Tax Type
Corporation Income Tax
Description
Expenses related to foreign source income
Topic
Collection of Tax
Subtractions and Exclusions
Date Issued
09-10-1992
September 10, 1992
Re: §58.1-1821 Application; Corporation Income Tax
Dear*********************
This will reply to your letter of July 17, 1992, in which you seek correction of corporation income tax assessments for***************(the "Taxpayer").
FACTS
The Taxpayer was audited and numerous adjustments were made. The taxpayer reported a subtraction for foreign source income for the two years under review. The auditor increased expenses related to the foreign source income, thereby reducing the subtraction. You contend that the use of federal Form 1118 is improper in computing related expenses and believe the auditor's expense calculation is excessive.
DETERMINATION
Methodology: Previous rulings by 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) (copy enclosed). Virginia law requires use of IRC §861 et seq. whether or not the taxpayer believes certain expenses have any connection to income from foreign sources and regardless of what the expenses would be under generally accepted accounting principles.
Related expenses: The department has previously ruled on the proper formula for computing nonallocable expenses attributable to foreign source income. See P.D. 91-229 (9/30/91) (copy enclosed). A review of the auditor's calculations reveals that they are consistent with the method established in the cited ruling.
You contend that the auditor's expense calculation of 49% is excessive and believe a more realistic approximation is between 25% and 30%. You provide no explanation as to why the auditor's calculation is incorrect, nor do you provide the basis for your approximation. The auditor used 49% of the expenses on Form 1118 because 49% of the Form 1118 income was subtracted as foreign source income.
You claim that the auditor used amounts included in §78 gross-up and subpart F income in computing expenses. However, a comparison of the Taxpayer's Form 1118, foreign source income, Schedule C, and allocable income shows that subpart F income and §78 dividends were not included in the auditor's expense computation.
Because the auditor computed expenses in accordance with the department's established policy, I find that the audit adjustments are correct. Accordingly, the assessment is correct and is now due and payable. You will shortly receive an updated bill with interest accrued to date. The bill should be paid within 30 days to avoid the accrual of additional interest.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6303F
Rulings of the Tax Commissioner