Tax Type
Individual Income Tax
Description
Does Sale of Timber Qualify for Out of State Tax Credit
Topic
Computation of Income
Credits
Taxability of Persons and Transactions
Date Issued
10-26-2001
October 26, 2001
Re: Individual Income Tax Dear *****
This will respond to your letter in which you inquire about the Virginia out-of-state tax credit and its application to your client (the "Taxpayer"). I apologize for the delay in the department's response.
FACTS
The Taxpayer is a resident of Virginia who sold an interest in timberland located in another state ("State A") and realized a gain. The Taxpayer will be required to file a 1998 nonresident income tax return with State A and pay tax to State A on the gain. You are requesting a ruling as to whether the gain will be subject to taxation in Virginia and whether there is an available credit that the Taxpayer may take with respect to the taxes paid to State A.
RULING
Code of Virginia § 58.1-332 (A) provides a credit for taxes paid to another state:
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- Whenever a Virginia resident has become liable to another state for income tax on any earned or business income for the taxable year... (Emphasis added)
For purposes of the credit, Title 23 of the Virginia Administrative Code (VAC) 10-110-221 defines both the term "earned income" and the term "business income." The term "earned income" is defined by the regulation as:
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- wages, salaries, or professional fees and other amounts received as compensation for professional services actually rendered, but does not include that part of the compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered. Earned income does not include interest or dividend income, capital gains, income from investments, or similar types of passive income.
The term "business income" is defined as:
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- income derived from an activity which constitutes a "business" for federal income tax purposes for which a federal Schedule C, E, or F must be filed. For example a sole proprietorship, provided that if the business incurred a loss such loss would be allowable under federal law. Thus income from hobbies and other activities not engaged in primarily for profit is not business income even though a Schedule C, E, or F may be filed for such activities.
In this case, the Taxpayer incurred tax liability from the sale of land in State A. Under the above definitions, the income derived from that sale would qualify as business income only if the property was held in the course of business requiring the filing of a Federal Schedule C, E, or F by the Taxpayer. Unless the Taxpayer can show that this transaction qualifies as business income, the Taxpayer would not be eligible to receive the out-of-state tax credit. See Public Document ("P.D.") 99-167, 6-24-99, copy enclosed.
If you have any further questions regarding this matter, you may contact ***** in the department's Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
AR/22703P
Rulings of the Tax Commissioner