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Virginia Tax Commissioner finds arbitration settlement proceeds do not qualify for foreign source income subtraction

The Tax Commissioner of the Virginia Department of Taxation recently denied a taxpayer’s request to subtract proceeds from an arbitration settlement as foreign source income, finding that the gain was not derived from the sale of intangible property outside the United States. The Commissioner also rejected the taxpayer’s attempts to characterize the settlement proceeds as technical fees. In doing so, the Commissioner explained that, under Virginia’s federal conformity provisions, the taxpayer’s treatment of the settlement proceeds as a gain on the sales of stock for federal income tax purposes controlled its treatment under the Virginia income tax.