Tax Type
Individual Income Tax
Description
Residency
Topic
Taxpayers
Date Issued
05-07-1999
May 7, 1999
Re: § 58.1-1821 Application: Individual Income Tax
Dear****************
This will reply to your letter concerning the 1993 Virginia individual income tax assessments on behalf of your clients, ***** (the "Taxpayers'). I apologize for the delay in responding to your letter.
FACTS
During 1993, the Taxpayers, who are Virginia residents, sold real estate located in another state (State A) and incurred a capital gain on the sale. For the 1993 taxable year, State A provided a deduction for 50% of a capital gain in determining taxable income. In computing the out-of-state tax credit for taxes paid on income on their 1993 Virginia Income Tax Return, the Taxpayers included the full amount of the capital gain instead of the amount of capital gain taxable in State A. The out-of-state tax credit was adjusted by the department to include only the portion of the capital gain subject to tax in State A. You contest the department's adjustment and request that the assessment be abated.
DETERMINATION
Code of Virginia § 58.1-332(A) allows Virginia residents a credit on their Virginia return for income taxes paid to another state provided the income is either earned or business income. This code section, in pertinent part, limits the amount of the credit:
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- 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...
Virginia law does not necessarily allow a taxpayer to claim a credit for the total amount of tax paid to another state. Rather, the credit is limited to the lessor 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.
At issue here is what the numerator in the fraction should represent. You contend that the full amount of the capital gain from the sale of the real estate in State A should be included in the numerator. You assert that including 50% of the gain in the numerator creates double taxation. This is not the case. The fact that the income tax paid to State A on half the gain exceeds the liability if Virginia taxes the entire gain is the result of State A's higher tax rate. State A's highest tax rate is more than double Virginia's highest rate. The fact is that State A's tax was imposed on only 50% of the gain. To include the full amount of the gain in the numerator would allow a credit for taxes on income for which no tax was paid.
The department has previously ruled that the numerator of the fraction should be the taxable income used by the sister state to determine the amount of tax due. In Public Document (P.D.) 95-96, 5/1/95, (copy attached), the department concluded, "The Virginia credit limitation clearly contemplates a net taxable income on which the other state imposes its tax.' The department went on to require a separate and additional calculation to determine the amount on which a New York nonresident's tax is actually imposed to more accurately reflect taxable income instead of gross income.
Fortunately, the treatment given to this capital gain by State A is more clear. State A granted a 50% deduction and then taxed the remaining gain. It is clear that only half of the capital gain was subject to tax. Virginia has been consistent in its statute and rulings that the income on which the tax is imposed is used in the numerator of the fraction to determine the amount of the credit received. In this case, the State A tax was imposed on only half of the capital gain and therefore only half of the gross capital gain should be used to determine the credit given in Virginia.
Accordingly, your application for relief cannot be granted. A schedule is attached showing the current tax liability. Pay the assessment within 60 days to avoid the accrual of additional interest. Please send your payment to the attention of *****, Virginia Department of Taxation, Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23218-1880. If additional information is needed, you may contact ***** at *****
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/11606G
Rulings of the Tax Commissioner