Technical Assistance Advisory No. 88-011 Re: Waiver By Partners Of Credit Which Might Pass Through A Partnership To Its Partners Under The West Virginia Capital Company Act Tax Department Technical Assistance Advisory No. 88-006 states that the West Virginia capital company credit carries back three (3) years, and for a partnership would apply against the taxes enumerated in Section 11-13C-5(c) through (i) of the West Virginia Code for which the partnership would be liable, and would pass through to the partners and apply against their personal income tax liability for income arising from the partnership. The credit carryback would be taken by the filing of amended tax returns by the partnership. The Tax Department has received a request for an advisory as to whether the pass through of the credit to the partners of a partnership that invests in a West Virginia capital company is mandatory. Section 5E-1-8 of the West Virginia Code provides that "the credit for investment by a partnership or by a corporation electing to be treated as a Subchapter S Corporation may be divided pursuant to election of partners or shareholders." The Tax Department has been asked whether this language may be interpreted to mean that the partnership does not have to pass the tax benefits through to the individual partners, but instead may retain whatever tax benefits arise out of an investment for application against taxes imposed upon the partnership itself. Section 5E-1-8(c) of the West Virginia Code reads as follows: (c) Any investor, including an individual, partnership or corporation who makes a capital investment in a qualified West Virginia capital company is entitled to a tax credit equal to fifty percent of the investment. The credit allowed by this article shall be taken after all other credits allowed by chapter eleven of this code. It shall be taken against the same taxes and in the same order as set forth in subsections (c) through (i), section five, article thirteen-c, chapter eleven of this code. The credit for investments by a partnership or by a corporation electing to be treated as a Subchapter S corporation may be divided pursuant to election of partners or shareholders. The last sentence of this Subsection merely permits the partners of a partnership or shareholders of an S corporation to allocate the credit flowing through the partnership or S corporation among themselves in any proportion they may wish. The Subsection specifically mandates that the credit shall be taken against the taxes and in the order of the taxes set forth in Section 11-13C-5(c)-(i) of the West Virginia Code. This provision is mandatory, not permissive. Therefore, the partners must take any credit available to them after application of the credit against the Subsection 11-13C-5(c)-(i) taxes applicable to the partnership, against the Subsection 11-13C-5(c)-(i) taxes for which the partners are liable due to the pass through of the income to them from the partnership. It should be noted that the refunds of tax to the partnership arising from the carryback of the credit would constitute current period income for the partners as a pass through from the partnership, rather than income which would require the filing of amended personal income tax returns for each partner for the carryback years. Although the application of the credit against taxes, and the order in which those taxes are to be offset are mandatory, the carryback of the credit is not mandatory. Section 5E-1-8(d) of the West Virginia Code reads as follows: (d) The tax credit allowed under this section is to be credited against the taxpayer's tax liability for the taxable year in which the investment in a qualified West Virginia capital company is made. If the amount of the tax credit exceeds the taxpayer's tax liability for the taxable year, the amount of the credit which exceeds the tax liability may be carried back or may be carried forward in accordance with the provisions of section forty-six (b) of the Internal Revenue Code of 1954 [26 U.S.C. §
46(b)], as amended.
Because the Subsection states that the credit may be carried back, the Tax Department interprets this language to mean that the taxpayer may elect to either carry the credit back and then forward or to only carry it forward. If the partners of the partnership choose to forgo the credit carryback for the partnership, thereby avoiding the complexity of filing amended tax returns for the partnership, they may do so. However, the potential tax benefits which would be available from the credit carryback would be lost. Even if the partners could waive the taking of the credit, we doubt that it would significantly reduce the tax filing complexities which the partners would experience relating to credit carryback and carryforward years. Without regard to whether the partners were permitted by statute to waive the application of the credit against their personal income tax liabilities, it would, nevertheless, be necessary for the partners to file personal income tax returns for the first year credit becomes available, showing increased personal income resulting from increased partnership income as well as income arising from the distributive share of partnership income arising from tax refunds relating to carryback years. The credit taken in the first year and in carryforward years must be applied against the partnership taxes and against the partners' personal income tax liabilities in the order prescribed by the statute. Because the personal income tax returns of the partners will in any event be required to reflect the pass through of partnership income in those years, the pass through and application of the credit to the partners' personal income tax liabilities arising from the partnership income would not appear to represent any serious increase in the level of complexity associated with the partners' personal income tax returns for those years. ___________________________________ Michael E. Caryl State Tax Commissioner Date: November 30, 1988