Tax Type
Corporation Income Tax
Description
Foreign source income
Topic
Subtractions and Exclusions
Date Issued
07-23-1993
July 23, 1993
Re: §58.1-1821 Application; Corporation Income Tax
Dear***************
This will reply to your letter of October 30, 1992 in which you seek a redetermination of P. D. 92-47 (4/27/92) (copy attached) issued in response to a protest filed by ************* (the "Taxpayer"). We have treated your letter, and the amended returns attached thereto, as a request for redetermination pursuant to Va. Code §58.1-1821.
FACTS
The Taxpayer was audited for the 1987 and 1988 taxable years, and numerous adjustments were made. The Taxpayer is contesting adjustments made by the auditor with respect to foreign source income, and with respect to expenses related to foreign source income.
DETERMINATION
Dividends from more than 50% owned Corporations: The Taxpayer received foreign source dividends from corporations in which the Taxpayer owned 50% or more of the voting stock. The department has previously ruled in P.D. 91-229 (9/30/91), copy attached, that because such dividends are subject to a separate subtraction they are not required to be included in the foreign source income subtraction. Accordingly, all dividends received from 50% or more owned subsidiaries shall be allowed as a separate subtraction, net of related expenses, pursuant to Va. Code §58.1-402(C)(10). (See discussion of foreign source income subtraction and expenses below.)
Subpart P Income: The Taxpayer has submitted additional information regarding foreign source dividend income. This information, which was not made available during the audit, revealed that a significant portion of the foreign dividend income was Subpart F income. Because this income is subject to a separate Virginia subtraction it is not required to be included in the foreign source income subtraction. Accordingly, Subpart F income shall be allowed as a separate subtraction pursuant to Va. Code §58.1-402(C) (7). (See discussion of foreign source income subtraction and expenses below.)
Foreign Source Income and Expenses: An audit adjustment was made to reduce the subtraction claimed by the Taxpayer pursuant to Va. Code § 58.1-402(C) (8), (Foreign Source Income) by expenses apportionable to such income. You contend that expenses that cannot be definitely allocated to any item or class of income should be excluded from the amount of expenses used in determining foreign source income.
The statutory requirement that the subtraction for foreign source income be computed net of related expenses is found in Va. Code §58.1402(C), which provides:
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- "[There] shall be subtracted to the extent included in and not otherwise subtracted from federal taxable income: ...
[8.] Any amount included therein which is foreign source income as defined in §58.1-302." (emphasis added)
- "[There] shall be subtracted to the extent included in and not otherwise subtracted from federal taxable income: ...
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- "[The] federal procedure in Treasury Reg. §1.861-8 is applied to allocate and apportion expenses to income derived from U.S. and foreign sources."
- "[The] federal procedure in Treasury Reg. §1.861-8 is applied to allocate and apportion expenses to income derived from U.S. and foreign sources."
The department has previously ruled that the proper method of computing nonallocable expenses attributable to foreign source income is to multiply total nonallocable expenses by a ratio, the numerator of which is gross Virginia foreign source income and the denominator of which is gross income from without the United States per the Form 1118 (P.D. 91229). Items which qualify for separate subtractions under other provisions of the Virginia code, such as IRC §78 gross-up, Subpart F income, and dividends from corporations in which the taxpaying corporation owns 50% or more of the voting stock are not subtracted again as foreign source income. Accordingly, they are not included in the numerator of the ratio, but are included in the denominator to the extent included on Form 1118.
While Virginia subtractions are generally considered as being net of applicable expenses, the subtractions for foreign dividend gross-up and Subpart F income are generally treated as subtractions to which no expenses relate. However, the subtraction for foreign dividends from corporations in which the taxpaying corporation owns 50% or more of the voting stock must be computed net of applicable expenses using generally accepted accounting principles. For the purpose of this audit, related expenses shall be computed using the same estimate applied to other allocable dividends during the audit. An apportioned share of nonallocable foreign source expenses does not need to be netted in determining this subtraction, because there is no Virginia statutory requirement to use the federal sourcing rules in computing this subtraction.
New Information received from Taxpayer: The Taxpayer has submitted a copy of Form 1118 for 1987, which was not previously provided to the department. Also, the Taxpayer has provided corrected information regarding the total amount of 1988 foreign source dividends, which had been incorrectly reported on Form 1118 as filed. Accordingly, this new information will be used in calculating the subtraction for foreign source income.
The audit report will be adjusted to include a separate subtraction for dividends received from 50% owned corporations, net of related expenses, and a separate subtraction for Subpart P income. The calculation of expenses related to foreign source income will be made using the 1987 Form 1118 and the corrected amount of 1988 foreign source income as provided. A revised audit report and refund shall be issued to you in due course.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/653lM
Rulings of the Tax Commissioner