Tax Type
Individual Income Tax
Description
Out-of-state tax credit; District of Columbia corporate franchise tax
Topic
Credits
Date Issued
05-10-1988
May 10, 1988
Re: Ruling Request
Individual Income Tax
Dear**************
This is in reply to your letter of November 30, 1987 in which you request a ruling regarding the applicability of the Virginia out-of-state tax credit, under Virginia Code §58.1-332, to Virginia resident shareholders in an S corporation subject to the District of Columbia Corporate Franchise Tax.
FACTS
Effective October 1, 1987 and applicable for tax years beginning after December 31, 1986, §47-1801.4(16) of the D. C. Code was amended to subject S corporations to the District of Columbia Corporate Franchise Tax. Prior to this date, S corporations were subject to the District of Columbia Unincorporated Business Franchise Tax.
Based upon the District of Columbia's previous treatment of S corporations, the department made the determination on April 9, 1987 (PD 87-124 attached) that the District of Columbia Unincorporated Business Franchise Tax, as applied to an S corporation, is a franchise tax rather than an income tax. Therefore, since only income taxes qualify for a credit under Virginia Code §58.1-332, the Virginia out-of-state tax credit is not available to Virginia resident shareholders of an S corporation subject to the District of Columbia Unincorporated Business Franchise Tax.
You now question whether the change in the form of taxation of S corporations by the District of Columbia will entitle Virginia resident shareholders of an S corporation, subject to the District of Columbia Corporate Franchise Tax, to claim a credit on their Virginia income tax returns for income taxes paid to the District of Columbia by the S corporation.
RULING
Virginia Code §58.1-332 was amended effective for taxable years beginning on and after January 1, 1985 to allow individual shareholders in an S corporation to claim a credit on their Virginia individual income tax return for income taxes paid by the S corporation to another state. This section provides in part that, "... the amount of any state income tax paid by an electing small business corporation (S corporation) shall be deemed to have been paid by its individual shareholders in proportion to their ownership of the stock of such corporation." (Emphasis added.)
As set forth in the above statute, in order for the tax to be creditable against the Virginia individual income tax, it must be a state income tax. It has been the department's long-standing position (since 1958) that the Unincorporated Business Franchise Tax imposed by the District of Columbia is not an income tax for purposes of the- tax credit under Virginia Code §58.1-332. Therefore, regardless of whether or not the tax is imposed on an individual as a sole proprietor or on an S corporation, the Unincorporated Business Franchise Tax imposed by the District of Columbia is not allowable as a credit against Virginia income tax.
The District of Columbia Corporate Franchise Tax, like the District of Columbia Unincorporated Business Franchise Tax is a tax imposed for the privilege of carrying on or engaging in any trade or business within the District of Columbia. As such, the tax is measured by, rather than being imposed on, net income. Accordingly, we find it is not an income tax for purposes of the tax credit under Virginia Code §58.1-332. Therefore, the District of Columbia Corporate Franchise Tax is not allowable as a credit against Virginia income tax.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner