Could Virginia residents claim all partnership tax paid through unified returns in five states as one out-of-state credit?

Subject

Five-state unified returns required a separate credit limitation for each state

Plain-English summary

Virginia required the couple to calculate a separate resident credit limitation for each of the five states in which the partnership filed a unified return. The husband was a partner in a business operating outside Virginia, and the couple had claimed credit for all income tax attributed to him on the combined filings.

Section 58.1-332 did not automatically credit every dollar paid elsewhere. For each state, the allowable amount was the lesser of the partner's actual share of tax paid or the Virginia tax imposed on that state's income. The limitation used a fraction comparing the income taxed by that state with Virginia taxable income.

Virginia's earlier guidance for a single unified return required a statement showing the partner's prorata taxable income and tax paid. With five states, those amounts had to be listed separately for each state so each limitation could be computed.

The couple had not supplied verifiable state-by-state income figures. Virginia assessed using available information but allowed them to file an amended 2005 return with the correct breakdown and payment within 30 days.

What this means for you

• A resident credit is generally capped at the lower of foreign-state tax paid or Virginia tax on the same income.
• Multistate pass-through filings need a separate calculation for every state.
• Keep statements showing each owner's share of taxable income and tax paid by state.
• Virginia may assess from available information when the state-by-state detail is missing.

Common questions

How many unified state returns were involved?

Five.

Could the couple combine all other-state tax into one credit?

No. Each state's limitation had to be calculated separately.

What corrective step did Virginia allow?

An amended 2005 return within 30 days.

Citations and references

• Va. Code §§ 58.1-111 and 58.1-332(A).
• Virginia Public Document 07-207.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-68

Original ruling text

May 12, 2010

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of an individual income tax assessment issued to * (the "Taxpayers"), for the taxable year ended December 31, 2005. I apologize for the delay in responding to your letter.

FACTS

The Taxpayers, a husband and wife, are Virginia residents. The husband is a partner in a partnership that conducts business outside Virginia. The husband participated in the filing of a unified nonresident individual income tax return with five states. The Taxpayers claimed a credit for all of the income tax attributable to the husband on the unified returns.

Based on information provided with the 2005 return, the Department recomputed the out-of-state tax credit separately for each state and issued an assessment. The Taxpayers contest the assessment, asserting they are entitled to a credit for all taxes paid to other states because the Department permits an out-of-state tax credit for taxes paid on a unified return on behalf of an individual owner of a pass-through entity.

DETERMINATION

Virginia Code § 58.1-332 allows Virginia residents a credit on their Virginia individual income tax return for income taxes paid fro another state provided the income is either earned or business income, or gain from the sale of a capital asset upon proof of such payment. V irginia Code § 58.1-332 A, in pertinent part, places a limitation on

the credit::

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 . . .

Therefore, Virginia law does not automatically allow a taxpayer to claim a credit for the total amount of tax paid to another state. Rather, the credit is limited to the lesser 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.

In Public Document (P.D.) 07-207 (12/5/20,07), the Department ruled that a taxpayer claiming the out-of-state tax credit for income taxes paid to another state in a unified return must attach a statement to his return verifying (1) the taxpayer's prorata portion of the unified return's taxable income, and (2) the taxpayer's prorata portion of the tax paid to the applicable state by the partnership on the individual's behalf.

The rule, as stated in P.D. 07-207, applied to a single state. When a unified return is filed in several states by a pass-though entity, a taxpayer's prorata portion of the unified return's taxable income for each state and the taxpayer's prorata portion of the tax paid to each applicable state must be listed separately in order to properly compute the limitation for each state's credit.

In this case, the Taxpayers failed to provide the appropriate information for computing the out-of-state tax credit limitation. In the absence of verifiable evidence of taxable income in other states, the Department made adjustments based on the available information and issued an assessment. See Va. Code § 58.1-111.

The Department acknowledges that the Taxpayers may have additional information that more accurately reflects the taxable income for each state in which a unified return was filed. The Taxpayers are, therefore, instructed to file an amended 2005 individual income tax return recomputing their out-of-state tax credit in accordance with this determination.

The amended return, along with the appropriate payment, should be submitted within 30 days from the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attention: *. No additional interest will accrue provided the total outstanding balance is paid within 30 days from the date of this letter. If the amended return is not filed within the time prescribed, the assessment will become immediately due and payable, and collection action will resume.

The Code of Virginia sections and public document 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 regarding this determination, you may contact * at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3030225183.E