Tax Type
Corporation Income Tax
Description
Foreign source income and expenses
Topic
Subtractions and Exclusions
Date Issued
08-26-1987
July 7, 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 January 16, 1987, and a conference held on December 17, 1986, in which you request that we reconsider our position that expenses must be applied to foreign source income.
As stated in our letter dated August 14, 1986, Public Document No. 86-154, the department interprets §§58.1-302 and 58.1-402 to provide for a subtraction of foreign source income which is net of expenses. You claim that the law in effect for the taxable years 1981 and 1982 differed significantly.
The income tax law was recodified by 1984 Acts of Assembly, chapter 675 effective January 1, 1985, well after the taxable years in question. The recodification of the law was not intended to make a substantive change in the subtraction of foreign source income, and it did not. The changes made clarified the law by separating provisions affecting individuals only and corporations only. Both versions of the law contain language which indicates that the subtraction is allowable only to the extent that an amount is included in federal taxable income for corporations or Federal Adjusted Gross Income for individuals.
The pertinent sections of the code before and after recodification are set forth below.
Current Law Former Law
§58.1-402. Virginia taxable income §58-151.032 Virginia Taxable Income.
************* *************
C. There shall be subtracted to (c) There shall be subtracted
the extent included in and not from federal taxable income
otherwise subtracted from federal the amounts described in
taxable income: paragraphs...(9)...of sub-section (c) of
§58.1-151.013...
********* _____________________
8. Any amount included therein §58.151.013 Virginia
which is foreign source income (c) Subtractions. -- To the as defined in §58.1-302. extent included in federal adjusted gross income, there shall be subtracted:
* * * *
(9) Any amount included therein which is foreign source income. . . .
The law and the regulations both state that the sourcing rules of I.R.C. §§861-862 must be used to determine the source of the income, and therefore they must be used to determine the source of expenses.
The auditor used the expenses shown on form 1118 because they are prepared in accordance with the federal sourcing rules and are therefore properly considered. However, we have recently ruled that supplemental information will also be considered if it is prepared in accordance with the federal sourcing rules. See the ruling letter dated June 8, 1987, Public Document No. 87-149 (copy enclosed).
Should you desire to submit supplemental information on the amount of expenses you may do so within thirty days from the date of this letter. The information must contain a statement that it is prepared in accordance with the sourcing rules of §§861-863 I.R.C. and explain why amounts differ from the amounts shown in the federal return. The information should be sent to: Supervisor; Technical Services Section, O.S.D.; Department of Taxation; P.O. Box 6-L; Richmond, VA 23282.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner