Tax Type
Individual Income Tax
Description
Out-of-state tax credit; New York Franchise Tax
Topic
Credits
Date Issued
09-10-1992
September 10, 1992
Re: §58.1-1821 Application: Individual Income Tax
Dear******************
This will reply to your letter of November 30, 1990 in which you request, on behalf of your clients, ************************(the "Taxpayers"), a refund for taxable year 1989. I apologize for the delay in responding to your inquiry.
FACTS
In taxable year 1989, the Taxpayers, who were Virginia residents, earned income from ownership in a Virginia S corporation with operations in Illinois, New York, and Virginia (the "Corporation"). The Taxpayers claimed the out-of-state tax credit on their 1989 Virginia individual income tax return for taxes paid to Illinois and New York on the S corporation income. The department disallowed the credit claiming that the tax paid to New York was a "franchise tax" rather than an income tax.
During 1989 New York allowed federal S corporations with operation in New York the option of electing "S" status in New York, thereby applying the New York personal income tax to the individual shareholders on their pro rata share of corporate earnings. If the election was not made a corporation would remain as a "C" corporation in New York and be required to pay the New York corporate franchise tax. The Corporation chose not to make the New York "S" election and was, therefore, subject to the corporate franchise tax.
You request reconsideration of the department's disallowance of the credit for corporate franchise taxes the Corporation paid to New York on the grounds that, in your opinion, the tax is an income tax.
DETERMINATION
Section 209 of Chapter 60, Article 9-A of the Code of New York provides, in part, that the New York franchise tax is imposed upon every domestic or foreign business corporation
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- [f]or the privilege of exercising its corporate franchise, or of doing business, or of employing capital, or of owning or leasing property in [the] state in a corporate or organized capacity, or of maintaining an office in [the] state, for all or any part of each of its fiscal or calendar years, .
- [f]or the privilege of exercising its corporate franchise, or of doing business, or of employing capital, or of owning or leasing property in [the] state in a corporate or organized capacity, or of maintaining an office in [the] state, for all or any part of each of its fiscal or calendar years, .
The New York corporate franchise tax can be determined by a method other than a tax on net income. The existence of the alternative methods indicates that the tax is not an income tax but rather a franchise tax. The mere fact that the Corporation's New York corporate tax was determined using the entire net income method, since it yielded the highest tax amount as compared with the three other methods, should not undermine the true character of the tax.
Several courts, including the U.S. Supreme Court, have consistently distinguished the New York corporate franchise tax from an income tax. In Educ. Films Corp. of Am. v. Ward, 282 U.S. 379, 51 Sup. Ct. 170 (1931), the Court held that income from copyrights, which was regarded as immune from direct state taxation at the time of the decision, could be used as part of the measure of the New York corporate franchise tax. In N. Fin. Corp. v. Tax Comm'n of the State of New York, 290 U.S. 601, 54 Sup. Ct. 230 (1933), the Court affirmed a state court decision which held that interest from federal obligations, which is not directly taxable by the states, may be included in the income figure upon which the New York franchise tax is assessed.
The fact that income which New York may not directly tax under the guides of an income tax is included in the tax base upon which the corporate tax is assessed further demonstrates that the New York corporate tax is not an income tax. If it were an income tax such income would have to be excluded from the tax base prior to determining the amount of taxes due. Based upon the general characteristics of the New York corporate tax we can not reach any conclusion other than that the tax is a franchise tax.
Since 1959 the Virginia Department of Taxation has consistently held that Virginia residents were not entitled to an out-of-state credit for taxes paid to another jurisdiction if such taxes were designated as "franchise" taxes. The department was successful in enforcing this policy until the Virginia Supreme Court overturned this policy by holding that, although designated as a "franchise" tax, the tax imposed by the District of Columbia on entities operating within its jurisdiction was actually an income tax. Llewellyn King v. W.H. Forst, State Tax Comm'n, 239 Va. 557 (1990).
Legislation enacted by the 1991 General Assembly (88 1734, Chapter 362 and SB 765, Chapter 456), effectively overturned the Virginia Supreme Court's King decision. The legislation expressly precluded individuals from claiming a credit for franchise and similar taxes paid to other states as a result of the Virginia Supreme Court decision in King. The law limits the individual income tax credit for taxes paid to another state to true net "income" taxes. The law was applied retroactively to taxable years beginning on and after January 1, 1987 which has prevented individuals from obtaining a credit for franchise taxes paid during 1989. However, taxpayers who filed a protective claim for refund under Va. Code §58.1-1824 based upon the King litigation before the date the bills were introduced (1/22/91) will be allowed refunds.
Unfortunately, your letter does not state the grounds upon which you sought a remedy. Such grounds, in this case, are limited to mentioning the King case or the final determination of the District of Columbia franchise tax case. In this regard, you also fail to mention any statutory or other persuasive authority upon which we could have found merit to your argument. Therefore, I have no authority to allow a refund. Accordingly, your claim is denied.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/4835O
Rulings of the Tax Commissioner