Tax Type
Individual Income Tax
Description
Taxes paid by residents to other states; Installment sale
Topic
Credits
Date Issued
06-21-1996
June 21, 1996
Re: § 58.1-1821 Application: Individual Income Tax
Dear********************
This will reply to your letter of March 31, 1995, in which you protest the disallowance of a credit for income tax paid to New York claimed by your client,*********(the "Taxpayer" ), for taxable year 1992.
FACTS
The Taxpayer owned his own business and operated it as a sole proprietorship for a number of years in the state of New York. In 1986, the Taxpayer entered into an agreement to sell all the assets of the business to an unrelated party on an installment basis. The Taxpayer is required to file New York nonresident returns on a yearly basis and report the gain from the installment sale.
The Taxpayer filed a 1992 Virginia resident return and claimed a credit for income tax paid to New York. This return was subject to an office audit. The department, citing Code of Virginia § 58.1-332(A), denied the Taxpayer a credit for income tax paid to another state because this credit is limited to "earned or business" income.
You believe the department erred in denying the Taxpayer this credit. You state the income derived from the installment sale is the type that qualifies for the credit, and you ask the department to grant the Taxpayer a credit for the taxes paid to another state.
DETERMINATION
Code of Virginia § 58.1-332(A) provides a credit when a Virginia resident becomes liable to another state for income tax on any "earned or business income" derived from sources outside of Virginia. The term business income is defined by Virginia Regulation ("VR") 630-2-332 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.
This definition contemplates a person engaging in a continuous and regular course of business. Sporadic activities or isolated transactions do not qualify as business income. A transaction involving the sale or other disposition of an asset can constitute business income. In order to determine whether such a transaction constitutes business income, it has been the department's policy to evaluate the transaction based upon the facts and circumstances surrounding the asset.
It is clear from the facts presented that the Taxpayer engaged in a continuous and regular course of business, and his activities would constitute a business for federal income tax purposes. The Taxpayer engaged in a business of providing professional services. These services are of a type that would normally be subject to state regulation and licensing requirements.
The department has previously ruled that the sale of property held in a trade or business constituted business income for the purposes of the credit. See Public Document ("P.D.") 95-331 (12/27/95), copy attached. Consequently, the department finds that P.D. 95-331 is applicable to the Taxpayer's situation and the gain from the installment sale of the assets of his business would constitute business income within the meaning of VR 630-2-332.
Accordingly, your request for relief is granted. The department has recomputed the Taxpayer's 1992 Virginia income tax liability with a credit for income tax paid to New York. This credit has been computed in accordance with the department's policy regarding tax paid to New York. See P.D. 95-96 (5/1/95), copy attached.
Attached is a schedule showing the computation of the Taxpayer's credit. A review of the Taxpayer's account indicates the original assessment was paid in full. Thus, a refund plus accrued interest will be issued in the near future. Should you have any questions regarding this matter, please contact ******at ******.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9983L
Rulings of the Tax Commissioner