Tax Type
Individual Income Tax
Description
Out of State Tax Credit; Is this Taxpayer Eligible
Topic
Basis of Tax
Credits
Date Issued
10-24-2001
October 24, 2001
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****
This will reply to your letter in which you seek correction of the Virginia individual income tax assessment issued to your clients, ***** (the "Taxpayers"), for the taxable year ended December 31, 1997.
FACTS
The Taxpayers, a husband and wife, are Virginia residents. The husband owns 100% of a Virginia S Corporation (the "Corporation"). The Corporation operates in Virginia and North Carolina, which imposes an entity level income and franchise tax on S corporations with nonresident shareholders. North Carolina does not have a reciprocity agreement with Virginia. The Taxpayers computed and claimed an out-of-state tax credit for taxes paid to North Carolina by the Corporation. The department disallowed the credit on the basis that the North Carolina tax is a franchise tax rather than an income tax. You contend that the tax credit was based on the North Carolina income tax.
DETERMINATION
Code of Virginia § 58.1-322 (A) provides:
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- Whenever a Virginia resident has become liable to another state for income tax on any earned or business income or any gain on the sale of a capital asset (within the meaning of § 1221 of the Internal Revenue Code), not including an asset used in a trade or business, to the extent that such gain is included in federal adjusted gross income, for the taxable year, derived from sources outside the Commonwealth and subject to taxation under this chapter, the amount of such tax payable by him shall, upon proof of such payment, be credited on the taxpayer's return with the income tax so paid to the other state.
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- However, no franchise tax, license tax, excise tax, unincorporated business tax, occupation tax or any tax characterized as such by the taxing jurisdiction, although applied to earned or business income, shall qualify for a credit under this section, nor shall any tax which, if characterized as an income tax or a commuter tax, would be illegal and unauthorized under such other state's controlling or enabling legislation qualify for a credit under this section.
This Code section specifically states that no franchise tax paid to another state may be used as a basis for the credit. North Carolina imposes both an income tax and a franchise tax on corporations. In addition, S corporations may pay the franchise and income tax on behalf of some or all nonresident shareholders.
A review of the Corporation's North Carolina income and franchise tax return indicates that the Taxpayers computed the out-of-state tax credit only on the Corporation's income tax. As such, the Taxpayers properly reported the credit for income tax paid to North Carolina in the taxable year at issue.
Accordingly, the assessment of additional income tax and interest issued to the Taxpayers for the taxable year ended December 31, 1997 has been abated. If you have any questions regarding this determination, you may contact ***** in the department's Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
ARO/35067B
Rulings of the Tax Commissioner