Tax Type
Corporation Income Tax
Description
Foreign source income
Topic
Subtractions and Exclusions
Date Issued
06-20-1988
June 20, 1988
Re: §58.1-1821 Application; Corporation Income Tax
§58.1-302 Foreign Source Income
Dear**************
This is in response to your letter of December 16, 1987 in which you applied for correction of an assessment of corporation income tax.
Facts
The taxpayer underwent a field audit and a number of adjustments were made for 1984 and 1985. The taxpayer protests only one adjustment which disallowed a portion of the subtraction for foreign source income claimed by the taxpayer. The portion disallowed by the auditor was derived from the sale of a subsidiary in a foreign country.
Discussion
As you note in your application, Virginia's definition of foreign source income includes "gains, profits, or other income from the sale of intangibles or real property located without the United States". Va. Code §58.1-302, emphasis added. The omission of tangible personal property from the definition is significant.
Although the sale of tangible personal property in a foreign country may generate income which qualifies as income without the United States under I.R.C. §§861-863, such income would not qualify under Virginia's definition of "foreign source income."
It appears that the auditor treated the transaction as a sale of tangible personal property instead of a sale of intangible stock in a subsidiary corporation. However, based on a conversation with a member of your staff, we have determined that the transaction was, in fact, a sale of intangible stock in your subsidiary corporation. Therefore, the gain arising from the transaction qualifies for Virginia's foreign source income subtraction.
Determination
Accordingly, the audit report and assessment will be revised to include the gain on the transaction in Virginia's foreign source income subtraction. We have reviewed the computations submitted with your partial payment of the assessment. The amount you paid appears to be the correct amount of tax and interest due after including the gains in the foreign source income subtraction. Accordingly, the balance of the assessment will be abated.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner