Tax Type
Individual Income Tax
Description
Taxes paid to a foreign country; Credit disallowed; Wages earned in a foreign country
Topic
Credits
Subtractions and Exclusions
Taxable Income
Date Issued
07-11-1986
July 11, 1986
RE: § 58.1-1821 Application/Individual Income Tax
Dear******************:
This will reply to your letter of December 7, 1985, in which you submit an application for correction of individual income tax assessed to you for taxable year 1982.
FACTS
The taxpayers are domiciliary residents of Virginia, one of whom in 1982 worked for five months in and paid income taxes to the nation of Nigeria. When filing their 1982 Virginia income tax return, the taxpayers claimed a credit for the income taxes paid to Nigeria. As the result of a compliance examination by the department, such credit was disallowed.and an assessment was issued for additional tax on the amount of disallowed credit.
The taxpayers contest the assessment issued to them, contending that income earned in Nigeria should not have been includable on their 1982 Virginia income tax return.
DETERMINATION
Section 58.1-322. A of the Code of Virginia provides that "[t]he Virginia taxable income of a resident individual means his federal adjusted gross income for the taxable year" with certain modifications. Among the modifications provided in Virginia Code §58.1-322 is one for "[a]ny amount...which is foreign source income as defined in 58.1-302." Also, a credit is provided in Virginia Code § 58.1-322 for income taxes paid to other states.
Because § 911(d)(1) of the Internal Revenue Code does not allow persons who earn income in a foreign country to exclude such income from the federal tax unless they are bonafide residents of the foreign country for an entire taxable Year or for at least 330 days in a 12 month period, the income earned by the taxpayers in Nigeria was included in their federal adjusted gross income for 1982. Instead, the taxpayers were able to claim a credit under Internal Revenue Code § 901 for taxes paid to a foreign country. Such credit did not reduce the taxpayer's federal adjusted gross income, however. Thus, the taxpayer's federal adjusted gross income subject to Virginia tax in 1982 included income earned in Nigeria.
As the taxpayer's Nigeria income was properly included in federal adjusted gross income, it now must be determined if the taxpayers are entitled to the deduction for foreign source income or the credit for taxes paid to another state.
As stated in § 630-2-302.F of the Virginia Individual Income Tax Regulations (copy enclosed), the term "foreign source income" does not include all income from sources outside of the United States. Rather, Virginia Code § 58.1-302 defines the term to mean:
-
- 1. Interest, other than interest derived from sources within the United States;
2. Dividends, other than dividends derived from sources within the United States:
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
4. Gains, profits, or other income from the sale of intangible or real property located without the United States.
- 1. Interest, other than interest derived from sources within the United States;
Nor is the credit for taxes paid to other states available in this case as § 630-2-332 of the Virginia Individual Income Tax Regulations (copy enclosed) specifically states that the credit "is applicable only to income tax paid to another state and does not apply to taxes paid to any foreign country." The department's policy that the credit is applicable only for taxes paid to a state of the United States was upheld by the Circuit Court of Wise County in George P. Young v. Commonwealth (1985).
Based upon the foregoing, I must conclude that the department's assessment in this case is correct and payable. If a hearing is still desired, please advise the department within thirty days.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner