Tax Type
Individual Income Tax
Description
Prorata share of Subchapter S income
Topic
Appropriateness of Audit Methodology
Corporate Distributions and Adjustments
Date Issued
09-20-1982
September 20, 1982
Re: 58-1118 Application/Individual Income Tax
Taxable Years 1978
Dear ****************
This letter will reply to your correspondence of August 9, 1982, in which you submit an application for correction of additional individual income tax assessed against your clients, for taxable year 1978.
FACTS
********* a Virginia resident, is the sole stockholder in ********* a qualified small business corporation ("Subchapter S Corporation). The corporation does business in both Virginia and California. The corporation is taxed as such in California, and paid California corporation income tax on income attributable to California.
In filing the 1978 Virginia individual income tax return, Subchapter S income attributable to business activity in California was subtracted from federal adjusted gross income in computing the Virginia taxable income of ********. On audit, this subtraction was disallowed, and additional tax and interest was assessed. The taxpayers contest this assessment.
DETERMINATION
§ 58-151.013 of the Code of Virginia defines the taxable income of a resident individual as his federal adjusted gross income (FAGI), with certain additions, subtractions, and modifications. We find no statutory provisions authorizing the subtraction by an individual of any Subchapter S corporation income which is not attributable to Virginia sources.
In following federal tax policy with respect to Subchapter S corporations, Virginia Code § 58-151.03(c) provides that such corporations shall not be subject to income tax in Virginia. Thus Virginia has elected to treat Subchapter S corporations in substantially the same manner as has the federal government, i.e., the corporate entity itself is not subject to taxation but the shareholders will be taxed as individuals on their prorata share of Subchapter S income, to the extent includable in FAGI.
In the instance, the Subchapter S corporation is doing business in both Virginia and California. However, California does not recognize the Subchapter S election and taxes the corporation on its income attributable to California activities, while Virginia taxes the individual shareholders on Subchapter S income. Thus some corporate income may in fact be subjected to tax in both jurisdictions. This treatment of income for tax purposes is analogous to the traditional corporation-shareholder taxation applicable to non-Subchapter S corporations where the corporation is taxed on its earnings while the shareholders are also taxed on dividends from these earnings.
Further, no credit is allowable for income tax paid by the corporation to California. While Virginia Code § 58-151.015 does allow a credit for tax paid by an individual to another state on certain non-Virginia source income, this credit does not extend to tax paid by a corporation in which an individual is a shareholder.
Therefore, based upon the foregoing, I find no basis for granting relief from the tax assessed, and the assessment is due and payable in full.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner