Tax Type
Corporation Income Tax
Description
Exempt Organizations
Topic
Taxpayers
Date Issued
07-16-1999
July 16, 1999
Re: Request for Ruling: Taxation of Employee Stock Ownership Plans
Dear***
This will reply to your letter in which you are requesting a ruling on behalf of your client, ***** (the Taxpayer) concerning the taxation of the income of an S corporation held by an "employee stock ownership plan' (ESOP) pursuant to the Taxpayer Relief Act of 1997.
FACTS
Effective in 1998, the Taxpayer became an S corporation. The Taxpayer is wholly-owned by an ESOP which is treated as a tax exempt trust for federal income tax purposes under Internal Revenue Code (I.R.C) § 401. The Taxpayer Relief Act of 1997 added I.R.C. § 512(e)(3). This section states that an ESOP which is a shareholder of an S corporation is not required to report the income from the S corporation as unrelated business taxable income for federal income taxation purposes. Given this treatment at the federal level, the Taxpayer is requesting Virginia's treatment of this situation considering the federal income taxation changes.
DETERMINATION
Code of Virginia § 58.1-401 exempts "electing small business corporations' from Virginia corporation income tax. As a result, S corporations are not subject to tax in Virginia. Instead, the income of such corporations is passed through to the shareholder's returns. Title 23 VAC 10-120-90(E) provides as follows:
Electing small business corporations which avail themselves of the election under Subchapter S of the Internal Revenue Code to have the income of the corporation included in the income of the shareholders are exempt from corporate income tax. All such income then becomes income taxable to the shareholder under laws and regulations applicable to individuals. Such corporations are required to file a Virginia return even though exempt from income tax.
In the case of the Taxpayer, the sole shareholder is a trust, not an individual. The department has previously ruled that trusts exempt from federal income taxation will also be exempt from Virginia income taxation unless the trust has unrelated business taxable income. See Public Document (P.D.) 94-302, copy attached.
I.R.C. § 501(a) exempts organizations which qualify under I.R.C. § 401(a) from taxation. These organizations are typically qualified pension, profit sharing, and stock bonus plans. According to the information provided, the ESOP meets the requirements under I.R.C. § 401 (a), and is accordingly exempt from federal taxation under I.R.C. § 501(a). Therefore, the ESOP will be exempt from Virginia income taxation to the extent the it is exempt from federal taxation.
Because the ESOP is exempt from federal taxation and the income that flows through from the Taxpayer is no longer characterized as unrelated business taxable income which would be taxable, the ESOP is not required to file an income tax return in Virginia. Should the ESOP ever report any taxable income at the federal level and have income from Virginia sources, the ESOP will be required to file in Virginia.
This ruling has been made subject to the facts presented to the department as summarized above. Any change in these facts or the introduction of facts by another party may lead to a different result. If you have any questions regarding this matter, you may contact ***** at the department's Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/18370G
Re: Request for Ruling: Taxation of Employee Stock Ownership Plans
Dear***
This will reply to your letter in which you are requesting a ruling on behalf of your client, ***** (the Taxpayer) concerning the taxation of the income of an S corporation held by an "employee stock ownership plan' (ESOP) pursuant to the Taxpayer Relief Act of 1997.
FACTS
Effective in 1998, the Taxpayer became an S corporation. The Taxpayer is wholly-owned by an ESOP which is treated as a tax exempt trust for federal income tax purposes under Internal Revenue Code (I.R.C) § 401. The Taxpayer Relief Act of 1997 added I.R.C. § 512(e)(3). This section states that an ESOP which is a shareholder of an S corporation is not required to report the income from the S corporation as unrelated business taxable income for federal income taxation purposes. Given this treatment at the federal level, the Taxpayer is requesting Virginia's treatment of this situation considering the federal income taxation changes.
DETERMINATION
Code of Virginia § 58.1-401 exempts "electing small business corporations' from Virginia corporation income tax. As a result, S corporations are not subject to tax in Virginia. Instead, the income of such corporations is passed through to the shareholder's returns. Title 23 VAC 10-120-90(E) provides as follows:
Electing small business corporations which avail themselves of the election under Subchapter S of the Internal Revenue Code to have the income of the corporation included in the income of the shareholders are exempt from corporate income tax. All such income then becomes income taxable to the shareholder under laws and regulations applicable to individuals. Such corporations are required to file a Virginia return even though exempt from income tax.
In the case of the Taxpayer, the sole shareholder is a trust, not an individual. The department has previously ruled that trusts exempt from federal income taxation will also be exempt from Virginia income taxation unless the trust has unrelated business taxable income. See Public Document (P.D.) 94-302, copy attached.
I.R.C. § 501(a) exempts organizations which qualify under I.R.C. § 401(a) from taxation. These organizations are typically qualified pension, profit sharing, and stock bonus plans. According to the information provided, the ESOP meets the requirements under I.R.C. § 401 (a), and is accordingly exempt from federal taxation under I.R.C. § 501(a). Therefore, the ESOP will be exempt from Virginia income taxation to the extent the it is exempt from federal taxation.
Because the ESOP is exempt from federal taxation and the income that flows through from the Taxpayer is no longer characterized as unrelated business taxable income which would be taxable, the ESOP is not required to file an income tax return in Virginia. Should the ESOP ever report any taxable income at the federal level and have income from Virginia sources, the ESOP will be required to file in Virginia.
This ruling has been made subject to the facts presented to the department as summarized above. Any change in these facts or the introduction of facts by another party may lead to a different result. If you have any questions regarding this matter, you may contact ***** at the department's Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/18370G
Rulings of the Tax Commissioner