Tax Type
Individual Income Tax
Description
Shareholder in a Virginia small business corporation.
Topic
Corporate Distributions and Adjustments
Taxability of Persons and Transactions
Date Issued
05-19-1982
May 19, 1982
Re: 58-1118 Application/Individual Income Tax
Taxable Years 1972, 1973 and 1974
Dear ****************
This will reply to your letter of December 16, 1981 in which you apply for correction of individual income tax assessed against your client, ******** for taxable years 1972, 1973, and 1974.
Facts
Your client, a resident of North Carolina for the years in question, was a 25 percent shareholder in an electing Virginia small business corporation. No Virginia returns were filed, and assessments were issued. Subsequently Virginia returns were filed.
Determination
§ 58-151.03(c) of the Code of Virginia exempts from Virginia corporation income tax, "electing small business corporations." As a result, Subchapter S corporations are not subject to tax in Virginia, Instead, the income of such corporations is taxed to the shareholders upon distribution.Virginia Code § 58-151.013(4)(B), as it existed between 1972 and 1976, allowed a subtraction from the federal adjusted gross income of an individual for dividends from stock in any corporation, 50 percent or more of the income of which was assessable under the income tax laws of Virginia. This provision was intended to offer some relief from the "double taxation" of corporate dividends on the premise that individuals with a Virginia income tax liability should not be taxed on dividend distributions from corporations whose income was also taxed in Virginia.
However, since a Subchapter S corporation is not subject to Virginia income tax, this double taxation does not occur. Additionally since the corporation is not taxable in Virginia, its income can never be assessable under Virginia's income tax laws, and the dividend subtraction was never applicable to Subchapter S distributions.
Further statutory basis for this position can be found in Virginia Code § 58-151.013(f)(2) which requires nonresident shareholders in electing small business corporations to include in Virginia taxable income their pro rata share of corporate taxable income and net operating losses. Since "dividend" distributions are includible in the corporation's taxable income but are not taxed to the corporation, the shareholders assume the liability of the corporation's taxable income.
Based upon the foregoing, I find no basis for granting relief for tax assessed on distributions from an electing small business corporation. Although Virginia Code § 58-151.0111(c) does allow a subtraction for distributions received from a corporation with a tax year beginning prior to January 1, 1972, the deficiency assessments for 1972 and 1973 were issued on July 19, 1978. The statute of limitations for pursuing judicial remedy under the provisions of Virginia Code § 58-1130 is three years from the date of assessment. Therefore, it is the department's position that further action on the assessments for these two years is barred by the statute of limitations.
Sincerely .
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner