Tax Type
Individual Income Tax
Description
Modifications to Federal Adjusted Gross Income; Foreign Source Income
Topic
Computation of Income
Date Issued
07-11-1985
July 11, 1985
Re: Virginia Code Section 58.1-1821 Application
Dear ****
This is in reply to your letter of May 23, 1985, in which you submit an application for the correction of the assessment of additional individual income tax for taxable year 1982, on behalf of your clients, ***** (hereinafter "Taxpayers").
Taxpayers timely filed their individual income tax return for taxable year 1982. The department later examined the return and disallowed part of the subtraction from federal adjusted gross income claimed by the husband. An assessment for additional income tax was issued on February 22, 1985. The amount of disallowed subtraction represents the amount of income earned by husband from foreign sources. The husband received wages and director's fees from various foreign corporations for consulting work he performed for these foreign corporations.
You contest the department s assessment, contending that this amount qualifies under Virginia Code Section 58.1-322, to be subtracted from federal adjusted gross income, as foreign source income.
DETERMINATION
You rely on Internal Revenue Code Section 862(a) which provides that, "compensation for labor or personal services performed without the United States" is foreign source income. While we agree that Taxpayer's income may qualify for federal purposes as income from foreign sources, this type of income is not included in the definition of foreign source income under Virginia Code Section 58.1-3O2. This section defines foreign source income as:
As stated above, Sections 861, 862, and 863 of the Internal Revenue Code are to only be used to determine the source of the income, not to determine the types of exempt income. The only types of income exempt from Virginia income tax as foreign source income, are the types of income enumerated above. It is clearly recognized that the Virginia and federal definitions of foreign source income are not the same. While federal law specifically defines "foreign source income" as including compensation and wages, Virginia law clearly does not.
This position is amplified in the Virginia Individual Income Tax Regulations in §630-2-302(F), which states,
Based on the foregoing, we have determined that Taxpayer's income does not qualify under Virginia Code Section 58.1-302 as foreign source income; therefore, it is not an allowable subtraction under Virginia Code Section 58.1-322. This determination is being issued based on the facts presented without a conference. If you feel that you have additional information and you desire to have a conference, please contact this office within thirty days.
Sincerely,
W. H. Forst
State Tax Commissioner
Re: Virginia Code Section 58.1-1821 Application
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- Individual Income Tax
Dear ****
This is in reply to your letter of May 23, 1985, in which you submit an application for the correction of the assessment of additional individual income tax for taxable year 1982, on behalf of your clients, ***** (hereinafter "Taxpayers").
Taxpayers timely filed their individual income tax return for taxable year 1982. The department later examined the return and disallowed part of the subtraction from federal adjusted gross income claimed by the husband. An assessment for additional income tax was issued on February 22, 1985. The amount of disallowed subtraction represents the amount of income earned by husband from foreign sources. The husband received wages and director's fees from various foreign corporations for consulting work he performed for these foreign corporations.
You contest the department s assessment, contending that this amount qualifies under Virginia Code Section 58.1-322, to be subtracted from federal adjusted gross income, as foreign source income.
DETERMINATION
You rely on Internal Revenue Code Section 862(a) which provides that, "compensation for labor or personal services performed without the United States" is foreign source income. While we agree that Taxpayer's income may qualify for federal purposes as income from foreign sources, this type of income is not included in the definition of foreign source income under Virginia Code Section 58.1-3O2. This section defines foreign source income as:
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- 1. Interest, other than interest derived from sources within the United States;
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- 2. Dividends, other than dividends derived from sources within the United States;
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- 3. 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; and
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- 4. Gains, profits, or other income from the sale of intangible or real property located without he United States.
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- In determining the source of "foreign source income," the provisions of §§ 861, 862, and 863 of the Internal Revenue Code shall be applied. (Emphasis added.)
As stated above, Sections 861, 862, and 863 of the Internal Revenue Code are to only be used to determine the source of the income, not to determine the types of exempt income. The only types of income exempt from Virginia income tax as foreign source income, are the types of income enumerated above. It is clearly recognized that the Virginia and federal definitions of foreign source income are not the same. While federal law specifically defines "foreign source income" as including compensation and wages, Virginia law clearly does not.
This position is amplified in the Virginia Individual Income Tax Regulations in §630-2-302(F), which states,
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- F. Foreign source income.
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- 1. Generally. As used in these regulations, the term "foreign source income" means income as defined in subsection (2) below. Foreign source income does not include all income from sources outside of the United States, but is limited to the types of income enumerated below, and is further limited by the federal definitions in IRC §§861 through 864 and the regulations thereunder in determining the source of a particular item of income.
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- 2. "Foreign source income" defined. "Foreign source income" is limited to the items enumerated in (a) through (d) below.
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- a. Interest. Interest means that derived from sources outside of the United States, subject to the limitations of IRC §§861 through 864.
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- b. Dividends. Dividends means those derived from sources outside the United States, subject to the limitations of IRC §§ 861 through 864.
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- c. Rents, royalties, license and technical fees. Rents, royalties, license and technical fees mean those derived from property located outside of the United States or derived from services performed outside of the U.S. The term "technical fees" shall not include wages, salaries, compensation or other "earned income" as defined in IRC § 911(b). Fees for the use outside of the U.S. of patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties constitute "license and technical fees."
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- d. Gains. Gains means those gains and other income derived from the sale of intangible or real property located outside of the United States. (Emphasis added.)
Based on the foregoing, we have determined that Taxpayer's income does not qualify under Virginia Code Section 58.1-302 as foreign source income; therefore, it is not an allowable subtraction under Virginia Code Section 58.1-322. This determination is being issued based on the facts presented without a conference. If you feel that you have additional information and you desire to have a conference, please contact this office within thirty days.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner