Tax Type
Individual Income Tax
Description
Foreign source income; Subtractions from Federal Adjusted Gross Income
Topic
Subtractions and Exclusions
Taxable Income
Date Issued
12-21-1990
December 21, 1990
Ruling of Commissioner, P.D. 90-231
Dear ****
This will reply to your letter of October 31, 1990, requesting a ruling on the source of certain capital gain income incurred by your client, (the "Taxpayer").
FACTS
The Taxpayer, a Virginia resident, is a shareholder in a French corporation. The other shareholders are residents of France. The only asset of the corporation is real estate located in France. In 1990, the corporation sold the real estate, and distributed the proceeds to its shareholders in liquidation.
You have conceded that under French law, and pursuant to the U.S.-French Income Tax Treaty, the Taxpayer is subject to French capital gains tax. Furthermore, you state that the Taxpayer will be entitled to a credit under Internal Revenue Code (IRC) § 901, subject to the limitations of § 904, for the tax paid to France.
You have requested a ruling on the "source" of the gain from the sale of the capital stock for Virginia income tax purposes.
RULING
Va. Code § 58.1-302, and Virginia Regulation (VR) 630-3-302(F) thereunder, allow the federal sourcing provisions of IRC Secs. 861 through 864 to be applied in determining the source of a particular item of income for Virginia income tax purposes.
It is important to note that as of the date of adoption of VR 630-2-302 (January 1, 1984), the Internal Revenue Code sections referred to in the regulations were the only relevant federal statutory sourcing provisions. Furthermore, the intent of the legislation was to allow the application of all federal sourcing provisions.
Pursuant to the Federal Tax Reform Act of 1986, IRC § 865 was enacted, which provides the current sourcing rules for treatment of gains from sale of certain stock or intangibles and from certain liquidations. Under IRC § 865(h)(2)(A)(ii), the French Income Tax Treaty will override, if the taxpayer so chooses, the "residence-of-the-seller" rule (IRC § 865(a)(1)), which generally treats income from a U. S. resident's sale of personal property as coming from U. S. sources.
Consistent with the intent of the Virginia legislation regarding foreign source income (i.e., applying the federal sourcing provisions), then the taxpayer's gain from the sale of stock in the French corporation will be considered to be foreign source income, eligible for the income subtraction provided by Va. Code § 58.1-322, to the extent that the gain is included in the Taxpayer's federal adjusted gross income.
I hope that the foregoing has responded to your inquiry; however, if you need any additional information, please contact the Department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner