Tax Type
Individual Income Tax
Description
Taxes paid by residents to other states; Capital gain on disposition of real property
Topic
Credits
Date Issued
06-11-1996
June 11, 1996
Re: § 58.1-1821 Application: Individual Income Tax
Dear***************
This will reply to your letter concerning your 1990 Virginia individual income tax assessment resulting from the disallowance of an out-of-state tax credit.
FACTS
You are a Virginia resident who is a partner in a real estate partnership located in Connecticut. The partnership, which is comprised of family members, purchases real property and leases the property to tenants. In 1990, the partnership sold real property for a capital gain, which was distributed to each of the partners. The gain was reported on your Virginia return. The gain was attributable to property located in Connecticut and was also taxed by Connecticut. An out-of-state tax credit was claimed on your 1990 Virginia return for the taxes paid on the gain to Connecticut.
The credit was disallowed by the department. The Connecticut tax, as structured at the time, was imposed on capital gains from the sale or exchange of real property. An assessment was issued by the department based on the theory that the Connecticut tax was not a broad-based net income tax. You contend the Connecticut tax was an income tax; therefore, the credit claimed on your 1990 Virginia return should be allowed pursuant to Code of Virginia § 58.1-332. You are requesting that the assessment be abated.
DETERMINATION
Code of Virginia § 58.1-332 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 . . . 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.)
When a Virginia resident, therefore, pays income taxes to another state and to Virginia on earned or business income, the Virginia resident may claim an out-of-state credit on the Virginia return for income taxes paid to the other state.
The gain received by the Taxpayer resulted from the sale of real property that was used to conduct partnership business activities. Therefore, the gain is considered business income for purposes of computing an out-of-state tax credit. At issue is whether Virginia will allow a credit for the Connecticut tax, a tax on capital gains that is not a broad-based net income tax.
The Virginia Supreme Court's decision in Llewellyn King v. W. H. Forst, Tax Commissioner, 239 Va. 557 (1990) overturned the Department of Taxation's long-standing policy that franchise taxes and other such taxes do not qualify for the Virginia out-of-state tax credit even though they may be based on net income. The 1991 General Assembly, subsequently, passed retroactive legislation that effectively overturned the Virginia Supreme Court's decision to the extent the decision required the allowance of a credit for franchise or other similar taxes paid to another state.
The Connecticut Supreme Court, in the case of Vivien Kellems et al. v. F. George Brown, Tax Commissioner, et al., 163 Conn. 478, 313 A.2d 53, (1972), addressed the constitutionality of the Connecticut statute that provided for tax on dividends and capital gains. The Connecticut Supreme Court, in part, provided that, "In essence, the act levies an income tax on dividends received and capital gains realized by residents of Connecticut." That court, therefore, considered the tax on capital gains to be an income tax. As the Connecticut tax imposed on capital gains was considered by the Connecticut Supreme Court to be an income tax and the tax was not characterized by the Connecticut General Statute to be a franchise, license, excise, unincorporated business or occupation tax, the Connecticut tax will also be considered an income tax for purposes of computing the Virginia out-of--state tax credit.
Based of the facts presented, I find basis to allow the out-of-state credit claimed on your 1990 Virginia individual income tax return for taxes paid to Connecticut on capital gains from the sale of real property. The 1990 assessment will be abated in full. If further assistance is needed, please contact ********at *******.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/7682N
Rulings of the Tax Commissioner