Tax Type
Individual Income Tax
Description
Subtraction disallowed additional tax and interest on stock options assessed
Topic
Assessment
Statute of Limitations
Date Issued
12-05-2005
December 5, 2005
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the individual income tax assessment issued to you (the "Taxpayer") for the taxable year ended December 31, 2001.
FACTS
The Taxpayer exercised incentive stock options while a resident of ***** ("State A") in 2000. While not normally subject to income tax, exercising incentive stock options results in income for purposes of computing State A's alternative minimum tax ("AMT"). As such, the Taxpayer paid a minimum tax to State A for the 2000 taxable year.
In the fall of 2000, the Taxpayer became a Virginia resident. The Taxpayer sold the stock acquired through the stock options in January 2001. The Taxpayer subtracted the gain on the sale of stock on her 2001 Virginia individual income tax return. The Department disallowed the subtraction and assessed additional income tax and interest.
The Taxpayer appeals the Department's assessment, contending that the Department should allow the subtraction or a credit for the tax paid to State A. In addition, the Taxpayer contends that the assessment was made outside the three-year statute of limitations period.
DETERMINATION
Subtraction of the Gain
The Taxpayer contends that tax on the incentive stock options was paid to State A in 2000 in the form of the AMT. The Taxpayer asserts that the subtraction should be allowed on the Virginia income tax return because the tax on the gain had already been paid to State A.
The AMT is a separate method of determining tax devised to ensure that a least a minimum amount of tax is paid by taxpayers who use certain tax deductions, exemptions, losses and credits. State A's AMT is imposed only to the extent that the minimum tax exceeds a taxpayer's regular income tax liability. The minimum taxable income is State A taxable income subject to certain addition and subtraction adjustments. In the instant case, the Taxpayer paid State A's AMT on income that included an imputed gain from exercising the stock options.
Virginia Code § 58.1-301 provides that terminology and references used in Title 58.1 of the Virginia Code will have the same meanings as provided in the Internal Revenue Code ("IRC") unless a different meaning is clearly required. For individual income tax purposes, Virginia "conforms" to federal law, in that it starts the computation of Virginia taxable income with federal adjusted gross income ("FAGI"). As such, any income included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically excluded by a Virginia modification pursuant to Va. Code § 58.1322.
Virginia Code § 58.1-322 does not provide for the exclusion from Virginia taxable income of gains from the sale of stock in taxable year 2001 that was acquired as a result of exercising stock options that were previously taxed in another state in taxable year 2000. See Public Document ("P.D.") 85-221 (12/11/85). When Virginia elected to conform its individual income tax to that of the federal government, one of the primary motivation was to simplify the tax for both tax administrators and taxpayers. Some conflicts in tax law are inevitable when dealing with multiple state jurisdictions. Even so, the Department cannot permit the subtraction claimed on the Taxpayer's 2001 Virginia income tax return.
Credit for Taxes Paid to Other State
Virginia Code § 58.1-332 A allows Virginia residents a credit against their income tax liability when they pay income tax to another state on earned or business income, or on any gain from the sate of a capital asset. The intent of the credit is to grant Virginia residents relief in situations where they are taxed by both Virginia and another state on these types of income during the same taxable year. The credit is claimed on the income tax return for the same taxable year in which the income is subject to taxation by another state, even though the tax is actually paid during the succeeding taxable year when the return is filed.
The amount of credit for taxes paid to other states is limited to the lesser of (i) the tax actually paid to another state on income sourced outside Virginia, or (ii) the amount of tax actually paid to another state that is equivalent to the proportion of income taxable in such state to Virginia taxable income. As such, Va. Code § 58.1-332 only provides relief for qualified income that is taxed by Virginia and another state in the same taxable year. See P.D. 94-321 (10/21/94) and P.D. 05-88 (6/9/05). In situations where the tax is paid to another state and Virginia in a different taxable year, Virginia law provides no relief.
In this case, imputed income determined when the stock options were recognized was included in State A's computation of the AMT for 2000 taxable year. In addition, the gain on the sale of the stock was properly included in FAGI for the 2001 taxable year and must therefore be included in Virginia taxable income. Based on Virginia law, a credit for the tax paid to State A for the 2000 taxable year cannot be claimed for the 2001 taxable year. Accordingly, the Taxpayer is not eligible for a credit for taxes paid other states on her 2001 Virginia income tax return.
Statute of Limitations
Virginia Code § 58.1-1812 provides that the Department must assess omitted taxes within three years of the later of the due date of the return or the actual date that the return was filed. You contend that you were not notified of the assessment until May 25, 2005.
Virginia Code § 58.1-1820 provides that assessments made by the Department are deemed to be made when a written notice of assessment is mailed to a taxpayer at his last known address. The Department's records indicate that the assessment was made and mailed to you on April 8, 2005, which is within the three-year limitations period. Accordingly, the assessment was timely made.
The document issued to the Taxpayer dated May 25, 2005, is a consolidated bill statement. A consolidated bill is merely a statement of amounts then due and not a notice of assessment.
CONCLUSION
Based on the foregoing, the assessment of tax and interest issued to you for the 2001 taxable year is correct. Please remit payment of the amount due, which includes updated interest as shown on the enclosed schedule, to the Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attn: *****. Payment must be made within 30 days from the date of this letter to avoid the accrual of additional interest.
The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this determination, you may contact ***** at *****.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/55949B
Rulings of the Tax Commissioner