Tax Type
Corporation Income Tax
Description
Allocation of interest and rental income; Installment sales; Foreign source income
Topic
Allocation and Apportionment
Subtractions and Exclusions
Date Issued
09-15-1987
September 15, 1987
Re: §58.1-1821 Application; Corporation Income Tax
Expenses related to foreign source income
Allocable interest income
Dear *****************
This is in response to your application for correction of an assessment, a conference held on March 2, 1987, and supplemental information submitted on April 3, 1987. There are several issues involved.
Facts
1980 - Allocation of net interest:
For 1980 the taxpayer received interest income which the auditor included in allocable income under the law in effect for that year. (Effective January 1, 1981, interest is included in apportionable income.) The taxpayer protests the allocation of interest income on the grounds that the taxpayer was relying on a letter from the department as part of a prior audit in which the taxpayer was told to include interest in apportionable income.
Until 1980 the department interpreted §58-151.037 to require the apportionment of interest received in the ordinary course of business. This interpretation was overruled by the Virginia Supreme Court in Commonwealth of Virginia v. Champion Int. Corp., 220 Va. 981 (1980). Accordingly the department must apply the law as interpreted by the court even though the taxpayer was relying on the department's instructions.
A review of the amount of interest included in allocable interest shows that the amount was the gross interest income even though the taxpayer also incurred substantial interest expense, some of which was related to the interest income. The amount will be adjusted to reflect the gross interest less related expenses. Attached is the computation of related expenses from the supplemental information furnished by you.
1980 - Allocation of rental income:
For 1980 the taxpayer received rental income which was included in allocable income under the law in effect for that year. (Effective January 1. 1981, rental income is included in apportionable income.) The taxpayer protests the adjustment made by the auditor to remove rental income from apportionable income and include it in allocable income on the grounds that the amount reflects gross rents not net rents.
The audit will be revised to reduce the allocable rental income to the net rents.
1980 - Installment sales proceeds:
For 1980 the taxpayer received amounts from a 1973 installment sale of a subsidiary. The auditor included the amounts in both the numerator and the denominator of the sales factor. The taxpayer protests the inclusion of the installment proceeds in the numerator on the grounds that the income-producing activity which produced the sale in 1973 occurred outside of Virginia.
Receipts from the sale of intangible property are included in the numerator of the sales factor based on the income producing activity of the taxpayer in the year of receipt. You have not shown that any income producing activity of the taxpayer in 1980 occurred in any place other than the taxpayer's Virginia headquarters and accounting office. Therefore, the installment sales proceeds were properly included in the numerator.
1981 & 1982 - Foreign source income:
For 1981 and 1982 the taxpayer claimed a foreign source income subtraction. The auditor determined that the income was not included in the definition of "foreign source income" as defined in Va. Code §58-151.013 (c)(9) (since recodified as §58.1-302).
The income was attributable to contracts requiring the taxpayer to maintain, repair, install and, in some cases, operate highly sophisticated equipment outside the United States. The taxpayer states that the performance of those contracts was possible only through the taxpayer's knowledge of, skill in, use of, and advice concerning advanced, modern technology. The taxpayer contends that income from those contracts qualifies for Virginia's foreign source income subtraction as ". . . technical fees from . . . services performed without the United States." Va. Code §58.1-302.
The Virginia definition of "foreign source income" is far more limited than the federal definition of "income from sources without the United States." For example. the Virginia definition does not include compensation for labor or personal services performed without the United States. Compare I.R.C. §862(a)(3) with Va. Code §58.1-302.
The term "technical fees" is not a separate category of income qualifying as foreign source income but is incorporated in a subsection dealing primarily with income from patents, copyrights and other intangible property. The fact that the income in question was derived from the taxpayer's knowledge of, and skill in, modern technology does not qualify the income as "foreign source income" under Virginia law. The income is not incidental to a contract relating to the rental of real property or the licensing of a patent, copyright, trademark. trade brand, franchise and other like property for use without the United States. See the Ruling dated November 3. 1986, Public Document No . 86-209 (copy enclosed).
Therefore the auditor properly removed the income from the foreign source income subtraction. However, it appears that when the income was included in apportionable income, corresponding adjustments to the expenses related to the foreign source income subtraction and to the denominator of the payroll and sales factor were not made. The audit will be revised to include these adjustments.
Determination
You will receive a revised audit report and bill with interest accrued to date. The amount due for 1982, and the interest, will be adjusted to reflect the carryback of the 1985 net operating loss. In order to avoid additional interest the revised bill should be paid within thirty days.
Sincerely,
W. H. Forst
Tax Commissioner
Related Documents
Rulings of the Tax Commissioner