Tax Type
Individual Income Tax
Description
Tax paid to State A by the Partnership was individual income taxout-of-state tax credit.
Topic
Credits
Persons Subject to Tax
Date Issued
08-30-2010
August 30, 2010
Re: § 58.1-1821 Appeal: Individual Income Tax
Dear *****:
This will reply to your letter in which you appeal the assessment of income tax issued to ***** (the "Taxpayers") for the 2005 taxable year. I apologize for the delay in the Department's response.
FACTS
The Taxpayers, husband and wife, are Virginia residents. The husband was a member in a professional limited liability company (PLLC) that was commercially domiciled in Kentucky. PLLC paid Kentucky income tax and reported the husband's pro rata share of the tax liability to the Taxpayers. The Taxpayers claimed a credit for taxes paid to Kentucky on their 2005 individual income tax return.
Under audit, the credit for taxes paid other states for tax paid to Kentucky was disallowed, and an assessment was issued. The Taxpayers contest the assessment, asserting that the tax paid to Kentucky by the Partnership is, in substance, an individual income tax and therefore eligible for the out-of-state tax credit.
DETERMINATION
Virginia Code § 58.1-33 2 provides a credit to resident individuals who have "become liable to another state for income tax on any earned or business income or any gain on the sale of a capital asset" for the taxable year. The credit is allowed under the statute upon proof of payment of the tax to the other state. As such, an individual claiming the credit, must have become "liable" for tax in another state, and must have actually paid the tax.
For taxable years beginning on or after January 1, 2005 and before January 1, 2007, Kentucky required partnerships, limited liability companies, and S corporations to file income tax returns and determine its Kentucky income tax liability as if they were corporations. See Ky. Rev. Stat. Ann. § 141.208.
Under Ky. Rev. Stat. Ann. § 141.420, members, shareholders, or partners required to file a Kentucky income tax return are entitled to a credit against the tax imposed on individuals. The credit is limited to the members', shareholders', or partners' proportionate share of the tax due from the pass through corporation.
In this case, PLLC paid income tax to Kentucky. The husband's proportionate share of the tax liability was reported to him by PLLC. The Taxpayers filed a joint nonresident Kentucky income tax return reporting their individual income tax liability and claiming the credit for tax paid on the husband's behalf by PLLC.
Based upon the foregoing, I conclude that the tax paid by the PLLC is in fact an income tax on individual members of PLLC. As such, the Taxpayers were in fact liable for the tax and will be deemed to have paid the tax to Kentucky. Accordingly, the assessment has been abated.
The Code of Virginia sections cited, along with other reference documents, are available on-line at www.tax.virgiriia.gov in the Tax Policy Library section of the Department's website. If you have questions concerning this determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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- Linda D. Foster
Deputy Tax Commissioner
- Linda D. Foster
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AR/1-3083495934.o
Rulings of the Tax Commissioner