86-159 | Virginia Tax

Tax Type

Individual Income Tax

Description

Out-of-state tax credit; New York minimum tax liability

Topic

Credits

Date Issued

07-31-1986

July 31, 1986

Re: §58.1-1821 Application/Individual Income Tax

Dear ******************

This will reply to your letter of November 14, 1985 seeking correction of an assessment in the above referenced case for taxable year 1982.

FACTS

In filing their 1982 Virginia resident individual income tax return, taxpayers claimed a credit for taxes paid to New York state. In computing this credit however, taxpayers combined their New York personal income tax liability with their New York minimum tax liability. The department disallowed that portion of the credit claimed by taxpayers for their New York minimum tax liability. Taxpayers now appeal such disallowance and seek approval by the department of their method of computing their 1982 Virginia income tax credit.

DETERMINATION

§58.1-332 of the Virginia Code provides in pertinent part that:

- [w]henever a resident of the Commonwealth has become liable for income tax to another state, on earned or business income, or any part thereof, for the taxable year, derived from sources without the Commonwealth and subject to taxation under this chapter, the amount of income tax payable by him shall, upon proof of such payment, be credited on his return with the income tax so paid by him to such other state. (Emphasis added)

Subsections (a) through (c) of §630-2-332(2) of Virginia's Individual Income Tax Regulations provide further that,

- [o]nly an income tax paid to another state on earned or business income from sources outside of Virginia qualifies for the credit. "Earned income" is then defined as, wages, salaries, or professional fees and other amounts received as compensation for professional services actually rendered. Earned income does not include interest or dividend income, capital gains, income from investments or similar types of passive income. "Business income" is defined as income from an activity which constitutes a "business" for federal income tax purposes.

Since the tax paid by taxpayers in this case to New York in 1982 was not the result of any business income, it must be determined whether such tax was based on taxpayers' earned income. According to New York law, the minimum tax is "in addition to "New York's personal income tax, and is based solely on certain federal items of tax preference, such as capital gains, depreciation, stock options, drilling costs, etc... (See N.Y. Code §§601-A, 641(a), and 622(b)).

Regardless of how such tax is characterized by New York, that portion of the credit claimed by taxpayers in this case for New York's minimum tax was properly disallowed by the department since it is not a tax on "earned income" within the meaning of Virginia's income tax law and regulations. Nor would such minimum tax liability qualify for credit against Virginia's income tax since such items of federal tax preference are not subject to tax in Virginia.

Therefore, I find no basis for correction of the assessment in this case, the full amount of which is hereby due and payable. A new bill will be issued to taxpayers under separate cover consistent with this determination.

Sincerely,

W. H. Forst
Tax Commissioner

Rulings of the Tax Commissioner