05-88 | Virginia Tax

Tax Type

Individual Income Tax

Description

Credit for income tax paid to another state was disallowed

Topic

Computation of Income

Corporate Distributions and Adjustments

Date Issued

06-09-2005

June 9, 2005

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 your clients, ***** (the "Taxpayers"), for the 2001 taxable year.

FACTS

The Taxpayers, a husband and wife, are Virginia residents who received income from the husband's interest in a partnership (the "Partnership") located in ***** ("State A"). The Partnership was terminated during the 2000 taxable year. Because the Partnership had no funds to pay its income tax liability, the partners, including the husband, directly paid the tax to State A on behalf of the Partnership.

The income distributed by the Partnership for the 2000 taxable year was reported on the Taxpayers' 2000 taxable year Virginia individual income tax return. The Taxpayers' 2001 income tax return reflected a credit claimed for tax paid to State A for the 2001 taxable year. Under a review by the Department, the credit for income tax paid to another state was disallowed because the Partnership income distribution was not subject to income taxation by both State A and Virginia during 2001.

The Taxpayers state that the Partnership failed to properly handle the State A tax payments through the partners' capital accounts. As a result, the husband, a cash basis taxpayer, believed it was proper to claim the out-of-state tax credit for the taxable year (2001) in which he paid the tax to State A. Further, the Taxpayers state that by the time they were notified of the disallowance of the out-of-state tax credit, the statute of limitations for filing an amended return for the 2000 taxable year had expired. The Taxpayers, therefore, request that the Department allow the out-of-state credit claimed on their 2001 Virginia income tax return.

DETERMINATION

Virginia Code § 58.1-332 A allows Virginia residents a credit against their income tax liability when they pay income tax to another state on earned or business income, or on any gain from the sale of a capital asset. The intent of the credit is to grant Virginia residents relief in situations where they are taxed by both Virginia and another state on these types of income during the same taxable year. The credit is claimed on the income tax return for the same taxable year in which the income is subject to taxation by another state, even though the tax is actually paid during the succeeding taxable year when the return is filed.

The amount of credit for taxes paid to other states is limited to the lesser of (i) the tax actually paid to another state on income sourced outside Virginia, or (ii) the amount of tax actually paid to another state that is equivalent to the proportion of income taxable in such state to Virginia taxable income. As such, Va. Code § 58.1-332 only provides relief for qualified income that is taxed by Virginia and another state in the same taxable year. See Public Document 94-321 (10/21/94). In situations where the tax is paid to another state and Virginia in a different taxable year, Virginia law provides no relief.

In this case, the income distributed from the Partnership was properly reported on the Taxpayers' 2000 Virginia income tax return. In addition, the tax was properly paid to State A for the 2000 taxable year during 2001. Based on Virginia law, a credit for the tax paid to State A could be claimed for the 2000 taxable year only. Accordingly, the credit claimed on the Taxpayers' 2001 Virginia income tax return was correctly disallowed.

Pursuant to Va. Code § 58.1-1823, an amended return claiming a refund must be filed within the later of

- (i) three years from the last day prescribed by law for the timely filing of the return; (ii) one year from the final determination of any change or correction in the liability of the taxpayer for any federal tax upon which the state tax is based, provided that the refund does not exceed the amount of the decrease in Virginia tax attributable to such federal change or correction; (iii) two years from the filing of an amended Virginia return resulting in the payment of additional tax, provided that the amended return raises issues relating solely to such prior amended return and that the refund does not exceed the amount of the payment with such prior amended return; or (iv) two years from the payment of an assessment, provided that the amended return raises issues relating solely to such assessment and that the refund does not exceed the amount of such payment.

In the instant case, the Taxpayers did not file an amended 2000 Virginia individual income tax return to request a refund of overpayments that would result from a credit for taxes paid to other states within the time period provided by statute. Accordingly, there is no statutory authority to allow an out-of-state tax credit on the Taxpayers' 2000 Virginia income tax return.

Based on the foregoing, the assessment for the 2001 taxable year is correct and remains due and payable. The enclosed schedule shows the outstanding balance of the assessment. To avoid the accrual of additional interest, payment should be sent within 30 days from the date of this letter to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23261-7203, Attention: *****.

The Code of Virginia sections and public document cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department's web site, located at www.policylibrary.tax.virginia.gov. If you have any questions regarding this determination, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/54472E

Rulings of the Tax Commissioner