Does using a self-directed IRA and tax-exempt trust custodian shield a taxpayer's regular home-purchase, renovation, and resale activity from Virginia BPOL tax?

Plain-English summary

A taxpayer used a self-directed IRA to buy, renovate, and resell houses. A trust company served as custodian: it paid purchase and renovation costs at the taxpayer's direction and received sale proceeds back into the IRA. The taxpayer argued that the trust company conducted the business and that the IRA was tax-exempt.

Virginia upheld BPOL tax on the taxpayer. He controlled every business decision; the custodian was only an agent, and the federal income-tax exemption for an IRA did not exempt the business privilege.

Who actually conducted the business

The taxpayer:

• selected properties for resale;
• determined renovation work;
• found and supervised tradespeople;
• directed payments from the IRA;
• set listing prices; and
• directed reinvestment of proceeds.

That was a continuous course of time, attention, and labor for profit — a business under Va. Code § 58.1-3700.1. The trust company did not choose or manage the projects; it acted as IRA custodian and paid third parties under the taxpayer's instructions.

Why receipts paid to the IRA still counted

BPOL gross receipts include money or consideration received from transactions arising from the licensed business (23 VAC 10-500-10).

Although buyers paid proceeds to the custodian, the IRA existed for the taxpayer's benefit and he could withdraw from it, subject to possible early-withdrawal consequences. The Department described the account as effectively the business bank account: expenses went out and property-sale receipts came in.

Why neither exemption argument worked

The custodian's potential bank-franchise-tax treatment under Va. Code § 58.1-1202 was irrelevant because it did not conduct the flipping business.

IRC § 408(e)(1) exempts a qualifying IRA from federal income tax. BPOL is not an income tax; it taxes the local privilege of engaging in business. The federal IRA rule therefore did not shield the gross receipts.

What this means for you

• A self-directed account does not shift your activities to the custodian. Control and decision-making identify the business operator.
• Following instructions is agency, not ownership of the business. Custodial status does not absorb your BPOL liability.
• Tax-exempt income and tax-exempt business activity are different. An IRA's federal treatment does not answer local license tax.
• Routing proceeds through an IRA does not erase gross receipts. Beneficial ownership and access still matter.

Common questions

Q: Did the trust company become the home-flipping business because title and payments ran through it?

A: No. It acted at the taxpayer's direction; he selected, renovated, priced, and sold the properties.

Q: Is BPOL tax an income tax?

A: No. The ruling describes it as a tax on the privilege of doing business.

Q: Did the federal IRA exemption apply?

A: No. It concerns federal income tax, not local BPOL gross receipts.

Citations and references

• Va. Code §§ 58.1-3703, 58.1-3700.1 — BPOL authority and business definition
• 23 VAC 10-500-10 — gross receipts
• Va. Code § 58.1-1202 — bank-franchise-tax argument
• IRC § 408(e)(1) — federal IRA income-tax exemption
• Related Virginia ruling: P.D. 15-19

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 19-55

Original ruling text

May 14, 2019

Re: Appeal of Final Local Determination

Taxpayer: *

Locality Assessing Tax: *

Business, Professional and Occupational License (BPOL) tax

Dear *:

This final state determination is issued upon the application for correction filed by * (the “Taxpayer”) with the Department of Taxation. You appeal an assessment of Business, Professional and Occupational License (BPOL) tax issued to the Taxpayer by *** (the “County”) for the 2017 tax year.

The BPOL tax is imposed and administered by local officials. Virginia Code § 58.1-3703.1 authorizes the Department to issue determinations on taxpayer appeals of BPOL tax assessments. On appeal, a BPOL tax assessment is deemed prima facie correct, i.e. , the local assessment will stand unless the taxpayer proves that it is incorrect.

The following determination is based on the facts presented to the Department summarized below. The Code of Virginia sections, regulation and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site.

FACTS

The Taxpayer owned an individual retirement account (IRA) for which a trust company was custodian. The Taxpayer selected residences to renovate for resale and directed the trust company to use the funds from the IRA for their purchase and renovation. The Taxpayer determined what work needed to be done and was responsible for finding the tradesmen to complete the work. He then directed the trust company to remit payment to them for the work performed. Upon completion of a renovation, the Taxpayer determined the price to list the property for sale. Once the property was sold, the proceeds were paid to the trust company and were reinvested in the Taxpayer’s IRA.

The County audited the Taxpayer, determined he was engaged in a licensable business activity within its jurisdiction, and issued a BPOL tax assessment for the 2017 tax year. The Taxpayer appealed the assessment to the County. In its final determination, the County determined that the Taxpayer was subject to the BPOL tax because he was engaged in the business of purchasing, renovating and selling homes.

The Taxpayer filed an appeal with the Tax Commissioner, contending he was not subject to BPOL tax because the business was conducted by the trust company, an entity exempt from BPOL tax. The Taxpayer also argues that his IRA was exempt from BPOL taxation.

ANALYSIS

Engaged in Business

The BPOL tax is a tax on the privilege of doing business within a locality. A local government body, by ordinance, may levy and provide for the assessment and collection of BPOL taxes on businesses, trades, professions, occupations and callings and upon persons, firms, and corporations engaged in business within the locality. See Virginia Code § 58.1-3703. A business is defined in Virginia Code § 58.1- 3700.1 as a course of dealing which requires the time, attention and labor of the person so engaged for the purpose of earning a livelihood or profit. It implies a continuous and regular course of dealing, rather than an irregular or isolated transaction.

The Taxpayer was conducting business activities in the County during the taxable year at issue, and the parties do not dispute that any gross receipts derived from such activities would be properly sitused to the County. The question in this case, however, is whether the Taxpayer remained subject to BPOL tax on the gross receipts derived for such activities when he was using a “self-directed” IRA to conduct business.

The Taxpayer contends that the trust company, an entity he claims was exempt from BPOL tax, conducted the licensable business activity. The Department disagrees. The trust company was merely the custodian of the Taxpayer’s IRA. The Taxpayer, not the custodian, oversaw the renovation and repair of the properties. The custodian applied the IRA funds to purchase and renovate the properties at the Taxpayer’s direction, including paying third parties to complete the renovation work. In addition, although the sales proceeds were paid to the custodian, the funds were kept for the Taxpayer’s benefit, a fact clearly indicated on the sample Form 1099 provided that reported the sales proceeds.

The Taxpayer argues that trust companies are generally exempt from BPOL tax because they are subject to the bank franchise tax. See Virginia Code § 58.1-1202. As explained above, the trust company was merely the custodian of the Taxpayer’s account. Thus, the extent the custodian may be subject to the bank franchise tax has no bearing on the outcome of this case.

The County’s BPOL tax was assessed based on the amount of gross receipts generated by the business. Title 23 of the Virginia Administrative Code (VAC) 10-500-10 defines “gross receipts” as:

the whole, entire, total receipts, of money or other consideration received by the taxpayer as a result of transactions with others besides himself and that are derived from the exercise of the licensed privilege to engage in a business or profession in the ordinary course of business . . . .

It appears that gross receipts were paid to the IRA, not the Taxpayer. As the owner of the IRA, however, the Taxpayer was able to take withdrawals from it at any time. The fact that penalties may have applied for taking an early withdrawal from the IRA does not mean that the funds were not ultimately the Taxpayer’s. The IRA was functioning essentially as the Taxpayer’s business bank account, out of which he paid expenses and into which he deposited proceeds. In such circumstances, the person conducting the business activities would be considered to have received the revenues generated by such activities.

Tax Exemption for IRA

The Taxpayer contends his IRA is exempt from BPOL taxation. Pursuant to Internal Revenue Code (IRC) § 408(e)(1), IRAs are exempt from federal income taxation. The BPOL tax, however, is separate and distinct from income tax because an income tax is a tax based on a taxpayer’s income while a BPOL tax is based on the privilege of engaging in business. See Public Document (P.D.) 15-19 (2/11/2015). As such, the federal income tax exemption for IRAs does not apply to BPOL tax.

DETERMINATION

Based on the evidence, the Taxpayer, not the IRA custodian, was properly subject to BPOL licensure and taxation because all of the business activities at issue were being done at the Taxpayer’s direction and control. The Taxpayer was effectively using the IRA as a business bank account and the custodian was an agent making payments at the Taxpayer’s direction. The fact that expenses and revenues were channeled through the Taxpayer’s IRA does not change the result. The Taxpayer’s IRA would have been exempt from federal income tax, provided that it was administered in accordance with all the legal requirements applicable to IRAs. The federal income tax exemption, however, did not shield the gross receipts attributable to the Taxpayer’s business activities from BPOL taxation.

As stated above, the County’s assessment is deemed prima facie correct, and the Taxpayer must prove it was erroneous on appeal. It is my determination that the Taxpayer has not met this burden of proof for the reasons stated. Therefore, the County’s assessment is upheld.

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

1826.A

Related Documents

15-19