Tax Type
Corporation Income Tax
Description
Foreign Source Income/ Amended returns
Topic
Records/Returns/Payments
Returns and Payments
Subtractions and Exclusions
Taxable Income
Date Issued
07-01-2013
July 1, 2013
Re: § 58.1-1824 Application: Corporate Income Tax
Dear *****:
This will reply to your letter in which you submit a protective claim for refund of Virginia corporate income tax on behalf of ***** (the "Taxpayer") for the short taxable year ended October 31, 2008. I apologize for the delay in responding to your request.
FACTS
The Taxpayer discovered it had failed to claim a subtraction for foreign source income on its corporate income tax return for the 2007 taxable year. Instead of filing an amended return to claim the subtraction, the Taxpayer filed a protective claim for refund pursuant to Va. Code § 58.1-1824.
DETERMINATION
Protective Claim
Pursuant to the authority granted the Department under Va. Code § 58.1-1824, a protective claim for refund can be held pending the outcome of another case before the courts or the claim may be decided based upon its merits pursuant to Va. Code § 58.1-1821. As permitted by statute, the Taxpayer's request has been treated as an appeal under Va. Code § 58.1-1821.
Under Title 23 of the Virginia Administrative Code (VAC) 10-20-190 A, no specific form is required for a protective claim. However, the protective claim must include information that sufficiently identifies the taxpayer, type of tax, taxable period, remedy sought, date of assessment, and the date of payment. In addition, an appropriately executed statement setting forth each alleged error, grounds upon which taxpayer relies, and all facts relevant to taxpayer's contention must also be included. If applicable, the taxpayer must also show that the determination of the issues depends upon the outcome of another case pending in court.
As permitted under Va. Code § 58.1-1821, the Department requested additional information in order to verify the validity of the Taxpayer's protective claim. See Title 23 VAC 10-20-165 D 3 d. By letter dated September 20, 2012, the Department requested documentation to support the facts relevant to the Taxpayer's claim. Specifically, the Taxpayer failed to provide objective evidence to identify and substantiate the amount of foreign source income that may be eligible for the subtraction or the amount of the overpayment resulting from such a subtraction.
Foreign Source Income
For corporate income tax purposes, Va. Code § 58.1-402 C 8 provides a subtraction to the extent included in federal taxable income for foreign source income as defined in Va. Code § 58.1-302. Pursuant to Va. Code 58.1-302, foreign source income, in pertinent part, includes:
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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.
It has been the Department's long-standing policy that the computation of the Virginia foreign source income subtraction (considering expenses related to the income) be determined in accordance with Internal Revenue Code (IRC) §§ 861 through 863. See Public Document ("P.D.") 86-154 (8/14/1986). Virginia law requires the use of the federal sourcing rules of IRC § 861 et seq., whether or not the taxpayer believes that certain expenses have any connection to income from foreign sources and regardless of what expenses would be under generally accepted accounting principles.
The provisions of IRC § 861 et seq., contain detailed rules for assigning income and deductions to particular sources. The provisions differentiate between deductions that are definitely allocable and deductions that are not definitely allocable. First, definitely allocable deductions that are directly related to a class of income are allocated and then apportioned between foreign and domestic source income. If a deduction is not definitely related to any gross income, the deduction must be apportioned ratably between each class of foreign and domestic source income for purposes of Virginia's foreign source income subtraction. See P.D. 91-229 (9/30/1991).
Federal form 1118 includes many types of income that do not qualify for the Virginia subtraction. For example, gains, profit and other income arising from the sale of tangible personal property are not included in the list of specified types of income qualifying for the Virginia subtraction. The purpose of Form 1118 is to compute the limitation on the amount of foreign taxes that can be claimed as a credit against federal tax liability. When the procedures of IRC § 861 et seq., are used to complete Form 1118, the information reported on this form is considered useful and presumed correct and accurate. Such information is an appropriate starting point for computing the foreign source income subtraction allowed on the Taxpayer's Virginia return. See P.D. 94-54 (3/14/1994).
The Taxpayer provided a copy of Form 1118 to support its claim for the subtraction. The form shows definitely allocable deductions attributed to rent and royalty income exceeded the gross income even before the apportionment of deductions that are not definitely allocable. Essentially, the Taxpayer reports a loss from this type of income. In accordance with P.D. 97-207 (4/28/1997), the Taxpayer's foreign source rent and royalty income eligible for the Virginia subtraction would be reduced to zero. As such, the Taxpayer does not appear to have been eligible for a foreign source income subtraction for the rent and royal income.
The Taxpayer's Form 1118 reports the vast majority of its foreign income resulted from the performance of services. Such income is not generally considered to qualify for Virginia's subtraction unless the services can be classified as "technical fees." The Department has previously ruled that the words "technical fees from . . . services performed" cannot be taken out of their context to create a subtraction for income earned from the performance of services outside the United States for any service that can be characterized as of a technical nature. See P.D. 86-209 (11/3/1986) and P.D. 92-44 (4/27/1992). In order to qualify for the Virginia foreign source income subtraction, the Taxpayer must prove by clear and cogent evidence that the services resulting in technical fee income are incidental to a contract relating to the rental of real property or the licensing of a patent or other like property outside the United States. See P.D. 91-57 (3/29/1991).
In addition, a portion of income reported on the Form 1118 was classified as "other" income. While such income may be composed of one or more of the types of income allowable for the Virginia subtraction, the burden of establishing the identity of this income rests with the Taxpayer. Absent a detailed schedule that establishes that the income included as other income qualifies as foreign source income as defined by Va. Code § 58.1-302, other income may not be subtracted as foreign source income. See P.D. 90-2 (1/2/1990).
CONCLUSION
Based on the information provided and the referenced authorities, the Taxpayer's refund claim for the taxable year ended October 31, 2008 does not include all relevant facts and does not specify the amount of the remedy sought. Accordingly, the Taxpayer's protective claim for refund must be denied.
The Code of Virginia sections, regulations, and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions regarding this determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-5179264070.o
Rulings of the Tax Commissioner