Ohio ~ Personal Income Tax, Practice and Procedure: Dividend Paid to S Corporation Shareholders from Earnings Attributable to Its C Corporation Days Qualified for Nonresident Tax Credit

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Individual income taxpayers who were co-owners through grantor trusts of an S corporation that was previously a C corporation, were allowed to claim an Ohio nonresident tax credit in relation to dividend income it received from previously accrued C corporation earnings because the dividend constituted nonbusiness income allocable to Missouri, the taxpayer’s place of domicile. As per the applicable statute, nonresident taxpayers are allowed a credit against the Ohio tax due for that portion of Ohio adjusted gross income that is not allocable or apportionable to Ohio under the allocation and apportionment provisions. Further, nonresidents’ “dividends and distributions” are not allocable to Ohio unless their domicile is in Ohio at the time the income is paid or accrued. A distribution of earnings and profits that accrue to a C corporation that later becomes an S corporation that is in excess of the accumulated adjustments account is generally treated as a dividend to the extent of the corporation’s accumulated earnings and profits from its C corporation days. In the present case, the dividend was nonbusiness income, as there is a distinction between the event triggering income tax liability (declaration of the dividend) and the event triggering the taxpayers’ liability as S-corporation shareholders when they report their distributive share of the corporation’s current income on their individual income tax return (accrual of income by virtue of the corporation’s business activity). The tax commissioner erred in treating the taxpayers’ dividend the same as a distributive share of the S corporation’s current income. Accordingly, the tax commissioner’s assessment in relation to the amount of credit associated with the dividend was reversed.

Giddens v. Testa, Ohio Supreme Court, No. 2014-2012, December 28, 2016, ¶404-584

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