Tax Type
Corporation Income Tax
Description
Foreign source income;Payroll based stock ownership, Net operating loss
Topic
Returns/Payments/Records
Date Issued
04-27-1992
April 27, 1992
Re: § 58.1-1821 Application: Corporation Income Tax
Dear ****
This will reply to your letter of May 2, 1991, in which you seek correction of corporation income tax assessments for ***** (the "Taxpayer").
FACTS
The taxpayer was audited and numerous adjustments were made. The auditor removed "other" income and service income from the taxpayer's subtraction for foreign source income. You applied for correction of assessment under Va. Code § 58.1-1821. In a letter dated April 5, 1991, it was determined that the income in question did not qualify as foreign source income under Virginia law. You request reconsideration of this ruling and submit additional information to support your position. You also raise two new issues in your appeal; these issues will be addressed separately.
Foreign source income: You contend that the service income removed from the taxpayer's foreign source income subtraction is "techinical fees from services performed without the United States," qualifying as "foreign source income" as defined in Va. Code § 58.1-302.
The department has previously ruled that the words "techinical fees from . . . services performed" cannot be taken out of their context to create a subtraction for income earned from the performance outside the United States of any service which can be characterized as of a technical nature. See P.D. 86-209 (11/3/86) (copy enclosed). In order for technical fees to qualify as foreign source income, they must be incidental to a contract relating to the rental of real property or the licensing of intangible property for use without the United States.
In this case, the "fees" were not incidental to the rental of real property or the licensing of intangible property. Instead, the income was generated from technical information on new products, technical advice on new manufacturing methods and technology, technical advice on installation and maintenance of products, and technical expertise for component and systems applications. Such income does not qualify as "technical fees" eligible for the Virginia foreign source income subtraction.
Accordingly, the auditor's adjustment is correct.
Subtraction for PAYSOP contributions: On its return, the taxpayer claimed a subtraction for employer contributions to a payroll based stock ownership plan (PAYSOP). The auditor reduced the subtraction, resulting in the assessment of additional tax.
Va. Code § 58.1-402 C.11. (repealed for taxable years beginning on and after January 1, 1987) provided a subtraction for the amount of employer contributions to a tax credit employee stock ownership plan (ESOP) for which a credit was allowed under § 44 G of the Internal Revenue Code, to the extent such contributions were included in and not otherwise subtracted from federal taxable income. Because a PAYSOP was classified as a tax credit employee stock ownership plan under § 44 G, employer contributions to such a plan qualified for the subtraction under Va. Code § 58.1-402 C.11., to the extent the contributions were included in federal taxable income.
It appears that the subtraction computed by the auditor was based on the tax credit reported on the taxpayer's return. However, Va. Code § 58.1-402 C.11. requires that the subtraction be based on the amount of employer contributions for which a credit was allowed. Therefore, the auditor's adjustment is incorrect. The subtraction computed by the taxpayer is substantiated by the supporting schedules filed with the federal return. Therefore, the audit report will be revised to reflect the subtraction as computed by the taxpayer.
NOLD carryback: You state that following your review of the audit report, you discovered that certain net operating losses should have been carried back to the audit periods. You have filed Form 500-NOLD carrying back the losses to the audited years and assert that the taxpayer does not have a tax liability but, instead, is due a refund.
The department will review the Form 500-NOLD in view of the resolution of the issues as set forth in this letter and will make any adjustments, if necessary.
Accordingly, the assessment as it relates to foreign source income is correct. The audit report will be revised to reflect the PAYSOP subtraction as computed by the taxpayer and will incorporate the NOLD carried back to the audit years.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner