Tax Type
Corporation Income Tax
Description
Foreign Source Income
Topic
Returns/Payments/Records
Date Issued
03-29-1991
March 29, 1991
Re: §58.1-1821 Application, Corporation Income Tax
Dear****************
This will reply to your letter of October 29, 1990, in which you seek correction of a corporation income tax assessment **************for (the "Taxpayer").
FACTS
On its Virginia returns for 1985 and 1986, the taxpayer claimed a subtraction for foreign source income. The auditor reduced the subtraction by applying additional expenses from federal Form 1118 (Computation of Foreign Tax Credit) to the income. While you agree that additional expenses should be applied, you claim that the expenses shown on Form 1118 do not represent the actual expenses associated with the taxpayer's income from foreign sources for which it claimed a Virginia subtraction, and you have submitted supplemental information which you claim more accurately reflects the expenses related to foreign source income.
DETERMINATION
Previous rulings of the department require the Virginia subtraction for foreign source income to be reduced by expenses, determined in accordance with Internal Revenue Code (IRC) §861 et seq. P.D. 86-154 (8/14/86). To compute the expenses, our auditors are justified in presuming that the information on federal Form 1118 is correct and accurate. The department allows supplemental information which may differ from and be more accurate than what is on Form 1118 if, and only if, it is consistent with IRC §861 et seq. Recognizing the record keeping burden and complexity of the computation required, the department will accept reasonable estimates, ratios and other methods that approximate the result required by federal sourcing rules.
A review of your computation reveals that it is not totally consistent with IRC §861 et seq. and does not establish that the revised expense information would not materially affect federal tax liability. Your computations include only "actual" expenses used to produce foreign source income. However. Virginia law requires that IRC §861 et seq. must be followed in attributing expenses to foreign income regardless of what the expenses would be under generally accepted accounting principles. You excluded charitable contributions from your computation, stating the contributions made to U.S. charities from U.S. source income have no relationship to foreign source income. The department has previously ruled that charitable contributions must be ratably apportioned when computing the Virginia foreign source income subtraction. P.D. 87-149 (6/8/87). This ruling was made in connection with an audit of the taxpayer's returns for 1981 and 1982. No federal tax credit was claimed in those years so none of the expense information was material to federal tax liability. Therefore, precision in preparing the form 1118 was not required. See U.S. Treas. Reg. 1-861-8(c)(1)(vi). A credit was claimed in 1984 and 1985, so the proposed information changes amounts actually reported to the IRS. The taxpayer must demonstrate that the proposed expenses are reasonably close to the amount that would be required under IRC §861 et seq. if the expenses were material to federal tax liability.
To support your position that charitable contributions should not be used to reduce the subtraction for foreign source income, you cite Dana Corporation v. Limbach, Ohio Board of Tax Appeals, Case No 87-B-141, dated March 30, 1990. The court's ruling in that case was based on Ohio law, which does not contain a provision similar to Virginia's that specifically incorporates the foreign sourcing rules in determining income and expenses from foreign sources. Therefore, I do not find the case to be persuasive.
The department will allow you to resubmit your supplemental information representing expenses to be applied to the subtraction for foreign source income, provided that it is prepared in accordance with IRC §861 et seq. and the taxpayer can demonstrate that the revision will not have a material affect on federal tax liability. If you choose to submit additional information, please send it to the department's Technical Services Section, P. O. Box 6-L, Richmond, Virginia 23282, within the next 30 days.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner