Tax Type
Individual Income Tax
Description
Taxpayers not be entitled to claim an out-of-state tax credit on Virginia return
Topic
Out of State Tax Credits
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
10-04-2012
October 4, 2012
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the individual income tax assessment issued to ***** (the "Taxpayers") for the taxable year ended December 31, 2010. I apologize for the delay in responding to your letter.
FACTS
The Taxpayers were residents of California when they sold their ownership interest in a business located in California on the installment basis in 2007, after which they moved to Virginia and became domiciliary residents of Virginia. For the installment payment received in 2010 while residents of Virginia, the Taxpayers claimed a credit for taxes paid to California on their 2010 Virginia income tax return. The Department disallowed the credit and issued an assessment. The Taxpayers filed an appeal, contending California imposed tax on the installment payment received in 2010, and the credit should be allowable by Virginia.
DETERMINATION
Virginia Code § 58.1-332 allows Virginia residents a credit against their income tax liability when they pay income tax to another state on earned or business income, or on any gain from the sale of a capital asset. Further, this code section states:
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- The credit . . . shall not be granted to a resident individual when the laws of another state, under which the income in question is subject to tax assessment, provide a credit to such resident individual substantially similar to that granted by subsection B of this section.
Under Va. Code § 58.1-332 B, a nonresident is permitted to claim a credit from tax on income from Virginia sources when their home state provides a substantially similar credit to Virginia residents or imposes a tax upon the income derived from Virginia sources that is exempt from taxation by Virginia. Because it is dependent on another state granting a similar or reciprocal credit, it may be limited by the credit permitted by the other state.
As a general rule, Virginia law does not allow a resident to claim a credit on his Virginia return for taxes paid to California because California law allows a Virginia resident to claim the credit on his California nonresident return. Similarly, a California resident would claim the credit for tax paid to California on his Virginia nonresident return.
In this case, the Taxpayers were contacted by California about the installment sale income. Under Cal. Rev. & Tax. Code § 17952(d), the source of gains on the sale of intangible personal property is determined at the time of the sale. Because the Taxpayers were residents of California at the time of the sale, California considers the gain recognized on the installments to be California source income even though the Taxpayers received the payment after they moved to Virginia.
In Public Document (P.D.) 11-48 (3/31/2011), the Department ruled that, to the extent installment payments result from the gain or sale of an intangible asset not employed in a trade or business carried out in Virginia, such payments would not be subject to Virginia income tax when received by a nonresident of Virginia. Conversely, such income is considered to be Virginia source income taxable when received by a resident of Virginia.
The issue, therefore, becomes which state should grant the credit for taxes paid to another state. The Department previously addressed an issue in which California will not grant the credit in P.D. 94-355 (11/23/1994). In that ruling, the Department determined that when a reciprocity state does not allow credit on a nonresident return for individual income tax paid to another state, the individual may claim the credit on the Virginia resident income tax return. Thus, when a state that practices reciprocity with Virginia for purposes of claiming the individual tax credit on their nonresident individual income places a limitation on such reciprocity, the out-of-state credit would be allowed, to the extent permitted under Va. Code § 58.1-332 A, on an individual's Virginia income tax return.
In this case, however, the Department cannot find any provision in Cal. Rev. & Tax. Code § 18002 that would prohibit nonresidents from claiming the credit for net income taxes imposed by and paid to the state of residence on income resulting from a sale of intangible personal property. Further, the California Second District Court of Appeal, Division 5 (the "Court") has ruled in a case involving gains on the sales of business interests in California in Gray et al. v. Franchise Tax Board, 235 CaI.App.3d 36, 286 Cal. Rptr. 453 (1991). In ruling that Connecticut's tax on net gains from the sale of capital assets was a net income tax and California must allow an out-of-state credit to the taxpayers, the Court inferred that income from intangible assets received by nonresident taxpayers qualifies for the credit under Cal. Rev. & Tax. Code § 18002.
Because a credit for income tax paid to Virginia would be allowable on the California nonresident individual income tax return, the Taxpayers would not be entitled to claim an out-of-state tax credit on their 2010 Virginia return. As such, the Department was correct in denying the credit. Accordingly, the assessment for the 2010 taxable year is upheld.
The Taxpayers will receive an updated bill with interest accrued to date. The outstanding balance should be paid within 30 days of the bill date to avoid the accrual of additional interest.
The Code of Virginia sections and public documents 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 about this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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- Craig M. Burns
Tax Commissioner
- Craig M. Burns
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AR/1-4969669408.E
Rulings of the Tax Commissioner