Tax Type
Corporation Income Tax
Description
Foreign source income
Topic
Subtractions and Exclusions
Date Issued
03-27-1987
March 27, 1987
Re: §58.1-1821 Application: Corporation Income Tax
§58.1-302 Foreign Source Income
Dear ********************
This is in response to your letter of June 27, 1986, in which you apply for correction of an assessment dated April 4, 1986, for the taxable years 1982 and 1983.
For both years the auditor disallowed amounts claimed as Foreign Source Income. You have furnished a list of the amounts which you claim are interest from foreign sources, although the amounts are not shown separately on federal form 1118. At the time of the audit the auditor was not furnished with a copy of form 1118 or other information to verify the nature and source of the claimed income. Therefore the amounts were properly disallowed. The schedule furnished does not provide sufficient information to permit us to allow a subtraction of the amounts claimed as foreign source income.
Because amounts shown on federal form 11;8 are based on computations under I.R.C. §§861-863, and similar computations are required by Virginia law, our auditors rely on form 1118 when reviewing amounts claimed as a subtraction for foreign source income. When amounts are not shown on form 1118 considerable information is required to verify that the amounts claimed are of the type allowable as a subtraction under Virginia law, that the amounts are income from without the United States under I.R.C. §§861-863, and that the amount subtracted is only the amount included in federal taxable income, i.e. net of expenses determined under I.R.C. §§861-863.
In addition to the disputed interest income, the taxpayer claimed a foreign source income subtraction for dividends which were clearly from sources without the United States. Because the federal form 1118 and supporting schedules were not provided to the auditor it was necessary for him to estimate the expenses which would have been shown on form 1118 pursuant to I.R.C. §§861-863. In the absence of other information the auditor's estimate appears to be reasonable and proper.
It appears that a number of computational errors were made in the preparation of the audit report. Accordingly, the audit report is being forwarded-to the Technical Services Section for revision. If you wish to provide any additional information on the nature, source and expenses related to the subtraction for foreign source interest income you may send it directly to:
Supervisor Technical Services Section
Office Services Division
Department of Taxation
P. O. Box 6-L
Richmond, VA 23282.
You will shortly receive a revised audit report and bill with accrued interest to date. The bill should be paid within 30 days to avoid additional interest.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner