Tax Type
Individual Income Tax
Description
S Corporation Income; erroneous telephonic advice
Topic
Assessment
Collection of Delinquent Tax
Date Issued
04-07-2005
April 7, 2005
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your correspondence in which you seek correction of the Virginia individual income tax assessment issued to ***** (the "Taxpayer") for the taxable year ended December 31, 2001. I apologize for the delay in the Department's response.
FACTS
The Taxpayer, a resident of ***** ("State A"), owned shares of stock in a Virginia S corporation ("VSC"). The Taxpayer did not file a Virginia income tax return for the 2001 taxable year. The Department received information from the Internal Revenue Service ("IRS") indicating that the Taxpayer had income for the 2001 taxable year. The Department sent a letter to the Taxpayer requesting that the proper Virginia income tax returns be filed or information be provided to show that the income was not taxable in Virginia. When an adequate response was not received, the Department issued an assessment.
The Taxpayer contends that he was a resident of State A for the 2001 taxable and that he was only a passive investor in VSC. He further argues that he was not required to pay Virginia income tax or file a Virginia income tax return pursuant to advice given by the Department. Consequently, the Taxpayer is requesting that the assessment be abated.
DETERMINATION
S Corporation Income
Virginia Code § 58.1-401 exempts "electing small business corporations" from Virginia corporation income tax. As a result, S corporations are not subject to tax in Virginia. Instead, the income of such corporations is taxed to the shareholders upon distribution. Title 23 of the Virginia Administrative Code ("VAC") 10-120-90 E provides:
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- Electing small business corporations which avail themselves of the election under Subchapter S of the Internal Revenue Code to have the income of the corporation included in the income of the shareholders are exempt from corporate income tax. All such income then becomes income taxable to the shareholder under laws and regulations applicable to individuals. Such corporations are required to file a Virginia return even though exempt from income tax.
Virginia Code § 58.1-325 B states:
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- For a nonresident individual who is a shareholder in an electing small business corporation (S corporation), there shall be included in his Virginia taxable income his share of the taxable income of such corporation, and his share of any net operating loss of such corporation shall be deductible from his Virginia taxable income.
Title 23 VAC 10-110-180 E further states that the income or loss to be included is that amount attributable to a business, trade, profession or occupation carried on in Virginia. Accordingly, when nonresident individuals are shareholders of an S corporation that conducts business in Virginia, the Department applies the provisions of Va. Code §§ 58.1405 through 58.1-421 in order to determine an individual's Virginia taxable income. As such, income received from a Virginia S corporation will remain Virginia source income in the hands of the shareholders whether they are residents of Virginia or not.
VSC conducted all of its business within Virginia. The fact that the Taxpayer was not involved in running the business has no bearing on the character of the income from VSC. The Taxpayer, as a nonresident shareholder of VSC, is required to file a nonresident individual income tax return and pay tax on his income from Virginia sources.
Advice from Department Representative
The Department had previously contacted the Taxpayer concerning the income from VSC for a prior taxable year. The Taxpayer states that he was initially advised by telephone that he might be required to file a nonresident income tax and pay tax on the income from VSC. The Taxpayer further states that after raising other issues with a Department representative, he was advised to consider the matter closed unless the Department contacted him within a specified period of time. The Taxpayer argues that he should not be liable for the assessment issued for the 2001 taxable year because he relied on the Department's advice.
Virginia Code § 58.1-1835 authorizes the Tax Commissioner to abate an assessment or a portion of an assessment that is attributable to erroneous advice furnished to the taxpayer in writing by an employee of the Department acting in his official capacity.
In this case, the Department provided advice by telephone, not in writing. As such, the Tax Commissioner is not required to abate the assessment based on erroneous telephonic advice.
CONCLUSION
The Taxpayer is subject to Virginia income tax as a nonresident on income distributed by VSC. The enclosed schedule shows the balance due. Inasmuch as the assessment was based on the information available, the Taxpayer may file a Virginia nonresident income tax return for the 2001 taxable year in order to more accurately reflect any allowable adjustments, which may reduce the balance due. The return, along with any applicable balance due, should be sent to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23261-7203, Attention: *****. The return and associated payment, or payment of the Department's assessment as shown on the enclosed schedule, must be submitted within 45 days from the date of this letter. Collection activity will be held pending payment of the balance due or filing of the 2001 Virginia nonresident individual income tax return.
The Taxpayer is subject to Virginia income tax as a nonresident on income distributed by VSC. The enclosed schedule shows the balance due. Inasmuch as the assessment was based on the information available, the Taxpayer may file a Virginia nonresident income tax return for the 2001 taxable year in order to more accurately reflect any allowable adjustments, which may reduce the balance due. The return, along with any applicable balance due, should be sent to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23261-7203, Attention: *****. The return and associated payment, or payment of the Department's assessment as shown on the enclosed schedule, must be submitted within 45 days from the date of this letter. Collection activity will be held pending payment of the balance due or filing of the 2001 Virginia nonresident individual income tax return.
The Code of Virginia and regulation sections cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department's web site, located at www.policylibrary.tax.virginia.gov. Forms and instructions needed for filing nonresident individual income tax returns are available on the Department's web site, located at www.tax.virginia.gov. If you have any questions regarding this determination, you may contact ***** at *****.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/52345E
Rulings of the Tax Commissioner