Tax Type
Individual Income Tax
Description
Out-of-state tax credit; Franchise tax paid by S Corp. to District of Columbia
Topic
Credits
Date Issued
05-27-1994
May 27, 1994
Re: §58.1-1821 Application: Individual Income Tax
Dear****************
This will reply to your letter in which you request the abatement of an assessment issued against your client, ************** (the "Taxpayer"), for taxable year 1990. Specifically, you request that certain S corporation income be excluded from the Taxpayer's income subject to
Virginia taxation.
FACTS
The Taxpayer, a Virginia resident, owns shares in an S corporation that earns income in the District of Columbia. The corporation is subject to the District of Columbia franchise tax on the income it earned during taxable year 1990. The Taxpayer initially claimed a credit on his Virginia return for the pro rata share of the franchise taxes paid by the corporation. The department denied the credit since a credit is only allowed for income taxes paid to another state. Va. Code Sec. §58.1-332 specifically states that no credit is allowed for franchises taxes paid to another state.
You contend that the Taxpayer should be permitted to exclude his share of the corporation's income as the income was derived from the corporation's activities within the District of Columbia and as the corporation did not pay any dividends to the Taxpayer.
DETERMINATION
Under Va. Code §58.1-322, Virginia taxable income is federal adjusted gross income, with certain specified modifications. As such, to the extent that income is subject to federal taxation, it is subject to Virginia taxation unless specifically excluded. Because there is no specific subtraction or deduction in Va. Code §58.1-322 for a taxpayer's share of S corporation income, the income is included in Virginia taxable income when the shareholder is a domiciliary or actual resident of Virginia.
Since the Taxpayer's share of the S corporation's earnings are included in federal adjusted gross income, and since Virginia law does not provide a specific subtraction for such income, the Taxpayer's share of the S corporation's income was properly included in Virginia taxable income and taxed by Virginia. The fact that a dividend was not paid to the Taxpayer does not alter this determination. Under federal law, an S corporation shareholder must recognize his pro rata share of the corporate income earned whether or not the corporation issues a dividend to its shareholders that would pay the tax due on such income.
The remaining unpaid balance of this bill with updated interest is*************. To avoid the accrual of additional interest, this amount should be paid within 30 days of the date of this letter. The check should be made payable to Department of Taxation, **********Office of Tax Policy, Department of Taxation, P. O. Box 1880, Richmond Virginia 23282. Please be sure that the Taxpayer puts his social security number and references bill number********on the check.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/73040
Rulings of the Tax Commissioner