Tax Type
Individual Income Tax
Description
Taxes paid by residents to other states; Gain from sale of rental property
Topic
Credits
Date Issued
12-27-1995
December 27, 1995
Re: § 58.1-1821 Application: Individual Income Tax
Dear***************
This will reply to your letter of October 20, 1995, in which you protest the disallowance of a credit for income tax paid to another state claimed by your client, ***********(the "Taxpayer"), for taxable year 1992.
FACTS
The Taxpayer was a Virginia resident in 1992. The Taxpayer was a partner in a partnership which operated in a state other than Virginia. The partnership derived its income from the rental of property.
During 1992, the property was sold at a gain. The Taxpayer paid individual income tax to the state where the property was located based upon the gain from the sale of the property, reduced by the rental loss incurred during 1992 prior to the sale. The Taxpayer filed a 1992 Virginia individual income return, and claimed a credit income tax paid to another state.
The Taxpayer's 1992 Virginia return was subject to an office audit. The Taxpayer's credit was disallowed, and an assessment was issued. You protest the denial of this credit, and request the Taxpayer be granted relief from the assessment.
DETERMINATION
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- Code of Virginia § 58.1-332 (A) provides in relevant part:
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)
- Code of Virginia § 58.1-332 (A) provides in relevant part:
-
- Virginia Regulation (VR) § 630-2-332 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, for example, a sole proprietorship, provided that if the business incurred a loss such loss would be allowable under federal law. Thus income from hobbies and other activities not engaged in primarily for profit is not business income even though a Schedule C, E, or F may be filed for such activities.
- Virginia Regulation (VR) § 630-2-332 defines "business income" as;
At issue here is whether a gain from the sale of a rental property is business income within the meaning of VR 630-2-332.
In the instant case, the partnership received periodic rents for the use of the property. The partnership was responsible for repairing and maintaining the property. Annual taxes, insurance, and utilities were also the responsibility of the partnership. The partners personally administered to the affairs of the partnership. No agents were employed by the partnership to collect rents or to attend to any matters with regard to the property.
Based on the evidence presented, the department finds that the partnership operations cannot be described as a passive investment activity. The partnership did not merely hold the property in anticipation of the rise in value over time, a characteristic of an investment motive. Rather, the facts demonstrate the partnership rented the property for use on a regular and continuous basis.
Therefore, the department concludes the activities of the partnership constitute a business. Because the partnership held the property in the course of its business, any gain derived by the Taxpayer from its sale would be business income within the meaning of VR 630-2-332.
Accordingly, your request for relief is granted. Attached you will find a schedule illustrating the Taxpayer's 1992 Virginia income tax liability recomputed with a credit for income tax paid to another state. A review of the Taxpayer's account shows they previously paid the 1992 assessment in full. Therefore, the department will be issuing a refund with interest in the near future. Should you have any questions regarding this matter, please contact ************* at**************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9992L
Rulings of the Tax Commissioner