Tax Type
Corporation Income Tax
Description
Foreign source income; Other income
Topic
Subtractions and Exclusions
Taxable Income
Date Issued
01-02-1990
January 2, 1990
Re: §58.1-1821 Application: Corporation Income Tax
§58.1-402 Virginia Taxable Income
§58.1-302 Foreign Source Income
Dear ******************
This is in reply to your letter dated August 15, 1989, in which you applied for correction of the above mentioned assessment of corporation income tax.
Facts
The contested assessment arises from the department's most recent audit of ******** (Taxpayer). Both of the contested adjustments made during the audit that resulted in additional tax were related to the subtraction claimed for foreign source income. Specifically, you object to the disallowance of certain income amounts classified as "other" on federal Form 1118 and to the manner in which the auditor determined the expenses related to the production of the allowable foreign source income.
DISCUSSION
Other Income
Although for purposes of claiming a federal foreign tax credit all types of income from sources without the United States are included on federal Form 1118, the Virginia subtraction is limited to the specific types of income from without the United States set forth in Virginia Code §581.1-302 (copy enclosed). Generally, the types of income allowable for the Virginia subtraction are restricted to passive income items such as interest, dividends, rents, royalties and gains or profits on the sale of intangible or real property. While the amount of income classified as "other" income on federal Form 1118 may be composed of one or more of the types of income allowable for the Virginia subtraction, the burden of establishing the identity of this income rests with the taxpayer. Absent a detailed schedule that establishes that the income included as "other" income qualifies as foreign source income as defined by Virginia Code §58.1-302, "other" income may not be subtracted as foreign source income.
Foreign Source Income Expenses
Because Virginia Code §58.1-302 explicitly requires the use of the federal provisions in determining the source of "foreign source income" these provisions are used to determine both the gross income and the expenses included in federal taxable income when computing the Virginia subtraction. Thus, gross income from sources without the United States must be reduced by definitely allocable expenses and by expenses not definitely allocable, all of which must be computed in the same manner as under federal law.
Because the procedures of I.R.C. §§861-863 are used to compute 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, U.S. Treasury regulations do not require a high degree of precision in allocating and apportioning expenses. 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. (See P.D. # 87-149.)
DETERMINATION
The department finds the supplemental information that you provided regarding the actual expenses related to the production of foreign source income acceptable and the audit will be adjusted accordingly. In addition, to the extent that you can provide the department with detailed information that establishes that the income included as "other" income on Form 1118 qualifies under the definition of "foreign source income" under Virginia Code §58.1-302, the audit will revised to remove such income from Virginia taxable income.
Please send the additional information detailing the types of income included as "other" income to the department's Technical Services Section, P. O. Box 6-L, Richmond, Virginia 23282, within the next 30 days.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner