Document Number
06-10
Tax Type
Corporation Income Tax
Description
A pass-through entity must perform a computation to determine a corporate income tax as if it were a corporation.
Topic
Appropriateness of Audit Methodology
Assessment
Date Issued
02-06-2006



February 6, 2006



Re: § 58.1-1821 Application: Corporate Income Tax

Dear *****:

This will reply to your letter in which you seek correction of the assessment for the minimum tax on telecommunications companies (the "Telecommunications Tax") issued to your client, ***** (the "Taxpayer"), for the taxable years ended December 31, 2001 through 2004.

FACTS


The Taxpayer is a Virginia telecommunications company that is a limited liability company. It has four members, each of which is an S corporation. For the years at issue, the Taxpayer elected to be treated as a partnership for both federal and Virginia income tax purposes.

The Taxpayer filed Virginia Telecommunications Companies Minimum Tax forms for the years at issue that reported no tax liability. The Department audited the Taxpayer and assessed the Telecommunications Tax. The Taxpayer contests the assessments and contends that the Taxpayer was exempt from the Telecommunications Tax because it is a limited liability company that is treated as a partnership for federal and state purposes. In addition, the Taxpayer contends that the Department erred in calculating the amount of the Telecommunications Tax.

DETERMINATION


Virginia Code § 58.1-400.1 A provides that a telecommunications company is subject to a minimum tax, in lieu of the corporate income tax, based on its gross receipts for the calendar year that ends during the taxable year if the corporate income tax is less than the minimum tax. Virginia Code § 58.1-400.1 B further provides that the State Corporation Commission ("SCC") must certify the name, address and gross receipts for each telecommunications company. The SCC makes all determinations regarding a company's status as a telecommunications company. See Title 23 of the Virginia Administrative Code ("VAC") 10-120-81 B. In the instant case, the SCC has certified the Taxpayer as a telecommunications company.

The Taxpayer contends that the Telecommunications Tax applies only to corporations. It argues that under Virginia Code § 58.1-390, pass-through entities are not subject to income tax. Further, the Taxpayer asserts that Va. Code § 58.1-400.1 strongly implies that the Telecommunications Tax is limited to corporations. The Taxpayer reasons that because the Telecommunications Tax is only imposed if it exceeds the corporate income tax liability, only corporations can be subject to the alternative tax.

The Telecommunications Tax was enacted in 1988 in order to transition telecommunications companies from a gross receipts tax imposed by the SCC to the income tax. The purpose of the Telecommunications Tax was to limit the general fund impact of the transition.

The clear language of the statute imposes the tax on telecommunications companies, not corporations. Virginia Code § 58.1-400.1 specifically defines a telecommunications company. The Taxpayer clearly fits within this definition. The fact that the Taxpayer's has no corporate income tax liability does not relieve it from its obligation under Telecommunications Tax statute. In fact, a literal reading of the statute indicates that a telecommunications company that is a pass-through entity could be subject to the Telecommunications Tax without any deduction for income tax, and its owners would still be subject to income tax on their proportionate shares of the telecommunications company's income.

In recognition of the inequity of this result, the Department developed a mechanism for pass-through entities to be treated as if they were subject to corporate income tax for purposes of computing the Telecommunications Tax. This mechanism is addressed in Title 23 VAC 10-120-89 A:
    • Unless specifically exempt under § 58.1-401 of the Code of Virginia, every telecommunications company certified as such by the SCC is subject to the minimum tax even though it may be exempt from, or not subject to, the corporate income tax under § 58.1-400 of the Code of Virginia. To the extent that the income of a noncorporate telecommunications company is subject to Virginia income tax at the entity level or in the hands of a partner or other person for whom the income retains its character, the telecommunications company will be deemed to have paid corporate income tax for purposes of computing the minimum tax and credit . . . [Emphasis added.]

I do not agree with your assertion that the Department's regulation is inconsistent with the statute. The regulation was promulgated to address an inequity overlooked by the statute. As such, in order to determine if it is subject to the Telecommunications Tax, a telecommunications company that is a pass-through entity must perform a computation to determine a corporate income tax as if it were a corporation. The Telecommunications Tax would be the amount by which the alternative computation based on gross receipts exceeds the deemed corporate income tax.

The assessments at issue do not reflect an adjustment for income tax paid by the owners of the Taxpayer because the Department does not have sufficient information to make such a computation. I will allow the Taxpayer to submit documentation to compute its deemed corporation income tax. Once the documentation is received, the appropriate adjustments will be made to the assessments. The assessment computational errors you mention in your letter and which you have discussed with members of my staff have been resolved.

Please send requested information to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attention: *****. The requested information must be received within 30 days from the date of this letter in order for the Department to properly adjust the Taxpayer's assessments. If the information is not provided within the time allotted, the Department will presume that the Taxpayer has no deemed liability and will issue a revised bill accordingly. The Taxpayer's request for the waiver of penalty and interest will be considered along with the deemed corporate income tax computations.

The Code of Virginia sections and regulations cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Departments web site. If you have any questions regarding this determination, please contact ***** at *****.
                • Sincerely,

                • Kenneth W. Thorson­
                  • Tax Commissioner



AR/56613B


Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46