Tax Type
Individual Income Tax
Description
Residency
Topic
Royalties
Taxpayers
Date Issued
05-28-1999
May 28, 1999
Re: § 58.1-1821 Application: Individual Income Tax
Dear****************
This will reply to your letter in which you make an application for the correction of additional individual income taxes assessed to you and your wife (the "Taxpayers') for the 1993 taxable year.
FACTS
The Taxpayers are Virginia residents. The husband is a partner in a domestic entity. In addition to the entity's normal business income, it derives fees from licensing agreements with foreign and domestic affiliates for the use of the entity's trademarks. These fees are distributed to the partners in the form of guaranteed payments.
The husband performs services in relation to these licensing contracts. For the 1993 taxable year, the Taxpayers claimed a subtraction on their Virginia return for the portion of the guaranteed payments related to license and technical fees from foreign sources.
The Taxpayers' return was reviewed by the department, and the subtraction was disallowed and an assessment issued. You contend the subtraction was properly claimed, and request that the assessment be abated.
DETERMINATION
Code of Virginia § 58.1-322 (C)(7) provides a subtraction from federal adjusted gross income for "any amount included therein which is foreign source income as defined in § 58.1-302.' 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 without the United States or from any interest in such property, including rents, royalties, or fees for the use of or the privilege of using without the United States any patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other like properties.
- Rents, royalties, license, and technical fees from property located or services performed without the United States or from any interest in such property, including rents, royalties, or fees for the use of or the privilege of using without the United States any patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other like properties.
At issue in the present case is whether the guaranteed payments received by the Taxpayers were passive income or payment for personal services rendered by the husband. Based on the information provided, every partner is the recipient of a guaranteed payment. Because all partners receive this guaranteed payment, it can be inferred that the husband would receive the same guaranteed payment whether or not he worked with the foreign affiliates. In light of this, it is clear that the payments resulted from personal services the husband performed for the domestic entity. Under Code of Virginia § 58.1-302, compensation for personal services is not included in the definition for foreign source income.
Accordingly, the foreign source income subtraction cannot be allowed because it resulted from compensation for personal services. As a result, the individual income tax assessment for the 1993 taxable year is correct. Please remit the balance shown on the attached schedule within 30 days to avoid the accrual of additional interest. Send the payment to ***** Office of Tax Policy, Department of Taxation, Post Office Box 1880, Richmond, Virginia 23218-1880. If you have any questions regarding this determination, you may call ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11303G
Rulings of the Tax Commissioner