95-202 | Virginia Tax

Tax Type

Individual Income Tax

Description

Taxes paid by residents to other states; District of Columbia franchise tax

Topic

Credits

Date Issued

08-03-1995

August 3, 1995

Re: § 58.1-1821 Application: Individual Income Tax

Dear*********

This will reply to your letter of December 20, 1994, concerning the 1991 and 1992 Virginia individual income tax assessments and your 1993 Virginia individual income tax return. I apologize for the delayed response.

FACTS

You are a Virginia resident and shareholder in an S Corporation which earns income from the District of Columbia. The corporation was subject to the District of Columbia franchise tax on income earned during taxable years 1991 through 1993. You claimed a credit on your 1991 and 1992 Virginia returns for franchise taxes paid by the S Corporation. The department disallowed the credits and issued assessments for the taxable years 1991 and 1992. Additionally, the department forwarded correspondence to you concerning your 1993 Virginia return.

DETERMINATION

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 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'r, 239 Va. 557 (1990)

Legislation enacted by the 1991 General Assembly (HB 1734, Chapter 362 and SB 765, Chapter 456), effectively overturned the Virginia Supreme Court's King decision. Specifically, Code of Virginia § 58.1-332 provides that:

- [N]o franchise tax, license tax excise tax, unincorporated business tax occupation tax or any tax characterized as such by the taxing jurisdiction, although applied to earned or business income, shall qualify for the credit under this section. (Emphasis added.)

This law change was effective retroactive to taxable years beginning on or after January 1, 1987. As indicated in this code section, a tax that is characterized by a taxing jurisdiction as a franchise tax is not allowable in the computation of the Virginia credit. D.C. Code Ann. §47-1810.1(a)(2) provides, in part, that the purpose of the Title 47, Chapter 18 of the District of Columbia Code concerning franchise taxes is to impose:

- A franchise tax upon every corporation. financial institution and unincorporated business for the privilege of carrying on or engaging in any trade or business within the District and of receiving such other income as is derived from sources within the District. (Emphasis added.)

As D.C. Code Ann. § 47-1801.4 (16) includes S Corporations in the definition of "corporations," the tax on S Corporations is clearly characterized as a franchise tax instead of an income tax even though the tax may be based on income. Consequently, since Code of Virginia §58.1-332 does not allow a credit for any franchise tax (including both the District of Columbia unincorporated and corporate franchise taxes). The credit claimed on your return was properly disallowed.

Based on this information, there is no basis to abate your income tax assessment for the years 1991 and 1992. However if the 1991 and 1992 assessments amounting to*********and********are paid within the next 30 days, additional interest will be waived. Concerning the 1993 income tax return, if a credit for franchise taxes paid by the S Corporation to the District is claimed on your return, the credit will be adjusted and you will be notified under a separate cover. If there are any questions, please contact**************.

Sincerely,

Danny M. Payne
Tax Commissioner

OTP/9018N

Rulings of the Tax Commissioner