Tax Type
Individual Income Tax
Description
Taxes to be credited against the Virginia income tax liabilities of its shareholders
Topic
Accounting Periods and Methods
Appropriateness of Audit Methodology
Corporate Distributions and Adjustments
Date Issued
09-22-1982
September 22, 1982
Dear ******************
This is in reply to your application for correction of individual income taxes dated August 28, 1980, filed on behalf of the above taxpayers.
All of the applicants are residents of Virginia and are subject to Virginia income taxes imposed on Virginia taxable income defined by § 58-151.013 of the Code of Virginia. During the years 1977, 1978 and 1979, each of the applicants was a shareholder in ********** a Virginia corporation electing to file as a Subchapter S corporation for federal income tax purposes.
You have established the facts that ******* conducts business in North Carolina and Kentucky, as well as Virginia; that North Carolina and Kentucky do not recognize a Subchapter S election; and that the corporation was required to pay income taxes to North Carolina and Kentucky on portions of its income for the years 1977, 1978 and 1979. Accordingly, the sole issue involved is whether or not all of the income of ********* attributable under its Subchapter S election to each of its Virginia shareholders, is includible in the Virginia taxable income of such shareholders.
Virginia income tax is imposed upon Virginia taxable income, which is defined by § 58-151.013 of the Code of Virginia as federal taxable income, subject to the specific additions and subtractions provided by subsections (b) through (h). There is no subtraction provided for any part of the income attributable to Virginia shareholders of a corporation under its Subchapter S election. Therefore, 211 such income is in-includible in Virginia taxable income.
You contend in argument that ***** income retains its corporate status and the Department's tax on the shareholders' shares of income earned outside Virginia is an indirect tax on ******** income and thus an unconstitutional and discriminatory tax which burdens interstate commerce and amounts to multiple taxation. In support of this contention, you cited the cases of Exxon v. Department of Revenue of Wisconsin, Northwestern States Portland Cement Company v. Minnesota and several others. These cases would appear to be irrelevant to the present issue, however, since they each concern income of corporations earned in the conduct of interstate commerce.
In the case at issue, ******* voluntarily elected not to be taxed as a corporation for federal income tax purposes, but rather to have its income taxed as the income of its shareholders. Since Virginia recognizes such election, its individual income tax laws rather than corporation income tax laws are applicable. It is my opinion, therefore, that ******* has not retained its corporate status for Virginia income tax purposes and there is no question of an indirect tax on ******** income.
The question of allowing credit to ********shareholders for income taxes paid by the corporation to the states of North Carolina and Kentucky is clearly addressed by § 58-151.015 of the Code. That section provides that under certain circumstances taxpayers will be allowed credit for income taxes paid by such taxpayers to another state. While ***** has not retained its corporate status for Virginia income tax purposes, the law provides no authority for allowing any of its taxes to be credited against the Virginia income tax liabilities of its shareholders.
The income tax laws of Virginia and their applications to the circumstances herein involved are clear. I must therefore deny your application for correction and require that taxes assessed for the years 1977, 1978 and 1979 be paid together with accrued interest to date of payment.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner