Tax Type
Individual Income Tax
Description
Residency
Topic
Taxpayers
Date Issued
08-06-1999
August 6, 1999
Re: Sec. 58.1-1821 Application: Individual Income Tax
Dear ****
This will reply to your letter concerning the 1992 through 1994 Virginia individual income tax returns for your clients, ***** (the ``Taxpayers'). I apologize for the delay in responding to your letter.
FACTS
The Taxpayer, a resident of Virginia, was a shareholder in an S corporation that was chartered, had a physical location, and was doing business in Utah. The Taxpayer received distributions from the S corporation for the taxable years 1992 through 1994. Because the S corporation had nonresident shareholders, a tax due was required to be computed on the Utah Small Business Franchise or Income Tax Returns. The Taxpayer contends that the nonresident shareholder's individual income tax was paid at the corporate level, therefore, he is eligible for the Virginia out-of-state tax credit for taxes paid in Utah. The department considered the tax to be a franchise tax paid by the corporation. The out-of-state credit, therefore, was disallowed, and the assessments for the applicable years were issued. You request that the department abate the outstanding assessments.
DETERMINATION
Generally
Concerning the Virginia out-of-state credit, Code of Virginia Sec. 58.1-332 provides that:
1992 and 1993 Utah Small Business Franchise or Income Tax Returns
For the taxable years 1992 and 1993, the Utah Code Ann. Sec. 59-7-102 provided, in pertinent part, that:
S corporations were generally exempt from the franchise tax in Utah Code Ann. Sec. 59-7-105(1)(9). An exception, however, was made for S corporations in Utah Code Ann. Sec. 59-7-105(3)(c). This section provides, in pertinent part, that:
For the taxable years 1992 and 1993, the S corporation of the Taxpayer exercised its corporate franchise and did business in Utah. It, therefore, was subject to the Utah corporate franchise tax. All of the shareholders were nonresidents of Utah. The S corporation filed a Utah Small Business Franchise or Income Tax Return and elected the first option. The corporate franchise tax imposed on the taxable income of the S corporation retained its character when it was allocated to the nonresident shareholders. Since the franchise tax was not eligible for the Virginia out-of-state credit, the individual income tax assessments for taxable years 1992 and 1993 were properly issued.
1994 Utah Small Business Franchise or Income Tax Return
Effective January 1, 1994, the Utah legislature added a section to Title 59, Chapter 7 of the Utah Code on the treatment of S corporations for corporate franchise tax purposes. Specifically, Utah Code Ann. Sec. 59-7-703, provides, in pertinent part, that:
When a nonresident shareholder has Utah income other than income received from the S corporation, he or she would be required to file a Utah individual income tax return. The corporate franchise tax paid by the S corporation would be claimed as a withholding tax payment against the individual income tax liability calculated on the Utah individual income tax return. In this instance, the nonresident shareholder would be eligible to claim an out-of-state credit on the Virginia tax return for individual income taxes paid to Utah.
In 1994, the Taxpayer chose not to file a Utah individual income tax return. The corporate franchise tax paid by the S corporation retained its character when allocated to the Taxpayer. This corporate franchise tax, therefore, was not eligible for the out-of-state tax credit for Virginia income tax purposes. The department, however, inadvertently allowed the credit claimed for taxes paid to Utah on the 1994 Virginia return. Consequently, no assessment was issued, and the statute of limitations, pursuant to Code of Virginia Sec. 58.1-1812, precludes the department from issuing an additional assessment for that period.
Although I am sympathetic to the Taxpayers' situation, Code of Virginia Sec. 58.1-332 provides no basis for the credit claimed. The department has no choice but to deny the relief sought by the Taxpayers. As the facts of this case are clear, the conference that you requested will not be necessary. The 1992 through 1993 assessments have been adjusted for the waived assessments attributable to the taxes paid to California. The amount overpaid on the 1992 assessment has been applied to the balance of the 1993 assessment ***** as shown on the attached schedules. Please remit *****, the balance of the 1992 assessment, to ***** Office of Tax Policy, Department of Taxation, Post Office Box 1880, Richmond, Virginia 23218-1880. If you have any questions, you may contact ***** at ****
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13511N
Re: Sec. 58.1-1821 Application: Individual Income Tax
Dear ****
This will reply to your letter concerning the 1992 through 1994 Virginia individual income tax returns for your clients, ***** (the ``Taxpayers'). I apologize for the delay in responding to your letter.
FACTS
The Taxpayer, a resident of Virginia, was a shareholder in an S corporation that was chartered, had a physical location, and was doing business in Utah. The Taxpayer received distributions from the S corporation for the taxable years 1992 through 1994. Because the S corporation had nonresident shareholders, a tax due was required to be computed on the Utah Small Business Franchise or Income Tax Returns. The Taxpayer contends that the nonresident shareholder's individual income tax was paid at the corporate level, therefore, he is eligible for the Virginia out-of-state tax credit for taxes paid in Utah. The department considered the tax to be a franchise tax paid by the corporation. The out-of-state credit, therefore, was disallowed, and the assessments for the applicable years were issued. You request that the department abate the outstanding assessments.
