Tax Type
Individual Income Tax
Description
Out-of-State tax credit; "Business Profits Tax"
Topic
Credits
Date Issued
07-30-1991
July 30, 1991
Re: § 58.1-1821 Application: Individual Income Tax
Dear********************
This will reply to your letter of January 4, 1990 on behalf of your client,*********("the Taxpayer"), as supplemented by your letter of May 31, 1990, requesting reconsideration of the department's December 20, 1989 determination in the above case.
FACTS
The department's prior determination (P.D. 89-348) upheld the disallowance of an out-of-state tax credit claimed on the Taxpayer's 1986 Virginia individual income tax return for "Business Profits Tax" paid to the state of ***********The department found that the ********* Business Profits Tax ********** was not an income tax and therefore was not allowable as a credit under Virginia Code § 58.1-332(A). You request reconsideration on the grounds that the******** BPT is an income tax and in support of your position cite several ************Supreme Court cases in which the Court classified the*******BPT as an income tax and stated that it is a tax on net income.
DETERMINATION
On April 20, 1990, in a 4-3 decision in the case of Llewellyn King v. Forst, 239 Va. 557 (1990), the Virginia Supreme Court overturned the Department of Taxation's long-standing policy that franchise taxes and other such taxes which are based on income but not denominated as "income" taxes do not qualify for the credit for income taxes paid to another state (Va. Code § 58.1-332). Legislation enacted by the 1991 General Assembly (HB 1734, Chapter 362 and SB 765, Chapter 456), effectively overturned the Virginia Supreme Court's King decision.
Under these bills, individuals are precluded from claiming a credit for franchise and similar taxes paid to other states as a result of the Virginia Supreme Court decision in King. These bills substantially limit the types of taxes eligible for the individual income tax credit. These bills made the change retroactive to taxable years beginning on and after January 1, 1987. However, taxpayers who filed a protective claim for refund under Va. Code § 58.1-1824, based upon the King litigation before the date the bills were introduced (January 22, 1991), will be allowed refunds.
Because the legislation is retroactive to taxable years beginning on and after January 1, 1987 only, your client's claim for taxable year 1986 is unaffected by this recent legislation.
I have reviewed my December 20 determination in light of your most recent comments and the decision of the Virginia Supreme Court in King. After further analysis of the construction given to the BPT by the********** Supreme Court, I find sufficient basis to allow the credit for the BPT paid by the Taxpayer for taxable year 1986.
Accordingly, a refund of the applicable taxes and interest will be issued to the Taxpayer as soon as practicable.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner