Tax Type
Individual Income Tax
Description
S corporation stockholder basis
Topic
Corporate Distributions and Adjustments
Taxable Income
Date Issued
12-28-1984
- December 28, 1984
Re: Ruling Request: Individual - S Corporation
Dear ****
This will reply to your letter of October 25, 1983 and the letter of May 7, 1984 from your associate, ********concerning basis of an S corporation stockholder in his stock for federal and state income tax purposes.
FACTS
An S corporation has interest income from federal tax-exempt investments. The interest retains its tax-exempt character as it passes through to the stockholder, and the stockholder's basis in his stock is increased.
Pursuant to §58-151.013(b)(2) of the Code of Virginia, such interest income would be subject to Virginia income tax. Virginia law is silent on the adjustment of a stockholder's basis.
When the corporation dissolves and distributes the interest to the stockholder, basis will be recovered before any taxable gain occurs. You suggest that the stockholder's basis for Virginia income tax purposes should be lower than his basis for federal income tax purposes to avoid being taxed twice for Virginia purposes.
DETERMINATION
As Va. Code §58-151.013(a) prescribes, the starting point for determining a resident individual's Virginia taxable income is his federal adjusted gross income, with the modifications specified in the section. No modification is authorized to adjust an S corporation stockholder's basis in his stock. Therefore, when a stockholder receives a distribution from his S corporation, whatever his basis is for federal income tax purposes (and its resultant effect on computing federal adjusted gross income) will not be modified for Virginia income tax purposes.
The situation you pose creates no result different from that required by statute. Suppose, for example, that an S corporation's sole income for a year is $100 federally tax-exempt interest. There is only one stockholder, whose basis in his stock is increased from $10 to $110 as a result of the income. He pays no federal income tax on the $100 interest but, by virtue of Va. Code
§58-151.013(b)(2), pays Virginia income tax of $5.75 on the interest (assuming he is in the 5.75% tax bracket). When the corporation dissolves and distributes the $100 to him (and assuming the corporation has no accumulated earnings and profits), the distribution is tax-free because it does not exceed his basis. Thus, he will have paid no federal income tax and will have paid only the Virginia income tax mandated by Va. Code §58-151.013(b)(2). Thus, no "double taxation" has occurred.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner