September 20, 2022
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the individual income assessment issued to ***** and ***** (the “Taxpayers”) for the taxable year ended December 31, 2018.
FACTS
The Taxpayers filed a Virginia resident income tax return for the 2018 taxable year claiming a credit for Unincorporated Business Franchise Tax (UBFT) paid to the District of Columbia. Under review, the Department disallowed the credit and issued an assessment. The Taxpayers appeal, contending the tax paid qualifies for Virginia’s credit for taxes paid to other states because it was a tax paid on capital gain from the sale of a capital asset.
DETERMINATION
Virginia Code § 58.1-332 A allows Virginia residents a credit on their Virginia return for income taxes paid to another state provided the income is either “earned or business income or . . . gain on the sale of a capital asset (within the meaning of § 1221 of the Internal Revenue Code), not including an asset used in a trade or business.”
The Department has consistently ruled that tax paid pursuant to the UBFT does not qualify for the out-of-state tax credit. See Public Document (P.D.) 11-92 (6/2/2011), P.D. 15-89 (4/28/2015), P.D. 18-166 (9/26/2018), and P.D. 19-107 (9/18/2019). In addition, Virginia Code § 58.1-332.2 defines an “income tax” as a term of art that refers to a specific type of tax levied on all of a resident’s earned and unearned income, and all income of nonresidents from sources within the jurisdiction, which is similar to the income tax that Virginia imposes on resident and nonresident individuals. Virginia Code § 58.1-332.2 B includes examples of taxes that do not qualify for the credit, even though they may be measured, in part, by income. Taxes do not qualify if (i) they are labeled as a franchise or license tax, and (ii) they do not tax all income of the individual. Examples of taxes that do not qualify for the credit pursuant to Virginia Code § 58.1-332.2 include the UBFT, the Texas Margin Tax, and the Ohio Commercial Activity Tax. See P.D. 12-108 (7/1/2012).
The Taxpayers assert that, because the income reported on their UBFT return was gain derived from the sale of a capital asset, it qualifies for the out-of-state tax credit even though it was reported on a UBFT return. The capital gain at issue was derived from the sale of rental real estate owned by the Taxpayers. Rental real estate is not a capital asset under IRC § 1221; rather, it is property used in a trade or business as defined in IRC § 1231. In addition, the clear language of Virginia Code § 58.1-332.2 A excludes from the out of state credit taxes paid that are attributable to the sale of an asset used in a trade or business. Therefore, the Department’s disallowance of the credit is upheld.
The Taxpayers will receive an updated bill that will include accrued interest to date. The Taxpayers should remit the balance due within 30 days of the bill date to avoid the accrual of additional interest and possible collection actions.
The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/4116.X