Tax Type
Individual Income Tax
Description
Allocation and Apportionment, Out-of-state S-corporation
Topic
Allocation and Apportionment
Date Issued
06-21-1999
June 21, 1999
Re: Sec. 58.1-1821 Application: Individual Income Taxation
Dear**
This will reply to your letter in which you request a determination on behalf of your client, the ***** (the ``Taxpayer') regarding the apportionment of S corporation income for the taxable year ended December 31, 1994. I apologize for the delay in responding.
FACTS
The Taxpayer is an out-of-state S corporation which owns, manages and leases commercial property. The S corporation owns one commercial property in Virginia which it manages and leases. Because the Virginia property operated at a loss, the Taxpayer reported no income from Virginia sources passing through to its shareholders on its 1994 Virginia S Corporation income tax return. Under audit, the statutory three factor method was used to apportion income within and without Virginia.
The shareholders were assessed tax, penalty and interest for their pro-rata share of the taxpayer's 1994 taxable income apportioned to Virginia. The shareholders contend that they are not required to file Virginia individual income tax returns because the Virginia commercial property had a net operating loss for the 1994 taxable year and they have no other source of Virginia income.
You contend that the Virginia operations of the S corporation were loss situations. This would result in no Virginia taxable income, and the Taxpayers would not be required to file a Virginia individual income tax return. Your letter is being treated as ***** a request to use an alternative method of allocation and apportionment based on separate accounting pursuant to Code of Virginia Sec. 58.1-421.
DETERMINATION
Virginia generally conforms to the federal treatment of S corporations. Electing small business corporations which make the election under Subchapter S of the Internal Revenue Code (IRC) and have the income of the corporation included in the income of the shareholders are exempt from the Virginia corporate income tax. Such corporations are required to file a Virginia return even though they are exempt from income tax. The income of the S corporation is computed under the Virginia laws and regulations applicable to corporations, including allocation and apportionment.
The policies which apply to requests for an alternative method of allocation and apportionment under Code of Virginia Sec. 58.1-421 are well established. See Virginia Regulation 23 VAC 10-120-280, copy enclosed. In order to be granted an alternative method of apportionment, a taxpayer must demonstrate by clear and cogent evidence that the statutory method is unconstitutional or inapplicable as applied to its situation.
The United States Supreme Court has recognized that allocation and apportionment of income is a process designed to approximate income from business transactions within a state. As long as each state's method of allocation and apportionment is rationally related to the business transacted within a state, then each state's tax is constitutionally valid even though there may be some overlap. See Moorman Mfg. Co. v. Bair, 437 U.S. 267, 98 S. Ct. 2340 (1978).
The department has previously ruled in Public Document (``P.D.') 91-90 (5/29/91), copy enclosed, that an out-of-state S corporation was not entitled to an alternative method of allocation and apportionment because the Virginia operations produced a net loss. The facts of this case are essentially the same. As such, the Taxpayer's request for permission to use an alternative method of allocation and apportionment must be denied.
Income received by an S corporation, which is determined to be income from Virginia sources, will remain Virginia source income in the hands of the shareholders. See P.D. 88-165 (6/29/88), copy enclosed. The S corporation had Virginia source income included in its federal taxable income and, therefore, had Virginia taxable income, which it passed through to its shareholders. As such, the shareholders are subject to income tax on their pro-rata portion of the Taxpayer's Virginia taxable income.
Every nonresident having Virginia taxable income for the taxable year is required to file a Virginia individual income tax return, assuming the filing threshold is met. Because the ***** nonresident shareholders had Virginia taxable income, they are required to report the income on a Virginia nonresident individual income tax return provided the filing thresholds are met. Accordingly, the 1994 assessments against the shareholders are upheld.
In accordance with this ruling and department policy, the shareholders are required to file individual income tax returns for all applicable years including 1994. If you have any questions about this determination, you may contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/16297B
Re: Sec. 58.1-1821 Application: Individual Income Taxation
Dear**
This will reply to your letter in which you request a determination on behalf of your client, the ***** (the ``Taxpayer') regarding the apportionment of S corporation income for the taxable year ended December 31, 1994. I apologize for the delay in responding.
FACTS
The Taxpayer is an out-of-state S corporation which owns, manages and leases commercial property. The S corporation owns one commercial property in Virginia which it manages and leases. Because the Virginia property operated at a loss, the Taxpayer reported no income from Virginia sources passing through to its shareholders on its 1994 Virginia S Corporation income tax return. Under audit, the statutory three factor method was used to apportion income within and without Virginia.
The shareholders were assessed tax, penalty and interest for their pro-rata share of the taxpayer's 1994 taxable income apportioned to Virginia. The shareholders contend that they are not required to file Virginia individual income tax returns because the Virginia commercial property had a net operating loss for the 1994 taxable year and they have no other source of Virginia income.
You contend that the Virginia operations of the S corporation were loss situations. This would result in no Virginia taxable income, and the Taxpayers would not be required to file a Virginia individual income tax return. Your letter is being treated as ***** a request to use an alternative method of allocation and apportionment based on separate accounting pursuant to Code of Virginia Sec. 58.1-421.
DETERMINATION
Virginia generally conforms to the federal treatment of S corporations. Electing small business corporations which make the election under Subchapter S of the Internal Revenue Code (IRC) and have the income of the corporation included in the income of the shareholders are exempt from the Virginia corporate income tax. Such corporations are required to file a Virginia return even though they are exempt from income tax. The income of the S corporation is computed under the Virginia laws and regulations applicable to corporations, including allocation and apportionment.
The policies which apply to requests for an alternative method of allocation and apportionment under Code of Virginia Sec. 58.1-421 are well established. See Virginia Regulation 23 VAC 10-120-280, copy enclosed. In order to be granted an alternative method of apportionment, a taxpayer must demonstrate by clear and cogent evidence that the statutory method is unconstitutional or inapplicable as applied to its situation.
The United States Supreme Court has recognized that allocation and apportionment of income is a process designed to approximate income from business transactions within a state. As long as each state's method of allocation and apportionment is rationally related to the business transacted within a state, then each state's tax is constitutionally valid even though there may be some overlap. See Moorman Mfg. Co. v. Bair, 437 U.S. 267, 98 S. Ct. 2340 (1978).
The department has previously ruled in Public Document (``P.D.') 91-90 (5/29/91), copy enclosed, that an out-of-state S corporation was not entitled to an alternative method of allocation and apportionment because the Virginia operations produced a net loss. The facts of this case are essentially the same. As such, the Taxpayer's request for permission to use an alternative method of allocation and apportionment must be denied.
Income received by an S corporation, which is determined to be income from Virginia sources, will remain Virginia source income in the hands of the shareholders. See P.D. 88-165 (6/29/88), copy enclosed. The S corporation had Virginia source income included in its federal taxable income and, therefore, had Virginia taxable income, which it passed through to its shareholders. As such, the shareholders are subject to income tax on their pro-rata portion of the Taxpayer's Virginia taxable income.
Every nonresident having Virginia taxable income for the taxable year is required to file a Virginia individual income tax return, assuming the filing threshold is met. Because the ***** nonresident shareholders had Virginia taxable income, they are required to report the income on a Virginia nonresident individual income tax return provided the filing thresholds are met. Accordingly, the 1994 assessments against the shareholders are upheld.
In accordance with this ruling and department policy, the shareholders are required to file individual income tax returns for all applicable years including 1994. If you have any questions about this determination, you may contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/16297B
Rulings of the Tax Commissioner