Tax Type
Corporation Income Tax
Description
Foreign source income
Topic
Computation of Tax
Subtractions and Exclusions
Date Issued
03-18-1994
March 18, 1994
Re: §58.1-1821 Application; Corporate Income Taxes
Dear*************
This will reply to your letter dated April 7, 1993, in which you make an application for correction of the assessments for additional corporate income taxes to ***********(the "Taxpayer") for the years ending December 31, 1989 and 1990.
FACTS
The Taxpayer was field audited by the department, and adjustments were made to the subtraction claimed by the Taxpayer for foreign source income. The Taxpayer has protested the department's treatment of expenses related to foreign source income.
RULING
An audit adjustment was made to reduce the subtraction allowed pursuant to Va. Code §58.1-402(C) (8), (Foreign Source Income) by expenses allocable and 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 §58.1-402(C), which provides:
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- "[There] shall be subtracted to the extent included in and not otherwise subtracted from federal taxable income: ...
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- [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."
Previous rulings of the department require the Virginia subtraction for foreign source income to be reduced by expenses, determined in accordance with IRC §861 et seq. See Public Document (P.D.) 93-235 (12/28/93) (copy attached). Virginia law requires the use of the federal sourcing rules of IRC §§861, 862 and 863 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.
Therefore, in accordance with the U. S. Treasury regulations under IRC §861, expenses that are not definitely allocable are to be 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 total Virginia foreign source gross income and the denominator of which is total gross income from without the United States per the Form 1118 (P.D. 93-235). 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. Allocable expenses are applied directly to the category of income to which they relate.
Accordingly, the auditor's adjustment to the foreign source income subtraction will be adjusted for dividends received from 50% or more owned corporations, and expenses will be calculated in the manner described above. Dividends received from 50% or more owned corporations will be allowed as a separate subtraction pursuant to Va. Code §58.1-402(C) (10).
The audit report and assessment will be adjusted in accordance with the attached schedules. The total amount due including interest, ************** must be paid within 30 days to prevent the accrual of additional interest.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/6942M
Rulings of the Tax Commissioner