87-283 | Virginia Tax

Tax Type

Corporation Income Tax

Individual Income Tax

Description

Out-of-state tax credit; Nonresident shareholder in a Virginia S corporation

Topic

Credits

Date Issued

12-23-1987

December 23, 1987

Re: Ruling Request/Individual Income Tax/Tax Paid By S Corporation

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

This is in reply to your letter of May 8, 1987 in which you request a ruling regarding the proper income tax treatment, for Virginia purposes, of certain income earned by a resident of Michigan. I apologize for the delay in responding to your letter and I hope that the delay has not caused you or your client any inconvenience.

FACTS

Your client is a resident of Michigan and is a shareholder in a Virginia S corporation. This S corporation, headquartered in Virginia, has operations in both Virginia and North Carolina. Because North Carolina does not recognize the federal S corporation election, the S corporation was required to pay corporation income tax to North Carolina. You ask if your client may claim a credit on his Virginia nonresident individual income tax return for the taxes paid by the S corporation to North Carolina.

RULING

Virginia Code §58.1-332 was amended effective for taxable years beginning on and after January 1, 1985 to ensure that individuals would not be taxed by both Virginia and another state on the income from an S corporation solely because the other state did not recognize the S corporation status. This subsection provides:

- For purposes of this section, 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.

However, this amendment is not applicable to your client's situation because subsection B of this same section provides:

- Whenever a nonresident individual of this Commonwealth has become liable for income tax to the state where he resides upon his Virginia taxable income for the taxable year, derived from Virginia sources and subject to taxation under this chapter, the amount of income tax payable by him under this chapter shall be credited with such proportion of the tax so payable by him to the state where he resides ... (Emphasis added.)

For purposes of computing Virginia taxable income and income tax, nonresidents of Virginia first compute their taxable income as a resident. Next they multiply their Virginia taxable income computed as a resident by the ratio of net income, gain, loss and deductions from Virginia sources to net income, gain, loss and deductions from all sources. Section 3 of Virginia Regulation 630-2-325 requires that a nonresident shareholder in an S corporation include the amount of income "attributable to a business, trade, profession or occupation carried on in this state." Therefore, in the case of a multi-state S corporation, only the income attributable to Virginia operations is included under net income, gain, loss and deductions from Virginia sources.

Because only the income attributable to Virginia operations is included in the numerator of the ratio, the income attributable to operations in North Carolina is effectively not taxed by Virginia. Therefore, even though North Carolina and your client's state of residence may tax this income, since this income is not being taxed by Virginia, there is no credit available on the Virginia nonresident income tax return for any taxes paid on this income.

If you have any further questions, please do not hesitate to contact this office.

Sincerely,

W. H. Forst
Tax Commissioner

Rulings of the Tax Commissioner