-165 (6/29/1988) and P.D. 07-99 (6/27/2007).  

Subtraction

Income properly included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Chapter 3 of Title 58.1 of Virginia Code § 58.1-322.01 through § 58.1-322.04. The Taxpayer claimed a subtraction on his Virginia individual income tax return for repatriated income passed-through his S corporations from the controlled foreign corporations. At one time, Virginia provided a subtraction from FAGI for certain foreign source income. However, the General Assembly repealed the subtraction effective for taxable years beginning on and after January 1, 2003. See P.D. 03-54 (5/3/2003), P.D. 07-1 (2/22/2007), P.D. 08-103 (6/18/2008) and P.D. 09-50 (4/27/2009). Therefore, the subtraction was properly denied.

TCJA

On December 22, 2017, Congress enacted Public Law 115-97, known as the TCJA, which substantially changed the federal income taxation of individuals and businesses. Although the TCJA is typically effective for taxable years beginning in 2018, certain provisions of the act effect prior years. 

House Bill 2529 and Senate Bill 1372 (Chapter 17, 2019 Acts of Assembly and Chapter 18, 2019 Acts of Assembly, respectively) were enacted to advance Virginia’s date of conformity to the IRC from February 9, 2018 to December 31, 2018. This legislation allows Virginia to generally conform to the TCJA and the Bipartisan Budget Act of 2018 for the 2018 taxable year and after. Pursuant to Tax Bulletin (VTB) 19-1 (2/15/2019), Virginia will also generally conform to the provisions of the TCJA that affect businesses for the 2018 taxable year and thereafter. It will also continue to deconform from certain provisions of the IRC as explained in VTB 17-1 (2/6/2017). 

Multinational companies and individual investors have been keeping some of their foreign profits untaxed by holding such profits abroad in foreign corporations for many years. The TCJA forces the domestic parent corporation (or United States individual shareholder) to pay a one-time income tax, known as “repatriation,” at reduced rates on all their untaxed foreign profits in the 2017 taxable year.     The repatriation inclusion under IRC § 965 requires that the gross inclusion of post-1986 accumulated, untaxed earnings and profits (“E&P”) is calculated, which is prescribed as additional subpart F income. United States S corporations that are shareholders of a deferred foreign income corporation may elect to pay may elect to defer payment of their federal income tax derived from repatriation until certain triggering events occur. See IRC § 965(i). 

The TCJA allows taxpayers to elect to pay certain income derived from the repatriation of income from foreign corporations by installments over an eight year period. See IRC § 965(h).  Taxpayers must pay 8% of their net tax liability for each of first five installments, 15% of the net taxability for the 6th installment, 20% of the net tax liability for the 7th instalment and 25% of the net tax liability for the 8th installment. Because the payment of his Virginia tax liability would cause undue hardship, the Taxpayer requests that he be allowed to satisfy his Virginia income tax liability through the same installment percentages as IRC § 965(h) pursuant to Virginia’s conformity with the IRC. 

Virginia conforms to the IRC because FAGI and FTI are the starting point of Virginia taxable income. As such, Virginia’s conformity to the IRC with respect to items that are part of FAGI and FTI. The satisfaction of a taxpayer’s additional federal income tax liability resulting from the repatriation is not part of FAGI or FTI. Rather, it is merely a mechanism for payment. As such, Virginia’s conformity to the IRC does not extend to the allowance of installment payments. 

Undue Hardship

The Taxpayer indicates that his payment of his additional Virginia tax liability would cause an undue hardship. The Department allows taxpayers to pay their income tax liability in accordance with a payment plan, in certain circumstances, if the payment causes an undue hardship. The Taxpayer may contact the Department’s Collections Unit at ***** to arrange a payment plan. Please note that while a payment plan will provide an extended period for payment of the balance due, interest will continue to accrue on the balance until paid, pursuant to Virginia Code § 58.1-1812.
  
The Code of Virginia sections, regulation, Tax Bulletins and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.

Sincerely,

 

Craig M. Burns
Tax Commissioner

AR/3589.B

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Last Updated 05/26/2021 07:53