04-59 | Virginia Tax

Tax Type

Individual Income Tax

Description

Gambling in 1999 is a business activity

Topic

Basis of Tax

Credits

Residency

Date Issued

08-18-2004

August 20, 2004

Re: § 58.1-1821 Application: Individual Income Tax

Dear *****:

This will reply to your letter in which you seek correction of the individual income tax assessment issued to ***** (the "Taxpayers") for the 1999 taxable year. I apologize for the Department's delay in responding to your letter.

FACTS

The Taxpayers, a husband and wife, are Virginia residents who filed a nonresident individual income tax return in another state ("State A") for the 1999 taxable year. During 1999, the husband won a substantial amount of income from horse racing and pari-mutual wagering, and a portion of this income was received in State A. On their 1999 Virginia individual income tax return, the Taxpayers claimed a credit for income tax paid to State A.

The Department initially allowed the credit and issued a refund, but after further review, the credit was disallowed on the basis that the husband's gambling winnings did not represent earned or business income. As a result, additional income tax and interest were assessed. The Taxpayers appeal the assessment, contending that the gambling in 1999 is a business activity, and income tax paid to State A on income derived from this activity is eligible for the credit allowed under Va. Code § 58.1-322(A).

DETERMINATION

At issue in this appeal is whether the gambling winnings received by the Taxpayers constitute earned or business income for the purposes of claiming the credit allowed under Va. Code § 58.1-332(A). This Code section provides that:

- 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 principal residence (within the meaning of §1034 of the Internal Revenue Code) 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.)

This statute does not provide a credit for all income tax paid to another state. Instead, the credit is limited to tax paid on "earned or business income" from sources outside of Virginia. While the statute itself does not define "earned or business income," Title 23 of the Virginia Administrative Code ("VAC") 10-110-221 defines these terms for the purposes of the credit.

Under this regulation, "earned income" is defined as:

- 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 Department has previously ruled that gambling winnings do not fall within the definition of earned income because such income is not compensation for services rendered. See Public Document (P.D.) 95-152 (6/12/95). While P.D. 95-152 addresses lottery winnings, the letter expresses the Department's general policy with regard to winnings received from any type of gambling activity including horse racing and park mutual wagering. The regulation further defines "business income" as:

- 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... (Emphasis added.)

This definition contemplates a taxpayer engaging in a continuous and regular course of business. In addition, there is long-standing federal policy that requires gambling activities to be pursued full-time, regularly, and for production of income for one's livelihood before such activities can be considered to be a trade or business.

In this case, the Taxpayers report their gambling income as "other income" on their federal income tax return and their gambling losses on federal Schedule A. Title 23 VAC 10-110-221 clearly requires that "business income" must be reported on federal Schedules C, E, or F.

In addition, the husband, who is employed full-time in Virginia, has indicated that he spent up to 25 hours a week researching, planning, and gambling on horses in various states during 1999. A number of years ago, the Internal Revenue Service approached the husband about obtaining a professional gambler's license, but he declined at that time because he was not engaged in gambling full-time. The evidence indicates that this status for federal purposes has not changed.

Based on the information provided, the Department finds that the husband was not engaged in a continuous and regular business of gambling. Accordingly, the assessments are correct and the outstanding liability totaling ***** tax and ***** interest) is due and payable. If the Taxpayers are unable to pay the balance due in full within 30 days from the date of this letter they may contact ***** in the Department's Collections Unit at ***** to arrange a partial payment plan. Please note that while a payment plan will provide an extended period for payment of the balance due, interest will continue to accrue on the balance until paid pursuant to Va. Code § 58.1-1812.

The Code of Virginia sections, regulations and public documents cited are available on-line in the Tax Policy Library section of the Department's web site, located at www.tax.state.va.us. If you have additional questions regarding 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/44688B

Rulings of the Tax Commissioner