Tax Type
Individual Income Tax
Description
Domestic International Sales Corporation ("DISC"); Foreign source income subtraction
Topic
Subtractions and Exclusions
Date Issued
03-10-1994
March 10, 1994
Re: §58.1-1821 Application: Individual Income Taxes
Dear**************
This will reply to your letter of November 8, 1993, in which you applied for correction of an assessment for additional individual income taxes on behalf of your clients, **************(the "Taxpayers") for 1990.
FACTS
The Taxpayers hold stock in a corporation which operates as a Domestic International Sales Corporation ("DISC"), as defined in I.R.C. §992. The Taxpayers reported a deemed distribution from the DISC on their 1990 federal individual income tax returns. The Taxpayers claimed a subtraction for this income on their 1990 Virginia individual income tax returns, which was disallowed by the department. You aver that because Virginia does not recognize DISC status, this income is taxed at the corporate level in Virginia and should accordingly be exempted from tax at the individual level to prevent double taxation.
DETERMINATION
I.R.C. §995(b)(1) provides, in pertinent part:
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- A shareholder of a DISC shall be treated as having received a distribution taxable as a dividend with respect to his stock in an amount which is equal to his pro rata share of the sum (or, if smaller, the earnings and profits for the taxable year) of ...
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- (E) the taxable income of the DISC attributable to qualified export receipts of the DISC for the taxable year which exceed $10,000,000,
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In determining Virginia taxable income a specific subtraction is provided in Va. Code §58.1-322 for foreign source income. For this purpose, dividends which are deemed to be foreign source income pursuant to I.R.C. §§861, 862, and 863 qualify for the subtraction.
Pursuant to I.R.C. §861(a)(2)(D), dividends from a DISC are foreign source income to the extent such dividends are attributable to qualified export receipts. I.R.C. §995(b)(1)(E) treats shareholders as having received a dividend attributable to qualified export receipts in excess of $10,000,000. Therefore, any amount taxable under I.R.C. §995(b)(1)(E) must be considered a foreign source dividend.
Accordingly, the income in question qualifies as foreign source income eligible for the Virginia foreign source income subtraction. The subtraction claimed by Taxpayers will be allowed, and the assessments attributable to this income will be abated.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/7514M
Rulings of the Tax Commissioner