Could Virginia residents claim an other-state credit for Kentucky income tax paid at the partnership level on a member's behalf?

Subject

Tax paid to State A by the Partnership was individual income taxout-of-state tax credit.

Plain-English summary

Virginia residents could claim an other-state credit for Kentucky income tax paid by the husband's professional limited liability company on his behalf. The Kentucky-based PLLC paid entity-level tax and reported the husband's proportionate share to the couple.

Virginia's credit required the residents to be liable for income tax in another state and to prove payment. For 2005 and 2006, Kentucky required partnerships, LLCs, and S corporations to compute Kentucky income tax as though they were corporations, while giving members a credit for their proportional share of that entity tax.

The couple filed a joint Kentucky nonresident return, reported their individual liability, and claimed the tax the PLLC had paid for the husband. Virginia concluded that the entity tax was, in substance, income tax on the individual members. The spouses were therefore liable for it and deemed to have paid it.

Virginia allowed the credit and abated the assessment.

What this means for you

• An entity-level payment can support a resident credit when the other state's law treats it as tax paid on members' behalf.
• The member's reported share and the other-state return provide important proof.
• The legal character of the other state's tax matters more than the name of the entity that remits it.
• This ruling depended on Kentucky's specific 2005-2006 statutes.

Common questions

Who actually remitted the Kentucky tax?

The professional limited liability company.

Why did Virginia treat the husband as having paid it?

Kentucky allocated the entity tax to members and allowed them a corresponding individual credit.

What happened to Virginia's assessment?

It was abated.

Citations and references

• Va. Code § 58.1-332.
• Ky. Rev. Stat. Ann. §§ 141.208 and 141.420.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-196

Original ruling text

August 30, 2010

Re: § 58.1-1821 Appeal: Individual Income Tax

Dear *:

This will reply to your letter in which you appeal the assessment of income tax issued to * (the "Taxpayers") for the 2005 taxable year. I apologize for the delay in the Department's response.

FACTS

The Taxpayers, husband and wife, are Virginia residents. The husband was a member in a professional limited liability company (PLLC) that was commercially domiciled in Kentucky. PLLC paid Kentucky income tax and reported the husband's pro rata share of the tax liability to the Taxpayers. The Taxpayers claimed a credit for taxes paid to Kentucky on their 2005 individual income tax return.

Under audit, the credit for taxes paid other states for tax paid to Kentucky was disallowed, and an assessment was issued. The Taxpayers contest the assessment, asserting that the tax paid to Kentucky by the Partnership is, in substance, an individual income tax and therefore eligible for the out-of-state tax credit.

DETERMINATION

Virginia Code § 58.1-33 2 provides a credit to resident individuals who have "become liable to another state for income tax on any earned or business income or any gain on the sale of a capital asset" for the taxable year. The credit is allowed under the statute upon proof of payment of the tax to the other state. As such, an individual claiming the credit, must have become "liable" for tax in another state, and must have actually paid the tax.

For taxable years beginning on or after January 1, 2005 and before January 1, 2007, Kentucky required partnerships, limited liability companies, and S corporations to file income tax returns and determine its Kentucky income tax liability as if they were corporations. See Ky. Rev. Stat. Ann . § 141.208.

Under Ky. Rev. Stat. Ann . § 141.420, members, shareholders, or partners required to file a Kentucky income tax return are entitled to a credit against the tax imposed on individuals. The credit is limited to the members', shareholders', or partners' proportionate share of the tax due from the pass through corporation.

In this case, PLLC paid income tax to Kentucky. The husband's proportionate share of the tax liability was reported to him by PLLC. The Taxpayers filed a joint nonresident Kentucky income tax return reporting their individual income tax liability and claiming the credit for tax paid on the husband's behalf by PLLC.

Based upon the foregoing, I conclude that the tax paid by the PLLC is in fact an income tax on individual members of PLLC. As such, the Taxpayers were in fact liable for the tax and will be deemed to have paid the tax to Kentucky. Accordingly, the assessment has been abated.

The Code of Virginia sections cited, along with other reference documents, are available on-line at www.tax.virgiriia.gov in the Tax Policy Library section of the Department's website. If you have questions concerning this determination, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Linda D. Foster

Deputy Tax Commissioner

AR/1-3083495934.o