Tax Type
Individual Income Tax
Description
Taxation of nonresidents; S corporation as limited partner in out-of-state partnership
Topic
Taxpayers' Remedies
Date Issued
08-05-1994
August 5, 1995
Re: Ruling request: Individual income taxes
Dear**************
This will reply to your letter of July 19, 1994 in which you have requested a ruling with respect to the proper method of allocation and apportionment for**************(the "Taxpayer").
FACTS
The Taxpayer is a Virginia S corporation, engaged in manufacturing. The Taxpayer is a limited partner in a Louisiana limited partnership "partnership") which is also engaged in manufacturing. As a result of the partnership income, Louisiana income taxes are due. Depending on whether an S corporation election is made in Louisiana, either the Taxpayer or the shareholders of the Taxpayer will pay income taxes to the state of Louisiana. The Taxpayer has two shareholders, only one of which is a Virginia resident. You have requested a ruling as to the proper method of allocation and apportionment for the Taxpayer, and as to the determination of the credit for taxes paid to other states allowed to the Taxpayer's shareholders.
RULING
Virginia residents are allowed a credit for income taxes paid to other states on earned or business income pursuant to Va. Code §58.1-332. In the event that a Louisiana S election is made, the 1993 Louisiana individual income tax which will be paid by the Virginia resident shareholder is an income tax on business income and thus will qualify for the credit allowed by Va. Code §58.1-332.
Virginia residents are also allowed a credit for state income taxes paid by an S corporation in proportion to their stock ownership in the S corporation. In the event that a Louisiana S election is not made, the 1993 Louisiana corporate income tax which would be paid by the corporation is an income tax, and thus would qualify for the credit allowed by Va. Code §58.1-332 C on behalf of the resident shareholder in proportion to his stock ownership in the corporation. However, the Louisiana franchise tax paid by the corporation will not qualify for the credit.
In either event:, the credit allowed pursuant to Va. Code §58.1-332 is not allowed to the nonresident shareholder with respect to any Louisiana income tax paid. However, see the discussion of apportionment 'below.
Virginia resident shareholders of an S corporation which conducts its business within and without of Virginia include 100% of their pro rata share of the S corporation's income in their Virginia taxable income. In lieu of allocation and apportionment, the Virginia residents may claim a credit for taxes paid to other states in accordance with Va. Code § 58.1-332.
Nonresident shareholders of an S corporation which conducts its business within and without of Virginia must include in their income from Virginia sources the portion of their pro rata share of the S corporation's income which is allocated and apportioned in Virginia.
In the case of the Taxpayer, income must be allocated and apportioned in accordance with Va. Code §§58.1-408 through 58.1-421, using the three factor formula of property, payroll, and sales.
The Taxpayer is a limited partner in a Louisiana partnership. In determining apportionment factors, the department's policy allows a corporation to use its proportionate share of partnership property, payroll, and sales in determining its apportionment factors where such corporation is a general partner. However, where a corporation is a limited partner, the department's policy does not allow factor representation from the limited partnership in determining the corporation's apportionment factors.
In the instant case, if the Taxpayer is not allowed to include its proportionate share of the partnership's property, payroll, and sales in its apportionment factors, the nonresident shareholder would be required to include 100% of his proportionate share of the Taxpayer's income in his Virginia source income even though a portion of the income is attributable to partnership activities conducted in Louisiana. This could result in Virginia taxation of the nonresident shareholder's income earned from sources outside of Virginia. Although resident shareholder's are allowed a credit for taxes paid to other states, nonresident shareholders of Virginia S corporations must rely on allocation and apportionment to avoid double taxation. Accordingly, given the extraordinary circumstances combining a Virginia S corporation with a nonresident shareholder and a Louisiana limited partnership, and because the allocated and apportioned income of the Taxpayer will be used solely for purposes of determining the nonresident shareholder's Virginia tax liability, an alternative method of allocation and apportionment is required in order to avoid multiple taxation of an individual taxpayer.
Accordingly, the Taxpayer may include its proportionate share of the partnership's property, payroll, and sales when determining its own apportionment factors. The overall apportionment factor will be used to apportion the nonresident shareholder's proportionate share of the Taxpayer's income for purposes of determining the nonresident shareholder's income from Virginia sources. The resident shareholder shall include 100% of his proportionate share of the Taxpayer's income in his Virginia taxable income, and may claim a credit as previously discussed for taxes paid to Louisiana.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8267M
Rulings of the Tax Commissioner