Tax Type
Corporation Income Tax
Description
Foreign source income expenses
Topic
Computation of Income
Date Issued
09-26-1991
September 26, 1991
Re: §58.1-1821 Application; Corporation Income Tax
Dear*****************
This will reply to your letter of February 18, 1991, in which you seek correction of assessments of corporation income tax for**********(the "Taxpayer").
FACTS
The taxpayer was audited and numerous adjustments were made, resulting in the assessment of additional tax. You object to three adjustments. The issues you raise will be addressed separately.
DETERMINATION
Foreign source income expenses: The taxpayer claimed a subtraction for foreign source income on its Virginia corporation income tax return. In its computation of the subtraction, the taxpayer applied "actual" expenses associated with the production of the income. The auditor reduced the subtraction by applying additional expenses to the income. You contend that the additional expenses are not directly related to the foreign income and, therefore, should not be used to reduce the subtraction.
Previous rulings by the department require the Virginia subtraction for foreign source income to be reduced by expenses, determined in accordance with Internal Revenue Code (IRC) §861 et seq. P.D. 86-154 (8/14/86) (copy enclosed). Virginia law requires use of IRC §861 et seq. whether or not the taxpayer believes certain expenses have any connection to income from foreign sources and regardless of what the expenses would be under generally accepted accounting principles. The regulations under §861 et seq. provide that expenses not definitely allocable are to be apportioned ratably among the statutory groupings of gross income and the residual grouping. You failed to include all applicable expenses (including interest, research and development, state and local taxes, stewardship, and charitable contributions) in the expenses to be ratably apportioned. The auditor properly included these expenses in computing the subtraction.
Foreign dividend gross-up: The taxpayer included foreign dividend gross-up in the subtraction for foreign source income on its Virginia return. When adjusting the subtraction for foreign source income by applying additional expenses, the auditor applied expenses to the foreign dividend gross-up amounts. You maintain that no expenses should be attributed to this income
The department has previously ruled that because dividend gross-up is a separate subtraction under Va. Code §58.1-402, and has no expense related under generally accepted accounting principles, it is not required to have expenses assigned under IRC §861 et seq. P.D. 86-154 (8/14/86). Therefore, the audit report will be adjusted to include the subtraction for foreign dividend gross-up without expenses being assigned.
ACRS depreciation: The auditor computed an ACRS addition for the 1987 Virginia return. You object to this adjustment, claiming that the addition computed by the auditor was based on information other than the actual ACRS depreciation for that taxable year.
At the time of the audit, the auditor was not supplied with a separate federal Form 4562 (Depreciation and Amortization) for 1987. Therefore, the auditor computed the ACRS addition based on the best information available. You have supplied more detailed ACRS depreciation information. I will refer this audit back to the auditor for review of your ACRS figures. She will make the appropriate adjustments to the audit report and assessment.
Accordingly, the audit report will be revised to remove expenses from the subtraction for foreign dividend gross-up, and the auditor will review the ACRS information and make the appropriate adjustments. In all other respects, the assessment is correct. You will shortly receive a bill with interest accrued to date. The bill should be paid within 30 days to avoid the accrual of additional interest
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner