Tax Type
Individual Income Tax
Description
Does Sale Qualify for Out-of-State Tax Credit
Topic
Credits
Taxability of Persons and Transactions
Date Issued
11-29-2001
November 29, 2001
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****
This will respond to your letter in which you seek correction of an individual income tax assessment issued to your client, ***** (the "Taxpayer"), for the 1996 Virginia individual income tax return. I apologize for the delay in the department's response.
FACTS
In 1986, the Taxpayer, a Virginia resident, obtained real property located in another state through a liquidation distribution from a corporation. Upon sale of the property in 1996, the Taxpayer claimed an out-of-state tax credit on his Virginia individual income tax return for taxes paid to the other state on the gain realized from the sale. The out-of-state tax credit was disallowed by the department upon audit, resulting in an assessment of individual income tax. You contest the assessment and assert that the property was business rental property and the gain constituted business income for purposes of the out-of-state tax credit.
DETERMINATION
Code of Virginia § 58.1-332(A) provides individuals a credit for income tax 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)
Title 23 of the Virginia Administrative Code (VAC) 10-110-221 defines "business income" 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...
The department has ruled that this definition contemplates a taxpayer engaging in a continuous and regular course of business. In the case of a transaction involving the sale or other disposition of an asset, the treatment of such sale or disposition as business income will be dependent upon the facts and circumstances surrounding the asset. See Public Document ("P.D.") 95-157 (6/16/95), copy enclosed.
Prior to the Taxpayer's acquisition of the property in 1986, the property was held by the corporation as rental property. Once the Taxpayer received the property, it sat idle until sold in 1996. You state that it was the Taxpayer's intent to rent the property. The gain on sale of the property was reported on Schedule D of the Taxpayer's 1996 federal income tax return and you indicated in earlier correspondence that the property was held for investment. Based on the facts and circumstances surrounding this case, I find that the gain from the sale of the property at issue was not earned or business income and the Taxpayer was not entitled to the out-of-state tax credit claimed on the 1996 individual income tax return.
Accordingly, the assessment is upheld. Please remit the balance due of ***** to ***** Office of Policy and Administration, Appeals and Rulings, Post Office Box 1880, Richmond, Virginia 23218-1880 within 30 days of the date of this letter to avoid the accrual of additional interest. If you have any questions regarding this determination, you may contact ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
AR/25944P
Rulings of the Tax Commissioner