Did Virginia fixed-date conformity require a 2007 subtraction for foreign dividends included in federal adjusted gross income?

Subject

Federal conformity did not revive repealed foreign-dividend subtraction

Plain-English summary

Virginia again denied the taxpayers' 2007 subtraction for foreign dividends because the General Assembly had repealed the provision for 2003 and later years. The taxpayers argued that fixed-date federal conformity required the subtraction because the dividends were included in federal adjusted gross income and reported for the federal foreign tax credit.

Virginia explained that conformity made federal adjusted gross income the state starting point. It did not authorize a state subtraction that the legislature had expressly removed. With the dividends in federal income and no current Virginia subtraction, the amounts remained in the Virginia base.

The taxpayers also pointed to an August 2008 Department letter concerning their 2006 return. That letter addressed a tax-credit adjustment, not foreign-source subtractions. Separate September 2008 letters had in fact disallowed the subtraction for 2006.

Virginia treated this reconsideration as its final determination on the foreign-dividend issue.

What this means for you

• Federal conformity establishes a starting point but does not create every state deduction or subtraction.
• State-specific subtractions can be repealed even when the income remains federally reportable.
• Read correspondence for the exact issue it decides; a credit adjustment is not approval of a subtraction.
• Tax-year effective dates control foreign-income treatment.

Common questions

Why were the dividends in the Virginia base?

They were included in federal adjusted gross income and Virginia no longer allowed the subtraction.

Did the federal foreign tax credit create a Virginia subtraction?

No.

Was this the Department's final determination?

Yes, on this issue.

Citations and references

• Va. Code § 58.1-322.
• Virginia Public Documents 09-50, 03-54, 07-1, and 08-103.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-40

Original ruling text

April 8, 2010

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter seeking reconsideration of the Department's determination letter dated April 27, 2009, issued as Public Document: (P.D.) 09-50, to * (the "Taxpayers").

FACTS

In P.D. 09-50, the Department determined that the Taxpayers were not entitled to a foreign source income subtraction for the 2007 taxable year because the General Assembly had repealed the subtraction effective for taxable years beginning on and after January 1, 2003. The Taxpayers now assert that the Department is required under fixed date conformity with federal statutes to allow their subtraction on the Virginia income tax return. The Taxpayer also claims that the Department has not consistently applied the policy stated in P.D. 09-50.

The Taxpayers continue to assert that the fixed date conformity provisions of the Code of Virginia provide for the subtraction of certain foreign source dividends from federal adjusted gross income (FAGI). They claim that because the foreign source dividends were included in FAGI and reported as income on Form 1116 for the purpose of calculating a federal foreign tax credit, conformity with the federal treatment of the foreign dividends requires Virginia to allow the subtraction.

DETERMINATION

As stated in P.D. 09-50, Va. Code § 58.1-322 did provide a subtraction from FAGI for certain foreign source income until the General Assembly specifically repealed the subtraction effective for taxable years beginning on and after January 1, 2003. As such, because the foreign dividends were included in the Taxpayers' FAGI and the Code of Virginia did not permit a subtraction for such income, the Department was correct in disallowing the subtraction on the 2007 income tax return. This policy has been consistently articulated in P.D. 03-54 (5/3/2003), P.D. 07-1 (2/22/2007), and P.D. 8-103 (6/18/2008).

The Taxpayers, however, indicate that they filed their 2006 Virginia income tax return with the same foreign source subtraction without a correcting adjustment by the Department. They claim a letter, dated August 23, 2008, from the Department concerning the 2006 return supports their position. This letter, which did explain a tax credit adjustment made to the 2006 return, did not address subtractions. The Department, however, subsequently issued letters, dated September 26, 2008, notifying the Taxpayers that the subtraction was disallowed. The letters, copies enclosed, disallowed the foreign source income subtraction and showed the additional adjustment made to the 2006 return.

I have carefully reconsidered the Taxpayer's appeal, but must respectfully disagree with your conclusions. While I recognize your continuing disagreement with the validity of the assessment, my letter of April 27, 2009, clearly explains the Department's authority for disallowing the Taxpayers' subtraction for foreign dividends. This letter constitutes the Department's final determination on this issue.

The Code of Virginia sections cited, along with other reference documents, are available on-line www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3438036947.E