Tax Type
Individual Income Tax
Description
Apportionment of S corporation income; Nonresident shareholder
Topic
Allocation and Apportionment
Corporate Distributions and Adjustments
Persons Subject to Tax
Residency
Date Issued
05-29-1991
May 29, 1991
Re: Ruling Request; Individual Income Tax
Dear*****************
This will reply to your letter of August 17, 1990, in which you request a ruling of behalf of **************(the "Taxpayer"), regarding the apportionment of S corporation income for individual income tax purposes.
FACTS
The taxpayer is a Maryland resident and sole shareholder of a Maryland S corporation. The S corporation filed Virginia corporation income tax returns because it had operations, leased property and had employees in Virginia. The department made an adjustment to the ACRS modification on the S corporation's 1986 Virginia return. In checking further, the department discovered that the taxpayer had not filed a Virginia individual income tax return for the 1986 tax year. The taxpayer states that all of his income from the S corporation is reported on his Maryland individual income tax returns; therefore, a Virginia individual income tax return is not required.
RULING
S Corporation: Virginia generally conforms to the federal treatment of S corporations. Electing small business corporations which make the election under Subchapter S of the Internal Revenue Code (IRC) to have the income of the corporation included in the income of the shareholders are exempt from the Virginia corporate income tax. Such corporations are required to file a Virginia return even though exempt from income tax. The income of the S corporation is computed under the laws and regulations applicable to corporations, including allocation and apportionment.
You contend that the Virginia operations of the S corporation were loss situations and that the S corporation's Virginia return should be amended to show the separate loss of the Virginia operations. This would result in no Virginia taxable income, and the taxpayer would not be required to file a Virginia individual income tax return. We have treated your letter as a request to use an alternative method of allocation and apportionment based on separate accounting.
The policies which apply to requests for an alternative method under Va. Code §58.1-421 are well established. See VR 630-3-421, P.D. 86-181 (9/18/86) and P.D. 85-116 (7/2/85) (copies enclosed). After considering the facts set forth, I conclude that you have not demonstrated by clear and cogent evidence that the statutory method is unconstitutional or inapplicable as applied to your situation.
Shareholder: Income received by an S corporation, which is determined to be income from Virginia sources, will remain Virginia source income in the hands of the shareholders. P.D. 88-165 (6/29/88) (copy enclosed). The S corporation had Virginia taxable income, which it passed through to its sole shareholder, the taxpayer. Therefore, the taxpayer had Virginia taxable income.
Every nonresident having Virginia taxable income for the taxable year is required to file a Virginia individual income tax return, assuming the filing threshold is met. Because the taxpayer, a nonresident, had Virginia taxable income, he is required to report the income on a Virginia nonresident individual income tax return.
Conclusion: Accordingly, the S corporation's amended return based on an alternative method of allocation and apportionment is not accepted. The taxpayer is required to file a Virginia nonresident individual income tax return for 1986, based upon his Virginia taxable income determined by apportioning the income of the S corporation using the statutory formula. However, as a resident of Maryland, the taxpayer may be allowed a credit for tax paid to Maryland which would offset some or all of the Virginia tax liability on the nonresident Virginia tax return.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner