Tax Type
Individual Income Tax
Description
Gross income; Foreign source income; Satellite transmissions
Topic
Taxable Income
Date Issued
02-10-1995
February 10, 1995
Re: §58.1-1821 Application: Individual income taxes
Dear********************
This will reply to your letters of July 12, 1994, December 30, 1994, and January 30, 1995, in which you contest the assessment of additional individual income tax to************ for the 1991 taxable year.
FACTS
The Taxpayer claimed a subtraction for foreign source income attributable to his interests in an S corporation and a limited partnership (the "Entities"). The subtraction was disallowed, as it did not appear to meet the definition of income which qualifies for the Virginia foreign source income subtraction. You contest this determination, and believe that the Taxpayer's share of income from the Entities meets the definition of foreign source income as defined in Code of Virginia §58.1-302.
DETERMINATION
The Entities received a license to utilize the satellite transmission services of a foreign country. This license was used to transmit telephone calls placed in the foreign country to users in the United States. The Entities received a fee for each long distance call billed to the recipient of the call in the United States. In effect, the Entities received a fee for use of the satellite transmission license by the calling parties.
Code of Virginia §58.1-302, in pertinent part, defines foreign source income as "Rents, royalties, license, and technical fees from property located or services performed outside the United States, or from any interest in such property, including rents, royalties, or fees for the use of or for the privilege of using outside the United States any patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other like property." The income in question appears to constitute a fee for the use of the Entities' license to utilize foreign telecommunications satellite services. The income has also been reported as foreign source income by the Entities for purposes of determining the federal foreign tax credit. Accordingly, the income meets the definition of foreign source income as defined by Code of Virginia §58.1-302, and constitutes foreign source income within the meaning of Internal Revenue Code §§861, 862 and 863.
The department has previously ruled that foreign source income received by a partnership will retain its character in the hands of the underlying partners. See Public Document (P.D.) 86-128 (7/11/86), copy attached. In P.D. 88-165, copy attached, the department similarly held that income received by an S corporation will retain its character in the hands of the shareholders.
In light of the documentation provided, the department finds that the income received by the Entities meets the definition of foreign source income for purposes of the Virginia subtraction, and shall be deemed to retain its character in the hands of the respective partners and shareholders of the Entities.
Accordingly, the assessment shall be adjusted to allow a subtraction for foreign source income. However, the amount of the subtraction shall be limited to the amount of income actually included in the Taxpayer's federal adjusted gross income which is attributable to the Entities, as itemized on the attached schedule. A revised bill, with updated interest will be sent to the Taxpayer in due course.
If you have any additional questions regarding this ruling, please call*****************.
Sincerely,
Danny M. Payne
Tax Commissioner
Enclosures
OTP/8315M
Rulings of the Tax Commissioner