Could a Virginia resident receive credits for tax paid through composite nonresident returns, and was Virginia's assessment timely?

Subject

Taxpayer was entitled to credit for taxes paid to other states.

Plain-English summary

A Virginia resident claimed credits for income tax paid to other states through composite nonresident returns filed by a pass-through entity. Virginia initially reduced the credits and assessed additional 2013 tax.

For each state, the taxpayer needed documentation showing his share of the composite return's taxable income and his share of the tax paid on his behalf. The submitted schedule met that requirement. During the appeal Virginia allowed two additional states, then determined that credits were also due for Hawaii, Mississippi, and Montana.

The assessment itself was timely. Although the taxpayer filed on April 10, 2014, the return was due May 1, 2014. The three-year assessment period therefore ran until May 1, 2017, making the April 21, 2017 assessment timely. Virginia ordered the paid assessment revised and a refund issued as warranted.

What this means for you

• A composite or unified nonresident return can support Virginia's credit for tax paid to another state.
• Break out each state's taxable income and tax paid separately.
• Document the taxpayer's pro rata share of both amounts.
• For an early-filed return, Virginia's three-year assessment period can run from the later statutory due date.

Citations and references

• Va. Code §§ 58.1-332 A, 58.1-104, 58.1-312, and 58.1-341 A.
• P.D. 07-207 and P.D. 10-68.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-148

Original ruling text

August 23, 2017

Re: § 58.1-1821 Appeal: Individual Income Tax

Dear *:

This will respond to your letter in which you seek correction of the individual income tax assessment issued to * (the ”Taxpayer”) for the taxable year ended December 31, 2013.

FACTS

The Taxpayer filed a Virginia resident individual income tax return for the 2013 taxable year on April 10, 2014. Under review, the Department adjusted the credit he claimed for income tax paid to other states and issued an assessment on April 21, 2017. The Taxpayer appealed, contending he should have been allowed credit for taxes paid to certain states in which composite nonresidents returns were filed on his behalf. The Taxpayer also contends that the Department issued the assessment after the statute of limitations on assessment expired.

DETERMINATION

Credit for Taxes Paid

Virginia Code § 58.1-332 A allows Virginia residents a credit on their Virginia return for income taxes paid to another state provided the income is either earned or business income. A taxpayer claiming the out-of-state tax credit for income taxes paid to another state on a unified return must attach a statement to his return verifying: (1) the taxpayer's pro rata portion of the unified return's taxable income, and (2) the taxpayer's pro rata portion of the tax paid to the applicable state by the partnership on the individual's behalf. See Public Document (P.D.) 07-207 (12/5/2007). When a unified return is filed in several states by a pass-though entity, a taxpayer's pro rata portion of the unified return's taxable income for each state and the taxpayer's pro rata 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. See P.D. 10-68 (5/12/2010).

The Taxpayer submitted a schedule detailing the information that is required by the Department's policy as to unified nonresident returns. While the appeal was pending, the Department granted the credit with respect to two additional states and issued a revised assessment which the Taxpayer paid. The documentation provided indicates that the Taxpayer was entitled to credit for taxes paid to three additional states. The three states are Hawaii, Mississippi and Montana.

Statute of Limitations on Assessment

The general statute of limitations for issuing tax assessments is provided under Va. Code § 58.1-104. For income tax purposes, however, Va. Code § 58.1-312 governs when assessments may be issued. Virginia Code § 58.1-312 allows the Department to assess omitted taxes within three years of the latter of the due date of the return or the actual date that the return was filed. Virginia Code § 58.1-341 A requires that a taxpayer file an individual income tax return by May 1 of the year following the tax year for which the return is filed. The Taxpayer filed his return on April 10, 2014, but the return was not due until May 1, 2014. The Department, therefore, had until May 1, 2017, to issue an assessment. Thus, the assessment issued on April 21, 2017, was made within the statute of limitations.

CONCLUSION

The Department timely issued the assessment, but the Taxpayer was entitled to credit for taxes paid to three more states than the Department allowed. The assessment, therefore, will be revised accordingly. Because the assessment has been paid, a refund will be issued as warranted.

The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1278.M