93-235 | Virginia Tax

Tax Type

Corporation Income Tax

Description

Taxable income; Foreign source dividends

Topic

Computation of Income

Date Issued

12-28-1993

December 28, 1993

Re: §58.1-1821 Application; Corporation Income Tax

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

This will reply to a letter of July 16, 1992 from**** in which*********applied for correction of assessments for additional corporate income taxes to*********** (the "Taxpayer") for the fiscal years ended December 31, 1989 and 1990. I apologize for the delay in responding.

FACTS

The Taxpayer was field audited for the 1988, 1989 and 1990 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, in 1989 and 1990.

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 Public Document (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 corporations shall be allowed as a separate subtraction pursuant to Va. Code §58.1-402(C) (10).

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.

The statutory requirement that the subtraction for foreign source income be computed net of related expenses is found in Va. Code S §58.1-402(C), which provides:

- "[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)

Virginia Regulation (VR) 630-3-302 provides:

- "[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."

Virginia law requires the use of the federal sourcing rules of §§861, 862 and 863 of the Internal Revenue Code (I.R.C.) whether or not the taxpayer believes that certain expenses have any connection to income from foreign sources and regardless of what expenses would be under generally accepted accounting principles. Previous rulings of the department require the subtraction for foreign source income to be reduced by expenses, determined in accordance with I.R.C. §861 et seq. (P.D. 91-229 (9/30/91)). Therefore, in accordance with the Treasury Regulations under I.R.C. §861, expenses that are not definitely allocable are apportioned ratably among the statutory groupings of gross income and the residual groupings.

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. 91-229). Items which qualify for separate subtractions under other provisions of the Virginia code, such as I.R.C. §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.

Other adjustments: In computing the foreign source income subtraction, the auditor failed to use foreign source income and expenses from all the "baskets" used to compute the foreign tax credit. We have previously ruled that the baskets required by I.R.C. §904 do not apply to the Virginia foreign source income subtraction. Accordingly, all foreign source income reported on Form 1118 shall be considered for purposes of the foreign source income subtraction regardless of the federal basket limitations of I.R.C §904. See P.D. 91-59 (3/29/91), copy attached.

In reviewing the information provided by the Taxpayer concurrent with this §58.1-1821 application, it became apparent that the subtraction claimed for foreign source income at December 31, 1989 did not include the proper amount of foreign source royalties. The audit report will be adjusted to include all foreign source royalties as reported on Form 1118 in the foreign source income subtraction.

In summary, the audit report will be adjusted to include a separate subtraction for dividends received from 50% owned corporations. The calculation of expenses related to foreign source income will be made using all foreign source income as reported on Form 1118, regardless of the basket. Finally, foreign source income (royalties) for 1989 will be computed using the proper amount as reported on Form 1118. A revised audit report shall be issued to you in due course.

Sincerely,

W. H. Forst
Tax Commissioner

OTP/6306M

Rulings of the Tax Commissioner