Tax Type
Corporation Income Tax
Description
Taxable income; Modifications to federal taxable income; Foreign source income subtraction
Topic
Computation of Income
Date Issued
09-30-1996
September 30, 1996
Re: Request for Ruling: Corporate Income Tax
Dear**************
This will respond to the request for ruling submitted on behalf of **************(the "Taxpayer") regarding the Virginia foreign source income subtraction. I apologize for the delay in responding to your request.
FACTS
The Taxpayer is a member of an affiliated group which files a combined Virginia corporation income tax return. Some or all members of the affiliated group recognize foreign source income as defined in Code of Virginia § 58.1-302. In some years, expenses related to this foreign source income exceed the income recognized, creating a loss on these investments. The Taxpayer requests a ruling on whether the Virginia foreign source income subtraction can be reduced by related expenses to such an extent that an addition to federal taxable income is created.
RULING
The department has previously ruled that the Virginia foreign source income subtraction must be reduced by related expenses, which are determined in accordance with Internal Revenue Code (IRC) § 861 et seq. See Public Documents (P.D.s) 86-154 and 93-235, (8/14/86 and 12/28/93, respectively), copies enclosed. The department, however, has not addressed the specific issue presented in the Taxpayer's request. In order to address that issue, it is first necessary to review the legislative history surrounding the Virginia foreign source income subtraction.
The Virginia foreign source income subtraction was enacted by the 1981 General Assembly (1981 Acts of Assembly, Chapter 402) as part of a broad legislative initiative in response to the Virginia Supreme Court's decision in Commonwealth v. Champion International Corporation, 220 Va. 981, 265 S.E. 2d 720 (1980). This decision dealt with the allocation and apportionment of the income of multi-state and multi-national corporations. As part of its response, the General Assembly utilized the definition of foreign source income found in § 358 of S. 983, introduced by Senator Charles Mathias in the 96th Congress (the "Mathias bill").
The Mathias bill generally, and § 358 in particular, acted to exclude certain types of foreign source income from state taxation. In remarks to the 97th Congress, in which S. 983 was reintroduced as S. 655, Senator Mathias stated that his bill would "rationalize the tax treatment of foreign source income by the States." Congressional Record, Vol. 127, No. 39, March 10,1981. It is clear that the Mathias bill did not intend to increase the states' ability to tax foreign source income.
Since the Virginia foreign source income subtraction was modeled after the Mathias bill, it is evident that the 1981 General Assembly did not intend to increase the amount of foreign source income subject to taxation by Virginia. This would be the result, however, if the department required that the excess of foreign source expenses over gross foreign source income be treated as an addition to federal taxable income.
It is a well established principle of Virginia taxation that Virginia taxable income is comprised of federal taxable income (or federal adjusted gross income, for individuals) which is then modified by certain specific additions, subtractions, deductions and exemptions. As a general rule, there is no provision in the Code of Virginia disallowing any type of loss which is recognized for federal tax purposes. If the department required that the excess of foreign source expenses over gross foreign source income be added back to federal taxable income, this would essentially disallow, for Virginia purposes, a valid loss or deduction for federal purposes. Such a requirement would be without statutory authority.
Accordingly, it is the department's policy that the Virginia foreign source income subtraction cannot be reduced below zero, and that there will be no addition to federal taxable income or federal adjusted gross income in the event that foreign source expenses exceed foreign source income. If you have any questions regarding this ruling, you may contact ***** at ******* .
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10811G
Rulings of the Tax Commissioner