87-148 | Virginia Tax

Tax Type

Individual Income Tax

Description

Franchise tax paid to the District of Columbia; Deduction request denied

Topic

Credits

Subtractions and Exclusions

Date Issued

05-27-1987

May 27, 1987

Re: Virginia Code §58.1-1821 Application
Individual Income Tax

Dear *********************

This is in reply to your letter of February 10, 1987 in which you make application for correction of the individual income tax assessment issued to your clients, *********** (Taxpayers), for taxable year 1985. On behalf of your clients, you are withdrawing their claim for a credit for income taxes paid to another state and are asking instead that they be allowed a deduction on their Virginia return for the District of Columbia Unincorporated Business Franchise Tax.

FACTS

The Taxpayers received income as the result of their ownership of shares of stock in an S corporation which is subject to the District of Columbia Unincorporated Business Franchise Tax. As a result of the amendment to Virginia Code §58.1-332 effective for taxable years beginning on and after January 1, 1985 (Chapter 466, 1985 Acts), the amount of any state income tax paid by an S corporation is deemed to have been paid by its individual shareholders in proportion to their ownership of stock in the S corporation. The Taxpayers filed their 1985 Virginia individual income tax return claiming a credit for income taxes paid to another state based upon the amount of District of Columbia Unincorporated Business Franchise Tax paid by the S corporation. This credit was disallowed by the department and an assessment for tax and interest was issued.

Based upon the department's consistent position that the District of Columbia Unincorporated Business Franchise Tax is not an income tax; therefore, not creditable against Virginia individual income tax as an income tax paid to another state, and upon information contained in a ruling issued by the department June 5, 1985 (PD 85-114), you are withdrawing your client's application for a credit and asking that the assessment be revised based instead upon the allowance of a deduction for this tax.

DETERMINATION

You are correct in your analysis of the department's position regarding the fact that, for Virginia individual income tax purposes, the District of Columbia Unincorporated Business Franchise Tax is not considered an income tax; therefore, not creditable against Virginia individual income tax as an income tax paid to another state. This position was again confirmed in a recent ruling issued on a case very similar to your clients. I have attached a copy of that document (PD 87-124) to this letter. However, it appears that you are confused regarding the deduction allowed for this tax on a Virginia return.

Public Document 85-114, that you cite as authority for claiming a deduction rather than the credit for the District of Columbia Unincorporated Business Franchise Tax, states in part:

- Since 1958, with respect to nonprofessionals, the department has allowed a deduction for the D.C. tax and has never allowed a credit. That is, the department will allow a resident nonprofessional to take a deduction for the D.C. franchise tax provided the deduction is allowable for Federal income tax purposes.

There is no separate deduction under Virginia law or on the Virginia individual income tax return for the District of Columbia Unincorporated Business Franchise Tax. The net amount of ordinary income (which already considers the taxes paid as an ordinary and necessary business expense of the S corporation) is passed through to the shareholders and is included in federal adjusted gross income. To the extent that, for federal income tax purposes, the amount paid by an S corporation to the District of Columbia for the District of Columbia Unincorporated Business Franchise Tax is an allowable deduction as an ordinary and necessary business expense and such amount is passed through to the shareholders, such amount is reflected on the Virginia individual income tax return. This is because the computation of Virginia taxable income begins with federal adjusted gross income

Accordingly, I find no basis to adjust your client's return or to issue a revised assessment. Since your decision to withdraw your client's application for the out-of-state income tax credit was predicated upon the anticipation of an additional allowable deduction and as I have explained above, such an additional deduction is not available to your clients, I am granting you 30 days to reverse that decision. Please notify this office within the next 30 days if you want to reverse your decision. Otherwise, this decision will be considered a final determination under Virginia Code §58.1-1821 and the full amount of the assessment will be due and payable within 30 days.

Sincerely,

W. H. Forst
Tax Commissioner

Rulings of the Tax Commissioner