Did RR 97-7 require a South Carolina resident partner to report personal-service income earned by the partnership in other states?

Plain-English summary

South Carolina Revenue Ruling 97-7 said a resident partner had to report the partner's full distributive share of personal-service income to South Carolina, including income the partnership earned in other states.

The income retained its personal-service character when it passed through the partnership. Because S.C. Code Section 12-6-2220(6) allocated all personal-service income received by a resident individual to South Carolina, the resident could not report only the portion the partnership apportioned to South Carolina.

To address double taxation, the ruling allowed the resident partner the credit under Section 12-6-3400 for qualifying income tax paid to another state on the same income. Its example required South Carolina resident partners in a South Carolina-Georgia law partnership to report service income from both states in South Carolina and allowed credit for Georgia tax on the doubly taxed income.

RR 22-5 later modified RR 97-7 to address other-state taxes paid at the pass-through-entity level. That later guidance should be used for current credit questions.

Resident and nonresident treatment

• South Carolina residents reported all partnership personal-service income, regardless of where the services were performed.
• Residents could claim the qualifying other-state tax credit described by the statute.
• Nonresident partners remained responsible for their South Carolina-source share.
• The ruling said nonresident liability could be reported on individual nonresident returns or through the partnership's composite return under the procedure then cited.

Common questions

Q: Could a resident use the partnership's state apportionment to exclude out-of-state service income from South Carolina? No. The ruling required all personal-service income to be reported by the resident.

Q: Did the income lose its personal-service character when passed through? No. The ruling said separately stated partnership items retained their character at the partner level.

Q: How was double taxation addressed? Through the credit for qualifying income tax paid to another state on income taxed by both states.

Q: Is RR 97-7 unchanged? No. RR 22-5 expressly modified it for modern pass-through-entity tax and credit issues.

Citations and references

• S.C. Code Ann. § 12-6-600 (partnership income passed to partners)
• S.C. Code Ann. § 12-6-560 (resident individual income computation)
• S.C. Code Ann. § 12-6-2220(6) (all resident personal-service income allocated to South Carolina)
• S.C. Code Ann. § 12-6-3400 and S.C. Regulation 117-81 (credit for qualifying other-state income tax)
• Ellis v. South Carolina Tax Commission, 280 S.C. 65, 309 S.E.2d 761 (1983) (partnership income character discussed)
• SC Revenue Ruling #22-5 (expressly modified RR 97-7)

Subject

Personal Service Income of Resident Partners

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR97-7.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P. O. Box 125, Columbia, South Carolina 29214

SC REVENUE RULING #97-7

SUBJECT:

Personal Service Income of Resident Partners
(Income Tax)

EFFECTIVE DATE:

Applies to all periods open under the statute.

SUPERSEDES:

All previous documents and any oral directives in conflict
herewith.

REFERENCES:

S. C. Code Ann. Section 12-6-600 (Supp. 1996)
S. C. Code Ann. Section 12-6-560 (Supp. 1996)
S. C. Code Ann. Section 12-6-2220 (Supp. 1996)
S. C. Code Regs. 117-81

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (Supp. 1996)
SC Revenue Procedure #94-1

SCOPE:

A Revenue Ruling is the Department of Revenue’s official
advisory opinion of how laws administered by the Department
are to be applied to a specific issue or a specific set of facts, and
is provided as guidance for all persons or a particular group. It is
valid and remains in effect until superseded or modified by a
change in the statute or regulations or a subsequent court
decision, Revenue Ruling or Revenue Procedure.

Question:
How is income of a resident partner receiving personal service income from South
Carolina and one or more other states reported for South Carolina individual income tax
purposes?
Conclusion:
A resident partner receiving personal service income from South Carolina and one or
more other states must report all personal service income to South Carolina pursuant to
Code §12-6-2220(6) for individual income tax purposes. The resident partner is allowed
a credit for taxes paid to other states as provided in South Carolina Code §12-6-3400.

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Discussion:
Code Section 12-6-600 addresses the taxation of partnerships and reads:
An entity treated as a partnership for federal income tax purposes is not subject to
tax under this chapter. Each partner shall include its share of South Carolina
partnership income on the partner’s respective income tax return. All of the
provisions of the Internal Revenue Code apply to determine the gross income,
adjusted gross income, and taxable income of a partnership and its partners,
subject to the modifications provided in Article 9 of this chapter and subject to
allocation and apportionment as provided in Article 17 of this chapter.
The law provides that each partner is directly taxable on his distributive share of
partnership income. Items of income, such as personal service income received from a
partnership performing legal or accounting services, are separately stated and passed
through to the partners. Such items retain their character at the partner level and are
treated as if realized by the partner directly from the source from which realized by the
partnership. See Ellis v. South Carolina Tax Commission, 280 S.C. 65, 309 S.E. 2d 761
(1983).
For South Carolina tax purposes, resident partners are taxable on their distributive share
of the partnership’s South Carolina taxable income as determined for a resident under
South Carolina Code §12-6-560. Code Section 12-6-560 provides:
A resident individual’s South Carolina gross income, adjusted gross income and
taxable income is computed as determined under the Internal Revenue Code with
the modifications provided in Article 9 of this chapter and subject to allocation and
apportionment as provided in Article 17 of this chapter.
Article 17 of Chapter 6 provides that certain items of income must be directly allocated
and excluded from the apportioned income and the apportionment factors. Specifically,
South Carolina Code '12-6-2220(6) provides:
[a]ll income from personal services received by a resident individual is allocated
to this State (emphasis added.)
South Carolina Regulation 117-81 further provides resident partners an income tax credit
when the partnership performs personal services in South Carolina and one or more
states. It provides:
Where an individual resident of this State is a partner of a partnership rendering
personal services in South Carolina and another State, the distributive share of

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the partnership income received by the resident partner is taxable in this
State and he will be allowed the tax credit provided in '[12-6-3400]...(emphasis
added.)
The tax credit allowed in §12-6-3400 to resident partners is provided as a credit against
South Carolina income taxes for income taxes paid to another state on income from
sources within that state which is taxed under Chapter 6 and the laws of the other state
regardless of the taxpayer’s residence.
Therefore, a resident partner’s distributable share of all partnership personal service
income must be reported to South Carolina. The statute does not allow the partner to
report only his apportioned share of South Carolina personal service income to South
Carolina.
An example best explains this concept. Assume a multi-state law partnership is located in
South Carolina and Georgia. The partnership has two partners residing in each state. The
partnership files a partnership return and apportions income among South Carolina and
Georgia based on an appropriate apportionment method. Each partner’s K-1 shows
income apportioned to his state of domicile and the other state. South Carolina’s resident
partners must file an individual income tax return in South Carolina reporting the
personal service income distributed by the partnership from both South Carolina and
Georgia sources. Each South Carolina partner is also responsible for reporting his share of
the Georgia partnership income in accordance with Georgia law. The South Carolina
partners are allowed a tax credit for taxes paid to Georgia on the personal service income
taxed in both South Carolina and Georgia.
Note in this example that the Georgia partners are responsible for reporting their share of
South Carolina partnership income to South Carolina. This may be done by each partner
filing a nonresident individual income tax return or by the partnership filing a composite
return computing and reporting the income tax of its nonresident partners. See SC
Revenue Procedure #92-5 for more information on composite returns.
SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Burnet R. Maybank III
Burnet R. Maybank III, Director

Columbia, South Carolina
July 22
, 1997

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