Tax Type
Corporation Income Tax
Description
Corporations required to file; Qualified Subchapter S subsidiary
Topic
Returns and Payments
Date Issued
08-27-1997
August 27,1997
Re: Request for Ruling: Corporation Income Tax
Dear****************
This will reply to your letter in which you are requesting a ruling on an election by *********** (the "Taxpayer") to be treated as a qualified Subchapter S subsidiary of its S corporation parent holding company (the "Parent") pursuant to the Small Business Job Protection Act of 1996 ("Small Business Act")(H.R. 3448).
FACTS
The Small Business Act, signed into law in August 1996, contains a number of provisions designed to benefit small businesses. These provisions amend Internal Revenue Code (IRC) § 1361 relating to the election and treatment of corporations electing Subchapter S status. The main thrust of these provisions is to provide greater eligibility for corporations to make the Subchapter S election.
The provisions include an amendment to allow an S corporation to possess a wholly owned S corporation subsidiary called a qualified Subchapter S subsidiary. For federal income tax purposes, a qualified Subchapter S subsidiary is not considered a separate corporation and its assets, liabilities, income, losses, and credits are treated as those of the parent S corporation. This new election is available for taxable years beginning after December 31, 1996.
As of January 1, 1997, the Parent elected to be treated as an S corporation for federal income tax purposes and the Taxpayer elected to be treated as a qualified Subchapter S subsidiary. Prior to these elections, the Taxpayer filed a Virginia corporation income tax return and paid Virginia income tax based on its Virginia taxable income. The Parent had no property, payroll, or sales within Virginia and was, therefore, not required to file a Virginia corporation income tax return.
Because Virginia generally conforms with the IRC, the Taxpayer believes the Parent will be required to file a Virginia S corporation tax return that includes the assets, liabilities, items of income, deductions, and credits of the Taxpayer. The Taxpayer requests confirmation of this status for Virginia income tax purposes.
DETERMINATION
Virginia's conformity to federal law is set forth in Code of Virginia § 58.1-301, which provides that the terms used in the Virginia income tax statutes will have the same meaning as used in the IRC. For Virginia, federal taxable income (FTI) and federal adjusted gross income (FAGI), the starting points for determining income taxable in Virginia for individuals and corporations, respectively, are identical to that as defined by the IRC.
Because a qualified Subchapter S subsidiary will not be treated as a separate entity for federal taxation purposes, the Taxpayer will not have any FTI. Although the Taxpayer will continue its legal existence and business activities in Virginia, the Taxpayer will have no FTI for computing a Virginia taxable income.
The department has previously ruled on a similar issue in relation to a real estate investment trust (REIT) as defined by IRC § 856. See Public Document (P.D.) 94-139, (4-27-94), copy attached. Under IRC § 856, all assets, liabilities, and items of income, deduction, and credit of a qualified REIT subsidiary are treated as assets, liabilities, and items of income, deduction, and credit of the REIT. The federal taxable income of a REIT includes the income of any qualified REIT subsidiaries. Therefore, for Virginia purposes the taxable income of a REIT and qualified REIT subsidiaries would be determined in accordance with federal treatment.
Under Title 23 of the Virginia Administrative Code (VAC) 10-120-310, every foreign corporation registered with the State Corporation Commission for the privilege of doing business in Virginia is required to file. Accordingly, the department will not terminate the Taxpayer's registration for Virginia corporation income tax. However, the registration will be amended to deem the Taxpayer as filing a return with the Parent.
For federal income tax purposes, the Parent will be considered the owner of all the Taxpayer's assets and liabilities. Consequently, the department will regard the Parent as having the attributes and conducting the activities that made the Taxpayer subject to Virginia income tax. Thus, the Parent will be required to register with Virginia for filing corporation income tax returns for its taxable years beginning after December 31,1996. To facilitate this process, an application for registration (Form R-1) and instructions are attached.
Code of Virginia § 58.1-401 exempts "electing small business corporations" from Virginia corporation income tax. As a result, S corporations are not subject to tax in Virginia. Instead, the income of such corporations is passed through to the shareholder's returns. Thus, the election by the Parent to be treated as an S corporation and the Taxpayer's election to be treated as a qualified Subchapter S corporation will impact the filing requirements of the Parent's shareholders.
Title 23 VAC 10-120-90(E), promulgated in January 1985, provides as follows:
-
- Electing small business corporations which avail themselves of the election under Subchapter S of the Internal Revenue Code to have the income of the corporation included in the income of the shareholders are exempt from corporate income tax. All such income then becomes income taxable to the shareholder under laws and regulations applicable to individuals . . . (Emphasis added.)
Assuming all the Parent's shareholders are not residents of Virginia, Code of Virginia § 58.1-341 requires every nonresident individual having Virginia taxable income to file an income tax return. Code of Virginia § 58.1-325(B) provides statutory guidance for the treatment of a nonresident shareholder of an S corporation with Virginia activity:
For a nonresident individual who is a shareholder in an electing small business corporation (S corporation), there shall be included in his Virginia taxable income his share of the taxable income of such corporation, and his share of any net operating loss of such corporation shall be deductible from his Virginia taxable Income.
Beginning with 1997, each of the individual shareholders of the Parent will be required to file a nonresident individual income tax return to report and pay tax on their distributed portion of the Parent's income from Virginia sources. P.D. 95-167, (6-23-95), copy attached, provides guidance for reporting S corporation income on an individual income tax return.
In addition, the shareholders will also be required to make estimated tax payments pursuant to Code of Virginia § 58.1-490 through § 58.1-504. I have enclosed a set of 1997 Form 760ES vouchers and instructions for your review and distribution to the Parent's shareholders.
In the alternative, the department will accept, subject to the certain conditions, a single unified nonresident individual income tax return by nonresident shareholders of an S corporation. P.D. 84-260, (12/28/84), copy attached, sets forth the circumstances under which the department would accept such a return. In order to file such a return, the shareholders, as a group, would have to receive permission from the Tax Commissioner.
Please send completed Form R-1 and, if desired, a request to file a unified nonresident individual income tax to********Office of Tax Policy, Department of Taxation. P. O. Box 1880, Richmond, Virginia 23218-1880.
I trust this will answer the questions posed in your letter; however, please contact
*********at************* if you have additional questions or if we may be of further assistance.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12358O
Rulings of the Tax Commissioner