Tax Type
Individual Income Tax
Description
S Corporations
Topic
Taxpayers' Remedies
Date Issued
02-27-1987
February 27, 1987
Re: Virginia Code § 58.1-1821 Application
Individual Income Tax
Dear **********************
This is in reply to your letter of August 6, 1986 in which you make application for correction on behalf of your clients, ******************** (Taxpayers), of the individual income tax assessed to them for taxable years 1983 and 1984.
FACTS
The Taxpayers were shareholders in an S corporation which suffered operating-losses during the years in question. The S corporation claimed a deduction on its federal return for depreciation under the Accelerated Cost Recovery System (ACRS), of which the Taxpayers' distributive share was equal to $23,799 in taxable year 1983 and $23,700 in taxable year 1984. Because the Taxpayers lacked sufficient basis in their shares of stock in the S corporation, they were precluded from including the operating loss of the S corporation in the computation of their federal adjusted gross income in either year.
The Taxpayers failed to include an addition to federal adjusted gross income on their Virginia individual income tax returns for taxable years 1983 and 1984 for an amount equal to 30% of their distributive share of the ACRS depreciation deduction claimed by the S corporation (Va. Code §§ 58.1-322 B.6. and 58.1-323). The department adjusted the Taxpayers' returns to include this income and issued assessments for both years. You contend that because the operating loss of the S corporation was not reflected in the Taxpayers' federal adjusted gross income, they are not required to make this addition to federal adjusted gross income.
DETERMINATION
In regulating the Virginia income tax modifications defined under Virginia Code § 58.1-323, the department adopted the "entity concept." This "entity concept" is equally applicable to the addition to and to the subtraction from federal adjusted gross income under Virginia Code § 58.1-322, for individuals and to the addition to and to the subtraction from federal taxable income under Virginia Code § 58.1-402, for corporations. The application of this concept is set forth in § 630-2-323 of the Virginia Individual Income Tax Regulations and § 630-3-323 of the Corporation Income Tax Regulations. The applicable portions of these regulations sections (which are identical in language) provide that:
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- B. 4. Partnerships, estates, trusts and electing small business corporations (Subchapter S) report the ACRS addition on their Virginia returns. The ACRS addition is included in the additions and subtractions reported to each partner, beneficiary and shareholder in accordance with the distributive share for the taxable year.
D. 2. Additions by other taxpayers.
a. Except for those situations set forth below, a taxpayer may claim a subtraction for only those ACRS additions made by the taxpayer. For this purpose a partner, beneficiary or shareholder is NOT deemed to have made ACRS additions reported by partnerships, estates, trusts and electing small business corporations (Subchapter S corporation). A partner, for example, may claim an ACRS subtraction only to the extent that it is included in the partner's distributive share of the income, loss, additions and subtractions for the taxable year. No adjustments are required due to any changes in the partner's ownership interest between the time the ACRS addition is made by the partnership and the time the ACRS subtraction is claimed by the partnership.
- B. 4. Partnerships, estates, trusts and electing small business corporations (Subchapter S) report the ACRS addition on their Virginia returns. The ACRS addition is included in the additions and subtractions reported to each partner, beneficiary and shareholder in accordance with the distributive share for the taxable year.
The total amount of ACRS depreciation was included in the computation of the S corporation's ordinary income (loss). Therefore, the amount of ACRS depreciation was included in the Taxpayers' distributive share of ordinary income (loss) for the taxable year. The fact that the Taxpayers were precluded from deducting the ordinary loss arising from their ownership of the S corporation stock, due to their lack of basis in the stock, does not relieve them of the requirement that they make the addition modification specified under Virginia Code § 58.1-322 B.6. Accordingly, your application for correction is denied.
It will be of interest to you and your clients that one provision of the recently enacted Virginia Tax Reform Act of 1987 eliminates the ACRS addition in 1988 and allows individuals to recover their outstanding additions in two years and corporations to recover their additions in five years.
Sincerely,
W.H. Forst
Tax Commissioner
Rulings of the Tax Commissioner