Tax Type
Individual Income Tax
Description
Foreign source income
Topic
Assessment
Persons Subject to Tax
Royalties
Subtractions and Exclusions
Date Issued
01-16-2005
December 16, 2005
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the individual income tax assessments issued to ***** (the "Taxpayers") for the 2001 and 2002 taxable years. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayers, a husband and wife, are Virginia residents who live in ***** ("Country A"). The husband teaches in Country A. The Taxpayers claimed a subtraction on their 2001 and 2002 taxable year individual income tax returns for the husband's income earned as a teacher in Country A.
Under audit, the Department disallowed the subtraction for wages claimed on the Taxpayers' 2001 and 2002 individual income tax returns, resulting in the assessment of additional tax for both taxable years. The Taxpayers contend that the income earned in Country A meets the definition of foreign source income and qualifies for subtraction on their Virginia return. Based on this position, the Taxpayers request that the audit adjustments be reversed and the payment for the assessments be refunded.
DETERMINATION
Virginia Code § 58.1-322 C 7 provides a subtraction from federal adjusted gross income for "any amount included therein which is foreign source income ("FSI") as defined in § 58.1-302." Virginia Code § 58.1-302, in pertinent part, defines foreign source income as:
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- 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.
The Department has previously ruled that these words cannot be taken out of context to create a subtraction for income earned from outside the United States for any service. See Public Documents 86-209 (11/3/86) and 92-44 (4/27/92). These words are incorporated in a subsection dealing with passive income from the rental of real estate and with income from patents, copyrights, and other intangible property, and do not stand alone as a separate FSI subtraction.
In the instant case, the income in question is not from "Rents, royalties, license, and technical fees from property located or services performed without the United States." Instead, the income is attributable to the husband's salary. As such, the income does not qualify as FSI eligible for the Virginia subtraction. If federal tax law does not allow for the exclusion of the husband's salary earned in Country A on the taxpayers' federal return, that salary may not be excluded on the taxpayers' Virginia return.
Based on the foregoing, the assessments are correct. Accordingly, the Taxpayers are not entitled to a refund. The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this determination, please contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/55972E
Rulings of the Tax Commissioner