Tax Type
Individual Income Tax
Description
Subtractions from federal adjusted gross income; Distributive shares of S corporation income
Topic
Taxable Income
Date Issued
03-07-1994
March 7, 1994
Re: §58.1-1821 Application: Individual Income Taxes
Dear**************
This will reply to your letter of November 5, 1993, in which you applied for correction of an assessment for additional individual income taxes on behalf of your clients, ****** (the "Taxpayers") for 1990.
FACTS
The Taxpayers hold stock in an S corporation which operates as a public service corporation subject to the state license tax on gross receipts. The Taxpayers reported their distributable share of income and deductions from the S corporation on their 1990 federal individual income tax return. The Taxpayers claimed a subtraction for the net amount of this income on their 1990 Virginia individual return, which was disallowed by the department. You aver that because the S corporation is a public utility subject to gross receipts taxes, the income is exempt from tax.
DETERMINATION
Va. Code §§58.1-2626 B and 58.1-2690 generally provide that a public service corporation is exempt from income taxation where such corporation is subject to the annual state license tax imposed pursuant to §58.1-2626. In addition, Va. Code §58.1-401 specifically provides that no tax levied pursuant to §§58.1-400 or 58.1-400.1 is imposed on a public service corporation to the extent that such corporation is subject to the license tax on gross receipts. However, the exemptions granted pursuant to each of these sections is specifically limited to taxes imposed on the corporation. In the instant case, the tax is imposed on the individual shareholders.
For an individual, the determination of Virginia taxable income begins with federal adjusted gross income, modified by the specific additions and subtractions provided in Va. Code §58.1-322. There is no specific subtraction provided for the distributive share of income received from a S corporation which is subject to the license tax on gross receipts. Because an individual's distributive share of S corporation income is included in federal adjusted gross income, it is included in Virginia taxable income.
The language included in Chapter 26 of the Code of Virginia which allows the corporate tax exemptions specifically limit the exemptions to taxes imposed on the corporation. There is no indication that the exemptions are intended to apply to any distributions from a public service corporation, whether they be dividends from a taxable C corporation, or the distributive share of an S corporation. Absent a specific subtraction for this type of income, I have no choice but to include it in the Virginia taxable income of the Taxpayers.
Accordingly, the assessment is correct and is now due and payable. The Taxpayers will shortly receive an updated bill with interest accrued to date which must be paid in full to avoid additional interest and collection actions.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/7506M
Rulings of the Tax Commissioner