August 24, 2021
Re: § 58.1-1821 Appeal: Individual Income Tax
Dear *****:
This will respond to your letter in which you seek correction of the individual income tax assessment issued to ***** (the “Taxpayers”) for the taxable year ended December 31, 2016. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayers, a husband and wife, filed a joint Virginia individual income tax return for the 2016 taxable year, claiming fixed date conformity (FDC) subtractions passed through to the Taxpayers as a result of the husband’s ownership interest in two subchapter S corporations. Under review, the Department disallowed the subtractions on the basis that the Taxpayers had not reported FDC additions in prior taxable years and issued an assessment. The Taxpayers appeal, contending the FDC subtractions on their return are correct.
DETERMINATION
In Public Document (P.D) 20-31 (3/4/2020) and P.D. 20-44 (3/18/2020), the Department determined that FDC subtractions cannot be denied based solely on the fact that a taxpayer did not take a FDC addition in a prior taxable year. Those determinations also state that, if the Department determines there has been an error in reporting an FDC addition in prior taxable years, then the Department must correct the taxpayer’s return for the taxable year in which an addition was required but not taken. As such, correction must be made within the applicable statute of limitations. Further, if the Department ascertains there has been a reporting error on the returns provided by the pass-through entity (PTE), then the Department must audit and make adjustments at the PTE level. Such adjustments would then be passed through to the owners of the PTE.
In this case, the Taxpayers did not acquire the ownership interest in the S corporations until 2015, which likely explains why no FDC additions were previously reported on their individual returns. Any prior FDC additions would have been attributed to the corporations, and passed through to its previous owners. A change of ownership would have had no impact on the Taxpayers’ ability to claim FDC subtractions properly reported by the corporations.
Because the Taxpayers properly reported their FDC subtractions as indicated on their federal and Virginia PTE tax forms, they are entitled to claim the subtractions on their 2016 Virginia joint individual income tax returns. Accordingly, the assessment at issue will be abated.
The Code of Virginia sections and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/3429-C