Tax Type
Individual Income Tax
Description
Taxes paid by residents to other states; D.C. Franchise tax
Topic
Credits
Date Issued
10-06-1995
October 6, 1995
Re: § 58.1-1821 Application: Individual Income Tax
Dear***************
This will reply to your letter of September 13, 1995, in which you request a determination regarding the application of the Virginia out-of-state tax credit (Code of Virginia § 58.1-332) to the District of Columbia Franchise Tax, when such is imposed on an S corporation which has a Virginia shareholder (the "Taxpayer").
FACTS
The Taxpayer is a Virginia resident shareholder of an S corporation which operates in the District of Columbia. The S corporation is subject to the District of Columbia Franchise Tax. The Taxpayer claimed an out-of-state tax credit for the Corporate Franchise Tax paid by the S corporation to the District on her 1993 Virginia individual income tax return. This was disallowed on audit, and the Taxpayer was assessed additional tax and interest. The Taxpayer now requests a determination as to whether the District of Columbia Corporate Franchise Tax qualifies for the credit provided in Code of Virginia § 58.1-332.
DETERMINATION
Code of Virginia § 58.1-332 allows Virginia resident shareholders of an S corporation to claim a credit on their Virginia individual income tax return for income tax paid by an S corporation to another state. This section provides in part:
-
- [t]he amount of any state income tax paid by an electing small business corporation (S corporation) shall be deemed to have been paid by its individual shareholders in proportion to their ownership of the stock of such corporation. (Emphasis added.)
As set forth in this statute, in order for the tax to be creditable against the Virginia individual income tax, it must be a state income tax.
On April 20, 1990, in the case of Llewellyn King v. W. H. Forst, State Tax Commissioner, 239 Va. 557, 391 S.E. 2d (1990), the Virginia Supreme Court overturned the Department of Taxation's long standing policy that franchise taxes and other such taxes which are based on income, but not designated as "income" taxes, do not qualify for the credit for income taxes paid to another state. Legislation enacted by the 1991 General Assembly (Chapters 362 and 456 of the 1991 Acts of Assembly) effectively overturned the Virginia Supreme Court's decision in King v. Forst.
Pursuant to the 1991 legislation, individuals are precluded from claiming a credit for franchise and similar taxes paid to other states. These bills limit the credit for taxes paid to another state to true "income" taxes, and were retroactive to taxable years beginning on and after January 1, 1987.
The department recently litigated this issue in Giesecke v. Department of Taxation, Fairfax County Circuit Court No. 1-24781 (1994). In Giesecke, the taxpayer challenged the retroactive application of the 1991 amendment. The Circuit Court of Fairfax County ruled in favor of the department, and on April 13, 1995, the Virginia Supreme Court declined to hear the appeal in Giesecke.
The District of Columbia Franchise Tax is a tax imposed for the privilege of carrying on, or engaging in, any trade or business within the District of Columbia. The tax is measured by, rather than being imposed on, net income. Accordingly, the tax is not an "income" tax for purposes of the tax credit under Code of Virginia § 58.1332. While I sympathize with your situation, there is no legal basis under which the department may allow the District of Columbia Corporate Franchise Tax as a credit against the Virginia individual income tax.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10243P
Rulings of the Tax Commissioner