10-68 | Virginia Tax

Tax Type

Individual Income Tax

Description

Assessment of recomputed out-of-state tax credit

Topic

Credits

Pass-Through Entities

Records/Returns/Payments

Date Issued

05-12-2010

May 12, 2010

Re: § 58.1-1821 Application: Individual Income Tax

Dear *****:

This will reply to your letter in which you seek correction of an individual income tax assessment issued to ***** (the "Taxpayers"), for the taxable year ended December 31, 2005. I apologize for the delay in responding to your letter.

FACTS

The Taxpayers, a husband and wife, are Virginia residents. The husband is a partner in a partnership that conducts business outside Virginia. The husband participated in the filing of a unified nonresident individual income tax return with five states. The Taxpayers claimed a credit for all of the income tax attributable to the husband on the unified returns.

Based on information provided with the 2005 return, the Department recomputed the out-of-state tax credit separately for each state and issued an assessment. The Taxpayers contest the assessment, asserting they are entitled to a credit for all taxes paid to other states because the Department permits an out-of-state tax credit for taxes paid on a unified return on behalf of an individual owner of a pass-through entity.

DETERMINATION

Virginia Code § 58.1-332 allows Virginia residents a credit on their Virginia individual income tax return for income taxes paid fro another state provided the income is either earned or business income, or gain from the sale of a capital asset upon proof of such payment. Virginia Code § 58.1-332 A, in pertinent part, places a limitation on
the credit::

- The credit allowable under this section shall not exceed . . . such proportion of the income tax otherwise payable by him under this chapter as his income upon which the tax imposed by the other state was computed bears to his Virginia taxable income upon which the tax imposed by this Commonwealth was computed . . .

Therefore, Virginia law does not automatically allow a taxpayer to claim a credit for the total amount of tax paid to another state. Rather, the credit is limited to the lesser of: (i) the amount of tax actually paid to the other state (the "tentative credit"); or (ii) the amount of Virginia income tax actually imposed on the taxpayer on the income earned or derived in the other state (the "limitation"). The limitation is computed by multiplying the individual's Virginia tax liability by a fraction, the numerator of which is the income upon which the other state's tax is imposed, and the denominator of which is Virginia taxable income.

In Public Document (P.D.) 07-207 (12/5/20,07), the Department ruled that a taxpayer claiming the out-of-state tax credit for income taxes paid to another state in a unified return must attach a statement to his return verifying (1) the taxpayer's prorata portion of the unified return's taxable income, and (2) the taxpayer's prorata portion of the tax paid to the applicable state by the partnership on the individual's behalf.

The rule, as stated in P.D. 07-207, applied to a single state. When a unified return is filed in several states by a pass-though entity, a taxpayer's prorata portion of the unified return's taxable income for each state and the taxpayer's prorata portion of the tax paid to each applicable state must be listed separately in order to properly compute the limitation for each state's credit.

In this case, the Taxpayers failed to provide the appropriate information for computing the out-of-state tax credit limitation. In the absence of verifiable evidence of taxable income in other states, the Department made adjustments based on the available information and issued an assessment. See Va. Code § 58.1-111.

The Department acknowledges that the Taxpayers may have additional information that more accurately reflects the taxable income for each state in which a unified return was filed. The Taxpayers are, therefore, instructed to file an amended 2005 individual income tax return recomputing their out-of-state tax credit in accordance with this determination.

The amended return, along with the appropriate payment, should be submitted within 30 days from the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attention: *****. No additional interest will accrue provided the total outstanding balance is paid within 30 days from the date of this letter. If the amended return is not filed within the time prescribed, the assessment will become immediately due and payable, and collection action will resume.

The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this determination, you may contact ***** at *****.

- - - - Sincerely,

- - - - Janie E. Bowen
        Tax Commissioner

AR/1-3030225183.E

Rulings of the Tax Commissioner