Tax Type
Individual Income Tax
Description
In general; Net operating loss carryover
Topic
Taxable Income
Date Issued
08-29-1997
August 29, 1997
Re: § 58.1-1821 Application: Individual Income Tax
Dear***********
This will reply to your letter in which you are protesting the assessment of individual income tax against your client, ********("the Taxpayer") for the 1994 taxable year. I apologize for the delay in responding to your letter.
FACTS
The department issued a nonfiler assessment to the Taxpayer based upon the Schedule K-1 issued to the Taxpayer. The Taxpayer contends that the distributive S corporation income for 1994 was offset by losses previously suspended under "at-risk" rules and carried over to 1994.
The Taxpayer, a non-resident of Virginia, is a shareholder in an S corporation which owns rental property in Virginia. The S corporation conducts 100% of its business activities in Virginia. During 1994, the S corporation issued a federal Schedule K-1 to the Taxpayer which reflected the Taxpayer's distributive share of net income from rental activities.
The schedule provided by the Taxpayer shows he initially invested in the S corporation in 1985. The S corporation sustained yearly losses until 1992 when it began to show a profit. Beginning in 1988, the Taxpayer's losses were suspended in accordance with IRC § 1366(d). In 1994, the Taxpayer had income from the S corporation. The Taxpayer carried forward prior year losses against this income.
The limitation under § 1366 is determined at the shareholder level, not at the S corporation level. Thus, Schedule K-1 from the S corporation reflects the gross amount of income or loss for a taxable year, giving effect to losses suspended under IRC § 1366(d). The Taxpayer maintains that even though he had losses carried forward which offset his distributive share of income, such losses were not reflected on Schedule K-1. The Taxpayer did not declare any income from the S corporation on his 1994 federal income tax return.
Accordingly, the Taxpayer contends that the losses which were suspended in prior years should offset any Virginia taxable income in 1994.
DETERMINATION
Code of Virginia § 58.1-301, copy enclosed, provides that the terms used in Virginia law as it relates to individual income taxation shall have the same meaning as terms used in the Internal Revenue Code. Accordingly, Virginia law provides that the starting pont for computing Virginia taxable income is federal adjusted gross income.
Code of Virginia § 58.1-325 B, copy enclosed, states that: For a nonresident individual who is a shareholder in an electing small business corporation (S corporation), there shall be included in his Virginia taxable income his share of the taxable income of such corporation, and his share of any net operating loss of such corporation shall be deductible from his Virginia taxable income.
The Taxpayer reported no income derived from the S corporation on his federal return since 1994 income was offset by prior year losses which were carried forward. Because there was no federal taxable income derived from Virginia sources, there was no Virginia taxable income.
Because there was no tax liability for 1994, the assessment has been abated in full. If you have any questions, you may contact ****** at *******.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11533B
Rulings of the Tax Commissioner