DETERMINATION
Generally
Concerning the Virginia out-of-state credit, Code of Virginia Sec. 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.)
- [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.)
1992 and 1993 Utah Small Business Franchise or Income Tax Returns
For the taxable years 1992 and 1993, the Utah Code Ann. Sec. 59-7-102 provided, in pertinent part, that:
-
Every state or national bank or corporation, other than corporations exempted in Section 59-7-105, for the privilege of exercising its corporate franchise or for the privilege of doing business in the state, shall annually pay to the state a tax on its net income for the taxable year computed and apportioned to this state. (Emphasis added.)
S corporations were generally exempt from the franchise tax in Utah Code Ann. Sec. 59-7-105(1)(9). An exception, however, was made for S corporations in Utah Code Ann. Sec. 59-7-105(3)(c). This section provides, in pertinent part, that:
-
- [I]f any shareholders of it are nonresident individuals, the corporation is allowed the option of: (i) reporting on that percentage of its taxable income which is equal to the percentage of its outstanding shares of stock owned by such nonresident individuals on that day and paying the tax due on it at the current corporation rate, or (ii) withholding Utah individual income tax at the current corporation tax rate on each nonresident shareholder's share of the corporation's earning from Utah sources, and remitting the tax withheld from it to the state of Utah as prescribed by the commission. (Emphasis added.)
- [I]f any shareholders of it are nonresident individuals, the corporation is allowed the option of: (i) reporting on that percentage of its taxable income which is equal to the percentage of its outstanding shares of stock owned by such nonresident individuals on that day and paying the tax due on it at the current corporation rate, or (ii) withholding Utah individual income tax at the current corporation tax rate on each nonresident shareholder's share of the corporation's earning from Utah sources, and remitting the tax withheld from it to the state of Utah as prescribed by the commission. (Emphasis added.)
For the taxable years 1992 and 1993, the S corporation of the Taxpayer exercised its corporate franchise and did business in Utah. It, therefore, was subject to the Utah corporate franchise tax. All of the shareholders were nonresidents of Utah. The S corporation filed a Utah Small Business Franchise or Income Tax Return and elected the first option. The corporate franchise tax imposed on the taxable income of the S corporation retained its character when it was allocated to the nonresident shareholders. Since the franchise tax was not eligible for the Virginia out-of-state credit, the individual income tax assessments for taxable years 1992 and 1993 were properly issued.
1994 Utah Small Business Franchise or Income Tax Return
Effective January 1, 1994, the Utah legislature added a section to Title 59, Chapter 7 of the Utah Code on the treatment of S corporations for corporate franchise tax purposes. Specifically, Utah Code Ann. Sec. 59-7-703, provides, in pertinent part, that:
-
(1)(a) An S corporation shall pay or withhold a tax on behalf of any nonresident shareholder ....
(b) A nonresident shareholder is entitled to a credit on the Utah individual return for the amount of tax paid by the S corporation on behalf of the nonresident shareholder.
(c) A nonresident shareholder who is an individual and has no other Utah source income may forgo the credit provided in Subsection (b! and not file a Utah individual income tax return for the taxable year. If the individual is entitled to credits under Utah Law an individual income tax return must be ***** filed to claim those credits.
(2) The commission, by rule, shall determine the rate that an S corporation shall withhold for nonresident shareholders. The rate shall be consistent with the composite tax rate paid by partnerships. (Emphasis added.)
When a nonresident shareholder has Utah income other than income received from the S corporation, he or she would be required to file a Utah individual income tax return. The corporate franchise tax paid by the S corporation would be claimed as a withholding tax payment against the individual income tax liability calculated on the Utah individual income tax return. In this instance, the nonresident shareholder would be eligible to claim an out-of-state credit on the Virginia tax return for individual income taxes paid to Utah.
In 1994, the Taxpayer chose not to file a Utah individual income tax return. The corporate franchise tax paid by the S corporation retained its character when allocated to the Taxpayer. This corporate franchise tax, therefore, was not eligible for the out-of-state tax credit for Virginia income tax purposes. The department, however, inadvertently allowed the credit claimed for taxes paid to Utah on the 1994 Virginia return. Consequently, no assessment was issued, and the statute of limitations, pursuant to Code of Virginia Sec. 58.1-1812, precludes the department from issuing an additional assessment for that period.
Although I am sympathetic to the Taxpayers' situation, Code of Virginia Sec. 58.1-332 provides no basis for the credit claimed. The department has no choice but to deny the relief sought by the Taxpayers. As the facts of this case are clear, the conference that you requested will not be necessary. The 1992 through 1993 assessments have been adjusted for the waived assessments attributable to the taxes paid to California. The amount overpaid on the 1992 assessment has been applied to the balance of the 1993 assessment ***** as shown on the attached schedules. Please remit *****, the balance of the 1992 assessment, to ***** Office of Tax Policy, Department of Taxation, Post Office Box 1880, Richmond, Virginia 23218-1880. If you have any questions, you may contact ***** at ****
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13511N
Rulings of the Tax Commissioner