Tax Type
Corporation Income Tax
Description
Foreign source income and expenses; Charitable contributions
Topic
Subtractions and Exclusions
Date Issued
05-07-1987
June 8, 1987
Re: §58.1-1821 Application; Corporation Income Tax
§58.1-302 Foreign Source Income; Expenses
Dear ******************
This is in response to your letter of August 13. 1985, in which you applied for correction of an assessment of corporation income tax for the taxable years 1981 and 1982. A conference was held on March 24, 1987, to discuss the issues raised in your application.
Facts
On its Virginia returns for 1981 and 1982 the taxpayer claimed a subtraction of gross income from foreign sources. The auditor reduced the subtraction by the expenses shown on federal form 1118 for the taxpayer which were related to the gross income claimed as a subtraction.
In your application and in conference you stated two reasons why you believed that the reductions were erroneous. First, you claim that the statute allows a subtraction of gross income from foreign sources. Second, assuming that the subtraction must be reduced by related expenses, the expenses shown on federal form 1118 are not accurate for state income tax purposes.
Gross or Net Income
For the reasons set forth in the ruling letter dated August 14, 1986, P.D. No. 86-154 (copy enclosed), the department concludes that the applicable statute (§58.1-402 C) permits a subtraction of net income from foreign sources.
Related Expenses
The taxpayer claims that the expenses shown on the federal form 1118 do not represent the actual expenses associated with its income from foreign sources for which it claimed a Virginia subtraction. The taxpayer has submitted supplemental information which it claims more accurately reflects the expenses related to foreign source income.
The purpose of federal form 1118 is to compute the limitation on the amount of foreign taxes which can be claimed as a credit against federal tax liability. Because the procedures of I.R.C. §§861-863 are used to complete federal form 1118, a review of the form constitutes a useful and proper audit technique and our auditors are justified in presuming that the information is correct and accurate.
However, when federal tax liability will not be affected by the limitation computed on form 1118, as in the taxpayer's case, U. S. Treasury regulations do not require a high degree of precision in allocations and apportioning expenses. See U.S. Treasury Regulation §1.861-8(c)(1)(vi). Therefore, the department will accept and consider supplemental information prepared in accordance with I.R.C. §§861-863 which shows the expenses related to the foreign source income with more precision than the expenses shown on form 1118.
Charitable Contributions
We have reviewed the supplemental information on expenses which you submitted at the conference. You stated that this information was prepared in accordance with the federal sourcing rules except for charitable contributions. You stated that you do not believe that charitable contributions made to U. S. charities from U. S. source income have any connection to income from foreign sources.
The federal sourcing rules include charitable contributions in the category of deductions which are not definitely related to any gross income. U. S. Treasury Regulation §1.861-8(e)(9). Therefore, charitable contributions must be apportioned ratably among the statutory groupings of gross income and the residual grouping. U. S. Treasury Regulation §1.861-8(c)(2).
The definition of foreign source income specifically requires the use of I.R.C. §§861-863 in determining the source of income. §58.1-302 of the Code of Virginia. Therefore, in determining the net foreign source income for purposes of the §58.1-402 C. 8 subtraction, the charitable contributions must be ratably apportioned as required by I.R.C. §§861-863 and the regulations thereunder.
Determination
Accordingly, we will accept your supplemental information as representing the amount of expenses to be applied to the subtraction for foreign source income provided that it is revised to include a ratable portion of charitable contributions as required by I.R.C. §§861-863. This supplemental information should be sent to: ************* Supervisor; Technical Services Section; Office Services Division; Department of Taxation; P. Q. Box 6-L; Richmond, VA 23282.
After receiving the supplemental information and assuming that our review of the revisions related to charitable contributions raises no questions, the audit report will be revised and the assessment adjusted.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner