Rev. Rul. 71-278

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in I.T. 3766, C.B. 1945, 83.

The question presented is whether the Indiana gross income tax paid by a partnership on account of the receipt by it of gross income is deductible from partnership gross income under section 164 of the Internal Revenue Code of 1954.

The Indiana gross income tax is levied upon the "receipt of gross income" of all persons residing or domiciled in the State, upon the receipt of gross income derived from activities or business or any other source within the State, and upon the receipt of gross income by all persons who are not residents of the State who derive income from sources therein. See section 64-2602 of Burns' Indiana Statutes Annotated, and the decision of the United States Supreme Court in J. D. Adams Manufacturing Co. v. Storen et al., 304 U.S. 307 (1938), where the Court upheld the constitutionality of the Indiana Gross Income Tax Act of 1933.

Partnerships are subject to the Indiana gross income tax, and if the tax imposed upon the receipt of gross income by the partnership has been paid by the partnership, such gross income is exempt from the tax when received by the individual members. For Federal income tax purposes, partnerships are not treated as taxable entities, but the members thereof are liable for tax in their individual capacities. Section 701 of the Internal Revenue Code. The taxable income of a partnership is computed, for Federal income tax purposes, in the same manner and on the same basis as in the case of an individual, with certain exceptions not material here. Thus, if a tax paid to a State by an individual is deductible under section 164 of the Code in computing the individual's taxable income, the same tax would be deductible in computing the taxable income of a partnership.

Accordingly, it is held that in computing the taxable income of a partnership and the distributable shares of the partners, the Indiana gross income tax paid by a partnership on account of the receipt by it of gross income is deductible from partnership gross income under section 164 of the Code. The partnership tax is not allowable as a deduction to the partners, but they are not precluded from claiming the optional standard deduction under section 141 of the Code.

I.T. 3766 is hereby superseded since the position therein is set forth under the current law in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.