Could Virginia residents claim the out-of-state tax credit for D.C. unincorporated business franchise tax paid by a single-member consulting LLC?

Subject

Income Tax Credit For D.C. Unincorporated Business Franchise Tax

Plain-English summary

Virginia said no credit was allowed for the D.C. unincorporated business franchise tax. The request involved a married Virginia couple. The husband was the sole member of a Virginia LLC operating a consulting business in the District of Columbia, and the LLC paid the District's unincorporated business franchise tax.

The requester argued that the later D.C. decision in District of Columbia v. Bender undermined the reasoning Virginia courts had used when denying the credit. The Tax Commissioner declined to disregard the Virginia Supreme Court's decision in Mathy v. Commonwealth.

The ruling gave three reasons: decisions from other jurisdictions did not bind Virginia agencies, Mathy did; the Department had consistently taken the position that the D.C. tax did not qualify; and the Tax Commissioner was not persuaded that the Virginia Supreme Court would necessarily reach a different result after Bender.

Virginia therefore reaffirmed its interpretation of Va. Code § 58.1-332 and denied the requested out-of-state tax credit treatment for the D.C. tax.

What this means for you

• The ruling treated the D.C. unincorporated business franchise tax as ineligible for Virginia's other-state income-tax credit.
• Payment by a single-member LLC did not change the stated policy.
• A later decision from a D.C. court did not authorize the Department to ignore binding Virginia precedent.
• The ruling reflects law and policy as of June 2, 2011; current treatment should be checked separately.

Citations and references

• Va. Code § 58.1-332.
• District of Columbia v. Bender, 906 A.2d 277 (2006).
• Mathy v. Commonwealth, 253 Va. 356, 43 S.E.2d 802 (1997), as printed in the official ruling.
• Bishop v. District of Columbia, 401 A.2d 955 (D.C. 1979), reinstated en banc, 411 A.2d 997, cert. denied, 446 U.S. 996 (1980).
• King v. Forst, 239 Va. 557, 339 S.E.2d 60 (1990), as printed in the official ruling.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-92

Original ruling text

June 2, 2011

Re: Income Tax Credit For D.C. Unincorporated Business Franchise Tax

Dear *:

This is in response to your letter dated May 10, 2010, seeking a ruling on the application of the credit allowed by Va. Code § 58.1-332 for income taxes paid to other states to the D.C. Unincorporated Business Franchise Tax, ("UBFT") and whether Virginia policy has changed as a result of District of Columbia v. Bender. 1 I apologize for the delay in responding to your request.

FACTS

Your clients are a married couple living in Virginia. The husband is the sole member of a Virginia LLC that operates a consulting business located in * ("District"). The LLC was subject to the UBFT. You ask if the couple can claim the Virginia credit for income taxes paid to other states for this tax.

RULING

Virginia has ruled repeatedly that the UBFT does not qualify for the credit. As you note in your letter, this policy was most recently upheld by the Virginia Supreme Court in Mathy 2 . In doing so, the Virginia Court relied on the characterization of the tax by the DC Court in Bishop .3 The recent Bender case clarified the holding of the Bishop decision, and you claim that this undercuts the rationale behind Virginia Supreme Court decision in Mathy . Therefore, you assert that the Virginia Department of Taxation ("TAX") should ignore the Mathy decision and allow taxpayers to claim the income tax credit for the UBFT.

I decline to ignore the Virginia Supreme Court's holding in Mathy for several reasons. First, decisions of the courts of other states are not binding on Virginia administrative agencies. The Mathy decision is. Second, TAX has consistently held administratively, and argued in court, its position that the UBFT does not, and never has, qualified for Virginia's credit for income taxes paid to other states. Third, I am not persuaded that the Virginia Supreme Court would reach a different result if the matter came before it again. The Mathy decision first cited King 4 as dispositive as to whether the UBFT is an income tax, then held that the UBFT, because it is an income tax, violated the Home Rule Act. The Virginia Supreme Court relied on the Bishop case in both Mathy and King . If the Court were to reexamine the issue it could reach the same result (denial of the credit), but for a different reason. . 5

Therefore, I decline your invitation to administratively overrule the Virginia Supreme Court's decision in Mathy , and I reaffirm Virginia's long-standing policy of interpreting Va. Code § 58.1-332 as not allowing credit for the UBFT.

I trust that this reply answers your ruling request. The Code of Virginia sections cited and other reference documents are available on-line in the Tax Policy Library section of the Department of Taxation's web site located at www.tax.virginia.gov . If you should have any questions regarding this ruling, you may contact * in the Office of Policy and Administration, Policy Development, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

PD/1-4443992384

1. District of Columbia v. Bender , 906 A.2d 277 (2006).

2. Mathy v. Commonwealth , 253 Va. 356, 43 S.E.2d 802 (1997).

3. Bishop v. District of Columbia , 401 A.2d 955 (D.C. 1979), reinstated en banc , 411 A.2d 997, cert. denied 446 U.S. 996 (1980)

4. King v. Forst , 239 Va. 557, 339 S.E.2d 60 (1990). .

5. For example, the Court could find that the Bender decision supports the reasoning of Justice Lacy's dissenting opinion in King .