Tax Type
Individual Income Tax
Description
Residency
Topic
Taxpayers
Date Issued
12-13-1999
December 13, 1999
Re: Sec. 58.1-1821 Application: Individual Income Tax
Dear****:
This will reply to your letter in which you are requesting a redetermination of the department's determination previously issued to you and your wife (the "Taxpayers') for the 1993 taxable year. A copy of this determination, Public Document ("P.D.') 99-128, (5/28/99), is attached.
FACTS
The Taxpayers are Virginia residents. The husband is a partner in a domestic entity (the "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 as a portion of their 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. In P.D. 99-128, the adjustment was upheld.
You maintain that the department has misinterpreted information you provided to the department concerning the subtraction which was disallowed and that the subtraction should be allowed.
DETERMINATION
In the instant case, the Taxpayers have provided a copy of a sample licensing agreement between the entity and a foreign affiliate for the use of the entity's trademarks. Nowhere in the contract is a provision that requires the entity to provide any service or expertise in the use of its trademarks. In order for a service to qualify under the foreign source income definition, the service must be such that if it is not provided, the trademark would be unusable. Given the nature of the trademark being licensed by the entity in this case and the lack of any mention of providing a service in the contract, the services rendered to the foreign affiliate by the husband do not fall under the definition of being incidental to the contract. Therefore, the subtraction as claimed by the Taxpayers cannot be allowed.
However, after further reviewing the documents provided to the department by the Taxpayers, it seems that the husband, as a partner of the entity, did receive a portion of the licensing fee collected by the entity from the foreign affiliate. The Taxpayers are able to claim this portion of the licensing fee as a foreign source income subtraction. The assessment for the 1993 taxable year has been updated to reflect this adjustment. Attached is a schedule showing the adjusted assessment.
Please pay the balance due shown on the schedule within the next 30 days to avoid the further accrual of interest. You may remit your payment to *****, Virginia Department of Taxation, Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23218-1880. If you have any questions regarding this matter, please contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/25767G
Re: Sec. 58.1-1821 Application: Individual Income Tax
Dear****:
This will reply to your letter in which you are requesting a redetermination of the department's determination previously issued to you and your wife (the "Taxpayers') for the 1993 taxable year. A copy of this determination, Public Document ("P.D.') 99-128, (5/28/99), is attached.
FACTS
The Taxpayers are Virginia residents. The husband is a partner in a domestic entity (the "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 as a portion of their 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. In P.D. 99-128, the adjustment was upheld.
You maintain that the department has misinterpreted information you provided to the department concerning the subtraction which was disallowed and that the subtraction should be allowed.
DETERMINATION
-
- Code of Virginia Sec. 58.1-302 defines foreign source income, in pertinent part, 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, copy rights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other like properties
- Code of Virginia Sec. 58.1-302 defines foreign source income, in pertinent part, as:
In the instant case, the Taxpayers have provided a copy of a sample licensing agreement between the entity and a foreign affiliate for the use of the entity's trademarks. Nowhere in the contract is a provision that requires the entity to provide any service or expertise in the use of its trademarks. In order for a service to qualify under the foreign source income definition, the service must be such that if it is not provided, the trademark would be unusable. Given the nature of the trademark being licensed by the entity in this case and the lack of any mention of providing a service in the contract, the services rendered to the foreign affiliate by the husband do not fall under the definition of being incidental to the contract. Therefore, the subtraction as claimed by the Taxpayers cannot be allowed.
However, after further reviewing the documents provided to the department by the Taxpayers, it seems that the husband, as a partner of the entity, did receive a portion of the licensing fee collected by the entity from the foreign affiliate. The Taxpayers are able to claim this portion of the licensing fee as a foreign source income subtraction. The assessment for the 1993 taxable year has been updated to reflect this adjustment. Attached is a schedule showing the adjusted assessment.
Please pay the balance due shown on the schedule within the next 30 days to avoid the further accrual of interest. You may remit your payment to *****, Virginia Department of Taxation, Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23218-1880. If you have any questions regarding this matter, please contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/25767G
Rulings of the Tax Commissioner