Tax Type
Individual Income Tax
Description
Deferral of gain; Out-of-state tax credit
Topic
Credits
Taxability of Persons and Transactions
Taxpayers
Date Issued
10-23-2000
October 23, 2000
Re: Request for a Ruling: Individual Income Taxation
Dear ****
This will reply to your letter in which you request a ruling on behalf of your client (the "Taxpayer") on the application of the Virginia out-of-state income tax credit.
FACTS
In 1998, the Taxpayer, while a resident of another state ("State A"), realized a gain on the exchange of real property located in State A. The transaction was treated as a "like-kind" exchange transaction that required a deferral of gain under Internal Revenue Code § 1031. However, because State A does not recognize gain deferral under these circumstances, the gain was reported on the Taxpayer's 1998 State A income tax return.
The Taxpayer, now a Virginia resident, plans to sell the real property received in the 1998 transaction in the 2000 taxable year. This sale will trigger recognition of the gain deferred from the 1998 transaction for both federal and Virginia income tax purposes.
You request that the Taxpayer be allowed to claim the Virginia out-of-state income tax credit for the 1998 transaction even though the gain would be recognized in State A and Virginia in different taxable years. You contend that disallowing the credit will result in "double taxation." In the alternative, you request that the Taxpayer be permitted to carry a basis adjustment increase in the 2000 taxable year equal to the amount of the gain previously taxed in State A.
DETERMINATION
Code of Virginia § 58.1-332. A. provides:
Virginia's method of preventing "double taxation" is to allow the out-of-state tax credit provided in Code of Virginia § 58.1-332. This section only provides relief on a gain on the sale of a capital asset that is taxed by Virginia and another state in the same taxable year. In situations when the tax is paid to another state in prior years on income, including gains from the sale of property, Virginia law provides no relief. See Public Document ("P.D.") 94-321 (10/21/94)(copy enclosed).
As for allowing a change in basis of the property, Code of Virginia § 58.1-301 provides that Virginia individual income taxation conforms with that of the Internal Revenue Code. Therefore, income of a Virginia resident included in federal adjusted gross income ("FAGI"), is also subject to Virginia taxation. The FAGI of a Virginia resident can be modified only by the additions, subtractions, deductions, and exemptions specifically indicated in Code of Virginia § 58.1-322 when computing Virginia taxable income.
As a "conformity" state, Virginia would base its tax on the Taxpayer's FAGI, including the capital gain, despite the fact that the gain was previously taxed by the other state. There is no provision in Code of Virginia § 58.1-322 that allows a step-up in basis when a gain is recognized in another state in a different taxable year. As such, your request for a step-up in basis equal to the amount of previously-taxed State A gain must also be denied.
I hope that the foregoing answers the questions posed in your request. If you have any other questions regarding this ruling, you may contact * * * at * * *
Danny M. Payne
Tax Commissioner
Re: Request for a Ruling: Individual Income Taxation
Dear ****
This will reply to your letter in which you request a ruling on behalf of your client (the "Taxpayer") on the application of the Virginia out-of-state income tax credit.
FACTS
In 1998, the Taxpayer, while a resident of another state ("State A"), realized a gain on the exchange of real property located in State A. The transaction was treated as a "like-kind" exchange transaction that required a deferral of gain under Internal Revenue Code § 1031. However, because State A does not recognize gain deferral under these circumstances, the gain was reported on the Taxpayer's 1998 State A income tax return.
The Taxpayer, now a Virginia resident, plans to sell the real property received in the 1998 transaction in the 2000 taxable year. This sale will trigger recognition of the gain deferred from the 1998 transaction for both federal and Virginia income tax purposes.
You request that the Taxpayer be allowed to claim the Virginia out-of-state income tax credit for the 1998 transaction even though the gain would be recognized in State A and Virginia in different taxable years. You contend that disallowing the credit will result in "double taxation." In the alternative, you request that the Taxpayer be permitted to carry a basis adjustment increase in the 2000 taxable year equal to the amount of the gain previously taxed in State A.
DETERMINATION
Code of Virginia § 58.1-332. A. provides:
- Whenever a Virginia resident has become liable to another state for income tax on any earned or business income or any 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, to the extent that such gain is included in federal adjusted gross income, for the taxable year, derived from sources outside the Commonwealth and subject to taxation under this chapter, the amount of such tax payable by him shall, upon proof of such payment, be credited on the taxpayer's return with the income tax so paid to the other state. (Emphasis added.)
Virginia's method of preventing "double taxation" is to allow the out-of-state tax credit provided in Code of Virginia § 58.1-332. This section only provides relief on a gain on the sale of a capital asset that is taxed by Virginia and another state in the same taxable year. In situations when the tax is paid to another state in prior years on income, including gains from the sale of property, Virginia law provides no relief. See Public Document ("P.D.") 94-321 (10/21/94)(copy enclosed).
As for allowing a change in basis of the property, Code of Virginia § 58.1-301 provides that Virginia individual income taxation conforms with that of the Internal Revenue Code. Therefore, income of a Virginia resident included in federal adjusted gross income ("FAGI"), is also subject to Virginia taxation. The FAGI of a Virginia resident can be modified only by the additions, subtractions, deductions, and exemptions specifically indicated in Code of Virginia § 58.1-322 when computing Virginia taxable income.
As a "conformity" state, Virginia would base its tax on the Taxpayer's FAGI, including the capital gain, despite the fact that the gain was previously taxed by the other state. There is no provision in Code of Virginia § 58.1-322 that allows a step-up in basis when a gain is recognized in another state in a different taxable year. As such, your request for a step-up in basis equal to the amount of previously-taxed State A gain must also be denied.
I hope that the foregoing answers the questions posed in your request. If you have any other questions regarding this ruling, you may contact * * * at * * *
Danny M. Payne
Tax Commissioner
Related Documents
Rulings of the Tax Commissioner