Tax Type
Individual Income Tax
Description
Earned or business income
Topic
Returns/Payments/Records
Taxable Income
Date Issued
06-15-1982
June 15, 1982
Re: 58-1118 Determination/Individual Income Tax
Dear *****************
This will reply to your letter of May 14, 1982 referring to my March 19 denial of your application for correction of assessment of individual income tax, your March 31 response to that denial and my May 5 response to you.
The issue at hand remains whether dividend income received from investments which were taxed by South Africa qualifies for credit for tax paid to another state under the provisions of Virginia Code § 58-151.015. In our earlier correspondence we have discussed the meaning of the term "state" as it is intended under § 58-151.015 and the definition of "earned income" within the same section. You now contend that the dividends received qualify for credit under § 58-151.015 as "business income.
The terms "business" or "business income" are statutorily defined neither by the Code of Virginia nor by the Internal Revenue Code or Regulations. However, there is substantial federal case law on defining "business" as it relates to federal income taxation. A central thesis in much of this case law is that all activities engaged in for profit do not constitute a trade or business as the term is intended for federal income tax purposes. In McDowell v. Ribicoff 61-2 USTC 9514, 292 F 2d. 174 (C.A. 3, 1961), the court held that:
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- The phrase 'trade or business' must refer not merely to Acts engaged in for profit, but to extensive activity over a substantial period of time during which the taxpayer holds himself out as selling goods or services.
- The phrase 'trade or business' must refer not merely to Acts engaged in for profit, but to extensive activity over a substantial period of time during which the taxpayer holds himself out as selling goods or services.
The courts have apparently adopted the view with which we concur, that the mere production of income from a means other than wage or salary, is not sufficient to constitute a business. In the instant case, you have not demonstrated that the income represents anything other than that derived from a private investment. You did not file a federal Schedule C, the obvious indicator that one is engaged in a business. To the contrary, the only supplemental income/loss which you report is that from a partnership.
To summarize our correspondence, you have claimed entitlement to a credit against your Virginia income tax under the provisions of Virginia Code § 58-151.015 on the basis that: 1) tax paid to South Africa constitutes income paid to another state; and, 2) the income on which tax was paid to South Africa constitutes business income. We have consistently maintained that the word "state" as used in § 58-151.015 refers only to another state of the United States and consequently the credit for tax paid to another state is not applicable. As a result, any discussion of the nature of the income is moot if the income source is not a state of the United States. However, we have also demonstrated that even should our interpretation of the term "state" be rejected, the credit remains inapplicable since the income in question is neither "earned" nor "business income."
We have set forth our position regarding each policy issue raised with respect to this case, and continue to find no basis for refund. Therefore we hold this determination final and deny your application for refund.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner