Tax Type
Individual Income Tax
Description
D.C. corporate franchise tax is not eligible for the credit under Va. Code § 58.1-332
Topic
Assessment
Credits
Date Issued
02-06-2006
February 6, 2006
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the individual income tax assessments issued to your client, ***** (the "Taxpayer") for the 2002 taxable year. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer is a Virginia resident who received income from interest in an S corporation that operates in the District of Columbia ("D.C."). The S corporation is subject to the D.C. corporate franchise tax. On his 2002 Virginia individual income tax return, the Taxpayer claimed an out-of-state tax credit for the corporate franchise tax paid by the S corporation to the District.
Under audit, the Department determined that the income on which the credit was computed was a franchise tax, and therefore, did not qualify for the credit for income tax paid to another state provided by Va. Code § 58.1-332 A. The Department disallowed the credit and assessed additional tax and interest.
The Taxpayer asserts that the Virginia Supreme Court determined that the D.C. corporate franchise tax implicitly has been treated as an income tax and that the D.C. unincorporated business tax is an income tax for purposes of the credit allowable under Va. Code § 58.1-332 A. As such, he requests that the credit claimed be restored and a refund be issued with applicable interest.
DETERMINATION
Virginia Code § 58.1-332 allows Virginia residents a credit against their income tax liability when they pay income tax to another state on earned or business income, or on any gain from the sale of a capital asset. The intent of the credit is to grant Virginia residents relief in situations in which they are taxed by both Virginia and another state on these types of income during the same taxable year. The credit is claimed on the income tax return for the same taxable year in which the income is subject to taxation by another state, even though the tax is actually paid during the succeeding taxable year when the return is filed.
The credit is limited to taxes imposed on income. Pursuant to Va. Code § 58.1-332 A, 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, 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.
The Virginia Supreme Court has not specifically found that the D.C. corporate franchise tax qualifies for the Va. Code § 58.1-332 credit. The decisions cited by the Taxpayer to support his position, Llewellyn King v. W. H. Forst, 239 Va. 557, 391 S.E.2d 60 (1990) and Joseph J. Mathy, et al. v. Commonwealth of Virginia Department of Taxation, 253 Va. 356, 483 S.E.2d 802 (1997), address the D.C. unincorporated business franchise tax.
The Taxpayer also cites Bishop v. District of Columbia, 401 A.2d 955 (D.C. 1979), aff'd en banc, 411 A.2d 997 (1980) to support his case. In Bishop, however, the D.C. Court of Appeals differentiated between the unincorporated business franchise tax and the corporate franchise tax. While the D.C. unincorporated business franchise tax was found to be a tax on personal income, the D.C. corporate franchise tax was considered to be a tax for the privilege of doing business that is applied to income.
More on point to the Taxpayer's situation is the decision by the Circuit Court of Fairfax County in Hans D. and Patricia A. Giesecke v. Department of Taxation, 34 Va. Cir. 455 (1994). In this case, the plaintiffs litigated the retroactive application of The General Assembly's 1991 amendment to Va. Code § 58.1-332 A regarding the D.C. corporate franchise tax and whether payment of such tax qualifies for the credit under that section. In its decision, the Circuit Court of Fairfax County ruled in favor of the Department, finding that the amendment denying the plaintiffs the credits claimed on their returns for corporate franchise tax paid to D.C. did not deny the taxpayers due process rights. In so deciding, the court upheld the General Assembly's amendment. The Virginia Supreme Court declined to hear the appeal in Giesecke, finding there was no reversible error in the circuit court's decision. These actions by the courts indicate agreement with the Department's position that the D.C. corporate franchise tax is not eligible for the credit under Va. Code § 58.1-332 for taxes paid other states.
CONCLUSION
Based on the foregoing, the Taxpayer's request for relief is denied. A schedule is enclosed showing the outstanding balance of the assessment for the 2002 taxable year. No additional interest will accrue provided the total outstanding balance is paid within 30 days from the date of this letter. The Taxpayer should remit payment to:Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attention: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.
Based on the foregoing, the Taxpayer's request for relief is denied. A schedule is enclosed showing the outstanding balance of the assessment for the 2002 taxable year. No additional interest will accrue provided the total outstanding balance is paid within 30 days from the date of this letter. The Taxpayer should remit payment to:Virginia Department of Taxation, 3600 West Broad Street, Suite 160, Richmond, Virginia 23230, Attention: *****. If you have any questions concerning payment of the assessment, you may contact ***** at *****.
The Code of Virginia and regulation sections cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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Kenneth W. Thorson
Tax Commissioner
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AR/56182E
Rulings of the Tax Commissioner