Tax Type
Individual Income Tax
Description
District of Columbia franchise tax; S corporation; Additional Assessment
Topic
Collection of Tax
Credits
Date Issued
12-28-1992
December 28, 1992
Re: §58.1-1821 Application: Individual Income Tax
Dear*****************
This will reply to your letter of September 14, 1992 on behalf of your clients,*************(the "Taxpayers") in which you request my reconsideration of the determination set forth in my letter dated August 17, 1992 denying your request to correct an assessment issued to the Taxpayers for taxable year 1989.
FACTS
The Taxpayers, who are residents of Virginia, filed their 1989 Virginia tax return in April of 1990. The Taxpayers claimed a credit for their pro rata share of franchise taxes paid to the District of Columbia by an S corporation in which the Taxpayers own shares. The department's initial screening of the return at the time that it was filed failed to detect the fact that the Taxpayers erroneously claimed a credit for District of Columbia franchise taxes paid by the S corporation.
In July of 1991 the department examined the Taxpayer's 1989 return and discovered that the Taxpayers had incorrectly claimed a credit for franchise taxes paid to the District of Columbia. Based upon the examination, the department concluded that the Taxpayers owed additional taxes.
I have addressed the validity of the assessment against the Taxpayers in the letter dated August 17, 1992. At such time I concluded that the assessment was valid. You have asked me to reconsider this same issue.
DETERMINATION
During the 1991 legislative session, the General Assembly enacted an amendment to Va. Code §58.1-332 to specifically exclude, from the allowable credits that a Virginia resident could claim, a credit for franchise taxes, or a tax characterized as such, paid to another jurisdiction. The amendment was retroactively enacted to taxable years beginning on or after January 1, 1987. Chapter 362, 1991 Acts of Assembly (copy enclosed).
Based upon the retroactive application of the 1991 amendment to Va. Code §58.1-332, any credit claimed for franchise taxes paid to the District of Columbia for taxable years after taxable year 1986 is invalid. This includes the out-of-state credit claimed by the Taxpayers on their 1989 return for franchise taxes paid to the District of Columbia. Your assertion that the Taxpayers properly claimed a credit is, therefore, incorrect.
Additionally, Enactment Clause Three of Chapter 362 states that a protective claim filed prior to the date that the bill affecting the amendment to Va. Code §58.1-332 was introduced (January 22, 1991) is unaffected by the enactment of the legislation. By negative inference one can only conclude that a taxpayer's failure to file a protective claim prior to January 22, 1991 would result in the taxpayer being subject to the retroactive application of the legislation.
The Taxpayers did not file a protective claim for refund based upon the final determination of Llewellyn King v. W. H. Forst, State Tax Comm'r, 239 Va. 557 (1991) prior to January 22, 1991. You contend that the Taxpayers would have filed a protective claim prior to January 1991 if they had received notice from the department that their 1989 tax return was under review prior to that date.
As determined previously, the Taxpayers incorrectly claimed the credit on their 1989 return. While it is unfortunate that the mistake was not discovered during the initial screening of the return, the department is under no obligation to complete an audit of the return at the time that it is filed. In fact, Va. Code §58.1-104 provides that the department may assess additional taxes within three years from the last day prescribed by law for the timely filing of the return.
Accordingly, since the assessment was issued prior to the expiration of the three year assessment period and since the Taxpayers failed to file a timely protective claim to avoid the retroactive application of the amendment to Va. Code §58.1-332, I find no basis to waive the assessment, nor do I have the authority to allow the credit.
The assessment is, therefore, correct and the department will recommence collection actions against the Taxpayers.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6423O
Rulings of the Tax Commissioner