Tax Type
Individual Income Tax
Description
Out-of-state tax credit; Franchise tax paid to the District of Columbia
Topic
Credits
Date Issued
06-02-1987
June 2, 1987
Re: Virginia Code §58.1-1821 Application
Individual Income Tax
Dear **************
This is in reply to your letter of January 9, 1987 in which you make application for correction of the individual income tax assessment issued to your clients, ************** (Taxpayers), for taxable year 1985. You appeal the department's decision disallowing the out-of-state tax credit claimed on your client's Virginia return for the Unincorporated Business Franchise Tax paid to the District of Columbia.
FACTS
Your clients are shareholders in an S corporation whose offices are physically located in the District of Columbia. The District of Columbia has determined that a corporation which has elected S corporation status under Internal Revenue Code §1361 is subject to the Unincorporated Business Franchise Tax. Therefore, the instant S corporation is subject to the Unincorporated Business Franchise Tax imposed by the District of Columbia. The Taxpayers claimed an out-of-state tax credit on their Virginia individual income tax return for taxable year 1985 based upon their prorata share of the Unincorporated Business Franchise Tax paid by such S corporation. The department disallowed the credit claimed on the basis that the tax paid was not an income tax and issued an assessment.
DETERMINATION
Virginia Code §58.1-332 was amended effective for taxable years beginning on and after January 1, 1985 to allow individual shareholders in an S corporation to claim a credit on their Virginia individual income tax return for income taxes paid by the S corporation to another state. This section provides in part that, "... the amount of any state income tax paid by an electing small business corporation (S corporation) shall be deemed to have been paid by its individual shareholders in proportion to their ownership of the stock of such corporation." (Emphasis added.)
As set forth in the above statute, in order for the tax to be creditable against the Virginia individual income tax, it must be an income tax. It has been the department's long-standing position (since 1958) that the Unincorporated Business Franchise Tax imposed by the District of Columbia is not an income tax. Therefore, it is not allowable as a credit against Virginia income tax regardless of whether the tax is paid by the S corporation or by the individual shareholder. This determination is consistent with the decision reached in another recent application for correction on this same issue (copy attached). Accordingly, your client's application for correction is hereby denied.
The department is currently in litigation in the Circuit Court of Fairfax County in the case of Llewellyn King v. W. H. Forst, Tax Commissioner, At Law No. 73892, regarding the District of Columbia Unincorporated Business Franchise Tax and the applicability of same to the Virginia out-of-state tax credit for a nonprofessional individual. In order to preserve your client's judicial remedies, they may want to pay the instant assessment and file a protective claim for refund within three years of the date of assessment pursuant to Virginia Code §58.1-1824. Under that section, the Tax Commissioner may decide such claim on its merits or may hold such claim without decision pending the conclusion of litigation affecting such claim.
Sincerely,
W. H.Forst
Tax Commissioner
Rulings of the Tax Commissioner