Tax Type
Corporation Income Tax
Description
Foreign source income; DISC adjustments
Topic
Allocation and Apportionment
Date Issued
02-23-1989
February 23, 1989
Re: §58.1-1821 Application; Corporation Income Tax
§58.1-302 Foreign Source Income
§58.1-446 Adjustment for DISC
Dear****************
This is in response to your letter of August 24, 1988, in which you applied for correction of an assessment of corporation income tax. The issues you raised will be addressed separately.
Domestic International Sales Corporation
You protest the adjustment under §58.1-446 of the Code of Virginia to include a Domestic International Sales Corporation (DISC). As you know, recently the Virginia Supreme Court announced its decision upholding this adjustment. Therefore, the adjustment was correct.
Exclusion of Subsidiaries
When the field audit was conducted in May 1987, information concerning some of the subsidiaries was not available and was to be mailed to the auditor within 60 days. In response to the auditor's December 2, 1987, follow-up letter you sent a list of contact persons from whom the information could be obtained. The auditor contacted each person and received information on some, but not all, of the subsidiaries. Therefore, the auditor closed the audit with the best information available.
The auditor excluded from the combined return the losses of certain subsidiaries because insufficient information was provided to the auditor to substantiate the proper amount of losses allowable. As a result, the combined Virginia tax liability was increased.
I find that the auditor acted properly in this situation. The privilege of filing a combined Virginia return carries with it the obligation of the parent (or designated lead affiliate filing the return) to provide the auditor with information substantiating any item reported in the combined return for all subsidiaries including in the return. However, if the necessary information is supplied within sixty days we will review it and reconsider the disallowance of the losses. Enclosed are lists of the necessary information we need for the various subsidiaries.
Foreign Source Income Expenses
The auditor adjusted the subtraction for foreign source income to reduce it by related expenses. You claim that the method used by the auditor results in an excessive amount of expenses. The department has previously ruled that expenses shown on form 1118 are a useful starting point for an auditor, but that supplemental information will be accepted. See the enclosed Ruling of the Commissioner dated July 7, 1987, P.D. No. 87-178. Therefore, if you submit supplemental information on the proper amount of expenses prepared in accordance with I.R.C. §861-863, we will review it and reconsider the adjustment for expenses.
Sales of Computer Time Sharing Services
The taxpayer claims that income from the sale of computer time sharing services qualifies for Virginia subtraction of income from foreign sources. The department has previously ruled that the subtraction is limited to rents, royalties, license and technical fees which are incidental to a contract relating to the rental of real property or the licensing of a patent, copyright, trademark, trade brand, franchise and other like property for use without the United States. See Ruling of the Commissioner dated September 15, 1987, P.D. No. 87-211 (copy enclosed). Income from computer time sharing services does not qualify for Virginia's foreign source income subtraction regardless of its source for federal purposes. To the extent that income from computer time snaring services arose from foreign customers or from foreign operations, the apportionment factors will fairly reflect the income subject to Virginia tax. Therefore, the auditor properly removed this income from foreign source income.
Determination
Accordingly, the assessment is correct as made. However, the department will accept and consider the information previously requested by the auditor on the subsidiaries and supplemental information on the expenses attributed to foreign source income if this information is submitted within sixty days from the date of this letter. It should be submitted to**********Supervisor, Technical Services Section, Department of Taxation, P. O. Box 6-L, Richmond, VA 23282.
Although you requested a conference, this letter has been issued without one because the application of the law is clear. If you still desire a conference you should request one within thirty days after notification of any action taken by the department in response to the additional information submitted.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner