92-223 | Virginia Tax

Tax Type

Individual Income Tax

Description

Subpart F income

Topic

Subtractions and Exclusions

Taxable Income

Date Issued

11-05-1992

November 5, 1992

Re: Request for Ruling; Individual Income Tax

Dear******************

This will reply to your letter of April 27, 1992 in which you request a ruling regarding the subtraction of Subpart F income for individual income tax purposes.

FACTS

A number of your clients are partners in law firms. These partners receive a Schedule K-1 from an assurance society; the K-1 includes an income item called Subpart P income. You state that this item is reported as portfolio income (interest or dividend) on Schedule B of Form 1040.

You ask if this income qualifies as "foreign source income" that can be subtracted from federal adjusted gross income in arriving at Virginia adjusted gross income. If not, you ask if this income qualifies for any other subtraction for individual income tax purposes.

RULING

Under the provisions of Va. Code §58.1-391(8) and Internal Revenue Code (IRC) §702(b), the character of the income to the partner is the same as it is to the partnership. The income in question is classified as Subpart F income. Therefore, the income for each partner is also characterized as Subpart F income.

The Virginia subtraction for foreign source income is limited to the specific types of income from without the United States set forth in Va. Code §58.1-302 (copy enclosed). Subpart F income is not one of the types of income which qualifies as foreign source income.

Subpart F income is defined in IRC §952 as, in the case of any controlled foreign corporation (CFC), the sum of:

- 1) income from insurance of U.S. risks,
  2) foreign base company income,
  3) certain income attributable to operations in boycotting countries if the CFC participates in the boycott,
  4) illegal bribes, kickbacks or other payments paid by or on behalf of the CFC, and
  5) income derived from foreign countries described in IRC §901(i).

Foreign base company income includes foreign personal holding company income, which in turn includes dividends, interest, rents, and royalties. Thus, some of the Subpart F income included in the U.S. shareholder's income could be dividends, interest, rents, and royalties received by the controlled foreign corporation. The "look-thru" provisions of IRC § 904 imply that there is a pass through of income character to the U.S. shareholder. If so, then some of the Subpart F income may qualify for Virginia's foreign source income subtraction. For example, to the extent that the foreign controlled corporation received a dividend or interest from another foreign corporation, which is foreign personal holding company income and which the U.S. shareholder was required to include in income, the income may be subtracted on the Virginia individual income tax return as foreign source income. None of the other components of Subpart F income would qualify as foreign source income.

It should be noted that the burden is on the taxpayer to prove that the Subpart F income reported on Schedule K-1 and included in federal adjusted gross income qualifies as foreign source income and, therefore, is eligible to be subtracted.

I hope this answers your questions. Please contact the department if you need additional information.

Sincerely,

W. H. Forst
Tax Commissioner

OTP/6126P

Rulings of the Tax Commissioner