03-32 | Virginia Tax

Tax Type

Individual Income Tax

Description

Out-of-state tax credit

Topic

Credits

Returns and Payments

Date Issued

04-11-2003

April 11, 2003

Re: § 58.1-1821 Application: Individual Income Tax

Dear *****:

This will respond to your letter in which you appeal the denial of the out-of-state tax credit claimed on the amended 1999 Virginia individual income tax return filed by ***** (the "Taxpayers"). I apologize for the delay in the Department's response.

- - - - FACTS

The Taxpayers (a husband and a wife) are domiciliary residents of Virginia. In 1999, they sold a parcel of undeveloped, nonbusiness real estate in State A. The Taxpayers reported the gain on the sale of the property and paid the income tax on their federal and Virginia individual income tax returns. They did not file a State A nonresident income tax return. In 2002, State A advised the Taxpayers that they must file a 1999 taxable year State A nonresident individual income tax return to report and pay the tax on the gain. State A later advised the Taxpayers that they did not qualify for a credit for taxes paid to Virginia on the gain.

The Taxpayers subsequently filed an amended Virginia individual income tax return on which they claimed credit for income taxes paid to State A. The Department rejected the filing of the amended income tax return, advising that a Virginia credit for tax paid to another state was not applicable because the gain was not the type of income eligible for the credit. The Taxpayers have appealed this decision and have requested a written ruling concerning the applicability of this credit.

- - - - DETERMINATION

Prior to January 1, 2000, Va. Code § 58.1-332(A), provided individuals a credit for income tax paid to another state:

- 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 income derived from an activity that 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).

The information provided to the Department does not show that the real estate sold in State A was business property. Accordingly, the gain on the sale of the land located in State A does not qualify for a credit for income tax paid to the other state.

It should be noted that Va. Code § 58.1-332(A) was amended by the Virginia General Assembly in 1999. Effective for taxable years beginning on and after January 1, 2000, the credit for income tax paid to another state was amended to allow it to be computed on the gain on the sale of a capital asset not used in a trade or business. This 1999 legislative change is not available for your 1999 return.

Based on the foregoing, your request for refund must be denied. The Code of Virginia sections and other documents cited are enclosed for your reference. These and other documents are available online in the Tax Policy Library section of the Department's web site, located at www.tax.state.va.us. If you have any questions about this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/42359E

Rulings of the Tax Commissioner