Tax Type
Corporation Income Tax
Description
Interest from foreign bank account
Topic
Computation of Income
Subtractions and Exclusions
Date Issued
04-27-1992
April 27, 1992
Re: § 58.1-1821 Application: Corporation income tax
Dear ****
This will reply to your letter of October 28, 1991, in which you applied for correction of an assessment of corporation income tax on behalf of **** ("Taxpayer").
The taxpayer protests the failure of the auditor to allow a subtraction for certain interest earned on foreign bank accounts. The taxpayer filed a federal form 1118 with its federal return that did not include the disputed interest.
The federal sourcing rules are used in preparing federal form 1118 and therefore the form is a useful starting point for audit purposes. However, not all income on form 1118 is "foreign source income" under Virginia law, nor is there a requirement that all Virginia "foreign source income" be reported on the form 1118.
The taxpayer has substantiated its claim that the disputed interest is income from without the United States under the federal sourcing rules, I.R.C. § 861 et seq. Therefore, the interest also qualifies for the Virginia foreign source income subtraction and will be allowed net of expenses determined under the federal sourcing rules. See P.D. 86-154 (8/14/86) (copy enclosed).
Accordingly, the audit report will be revised to remove the disputed interest from the sales factor and allow a foreign source income subtraction for the interest net of related expenses. Since you have not provided the expense information (which is often based on form 1118 information) the auditor will have to estimate a reasonable expense amount based on the expenses shown on the form 1118 for similar income. You will receive a revised audit report and, if appropriate, a bill with interest accrued to date. The bill should be paid within thirty days to avoid the accrual of additional interest.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner