Tax Type
Individual Income Tax
Description
Out-of-state tax credit; District of Columbia unincorporated business franchise tax
Topic
Credits
Date Issued
06-02-1987
June 2, 1987
Re: Ruling Request / Out-of State Tax Credit
Individual Income Tax
D. C. Unincorporated Business Franchise Tax
Dear ********************
This is in reply to your letter of November 10, 1987 in which you request a ruling regarding the application of the Unincorporated Business Franchise Tax imposed by the District of Columbia on income from an S corporation to the credit allowed on the Virginia individual income tax return for income taxes paid to another state.
RULING
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 ruling is consistent with the decision reached in a recent application for correction filed under Virginia Code §58.1-1821 on this same issue (copy attached).
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. 73392, 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. If because of the outcome of this litigation the department changes its position on this issue, you will be notified.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner