How did SC PLR 92-1 treat a couple who moved from Wisconsin to South Carolina with a stock-loss carryover and installment gain from stock sold before the move?

Plain-English summary

South Carolina PLR 92-1 addressed a Wisconsin couple who planned to become South Carolina residents during 1991 while carrying two stock transactions across the move:

• a $242,509 short-term capital loss from closing a short sale; and
• a $435,000 long-term capital gain from stock sold on the federal installment method, with payments beginning in 1992.

For these taxpayers, South Carolina followed the federal capital-loss carryover and installment-gain schedule. Wisconsin's different deduction and timing choices did not change the South Carolina computations.

Filing after a midyear move

The couple could file their 1991 South Carolina return in either of two historical ways under Section 12-7-445:

1. File as South Carolina residents for the entire year, report all income, and take any applicable other-state credit; or
2. Compute as nonresidents for the entire year, but include all income, gains, losses, and deductions—regardless of source—for the period when they were South Carolina residents.

The PLR described the second method as a nonresident return with the statutory part-year-resident adjustment.

Capital loss carryover

The taxpayers sold short 28,600 shares for $928,280 and closed the position by buying the shares for $1,173,789, producing the stated $242,509 loss.

Federal law limited their 1991 capital-loss deduction to $3,000, with the remainder carried forward. Wisconsin limited its deduction to $500.

South Carolina used the federal taxable-income starting point and provided no adjustment merely because domicile changed. The South Carolina capital-loss carryover therefore equaled the federal carryover, not Wisconsin's separately limited amount.

Installment gain after the move

While still Wisconsin residents, the couple sold stock in a Wisconsin corporation for a $435,000 long-term gain using the federal installment method. The contract called for five years of payments beginning in 1992: $195,000 in year one, $69,112 in years two through four, and $69,113 in the final year.

South Carolina required the gain to be reported on the same installment schedule as the federal return. A Wisconsin election to accelerate the entire gain into 1991 had no effect on South Carolina reporting.

The ruling also applied South Carolina's then-current percentage reduction for net long-term capital gain under Section 12-7-437.

No Wisconsin tax credit

The historical South Carolina credit required tax paid to another state on income sourced there regardless of the recipient's residence.

The Wisconsin statute quoted in the PLR sourced nonbusiness stock gains of nonresidents according to residence. The couple therefore did not qualify for a South Carolina credit even if they elected to pay Wisconsin tax, because Wisconsin did not tax that gain irrespective of residence.

What this means for you

People moving between states

Separate the filing-status election from the treatment of carryovers and installment income. The historical PLR followed federal computations even though the transactions began before South Carolina residency.

Taxpayers with different state carryover limits

Another state's lower usable loss did not reduce the federal carryover used by South Carolina in this ruling.

Installment sellers

The state of residence when the original sale occurred did not let the taxpayers accelerate or defer South Carolina gain differently from the federal installment schedule.

Other-state credit claims

Paying another state was not enough. The PLR required the income to be sourced and taxed there independently of residence.

Common questions

Q: Did the couple have to file only as full-year residents?
A: No. The PLR described both a full-year resident method and a statutory nonresident-computation method for part-year residents.

Q: Which capital-loss carryover did South Carolina use?
A: The federal carryover, unaffected by Wisconsin's $500 deduction limit.

Q: Could Wisconsin's accelerated gain election change South Carolina reporting?
A: No. South Carolina followed the federal installment method.

Q: Did South Carolina still apply its capital-gain reduction?
A: Yes, using the historical percentage applicable to the recognition year.

Q: Was a Wisconsin tax credit allowed?
A: No under these facts, because the stock gain was not taxed by Wisconsin irrespective of residence.

Citations and references

• S.C. Code Ann. §§ 12-7-410, 12-7-430, and 12-7-435 — historical federal-income starting point and modifications
• S.C. Code Ann. § 12-7-445 — historical part-year resident election
• S.C. Code Ann. § 12-7-1120(5) — historical allocation of nonbusiness intangible gains and losses
• S.C. Code Ann. § 12-7-437 — historical net long-term capital-gain percentage reduction
• S.C. Code Ann. § 12-7-1240 — historical other-state tax credit
• I.R.C. § 453 — installment method
• Wis. Stat. § 71.04 — historical sourcing rule quoted by the PLR
• Picchione v. Commissioner of Internal Revenue, 440 F.2d 170 (1st Cir. 1971)
• Snell v. Commissioner of Internal Revenue, 97 F.2d 891 (5th Cir. 1938)

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR92-1.pdf

Original ruling text

SC PRIVATE LETTER RULING 92-1

TO:

Mr. & Mrs. X

TAX ANALYST:

Jean P. Croft

SUBJECT:

Treatment of Capital Gain and Capital Loss Carryover
(Income Tax)

REFERENCE:

S.C. Code Ann. 12-7-437 (Supp. 1990)
S.C. Code Ann. 12-7-445 (Supp. 1990)
S.C. Code Ann. 12-7-430 (Supp. 1990)

AUTHORITY:

S.C. Code Ann. 12-4-320(2) (July 1991)
S.C. Revenue Procedure 87-3

SCOPE:

A Private Letter Ruling is a temporary document issued to a taxpayer,
upon request, and it applies only to the specific facts or circumstances
related in the request.
Private Letter Rulings have no precedential value and are not intended for
general distribution.

Questions:
1.

What type of income tax return should Mr. and Mrs. X file if they are residents of
another state at the beginning of the taxable year but are legal residents of South
Carolina at the end of the year?

2.

How should Mr. and Mrs. X treat a capital loss carryover for South Carolina income tax
purposes if they were residents of another state at the time the loss was incurred?

3.

How should Mr. and Mrs. X treat, for South Carolina income tax purposes, a capital
gain which is reported on the installment basis for federal income tax purposes if the
sale occurred prior to the time they became residents of South Carolina?

1

Facts:
On February 7, 1991, Mr. and Mrs. X ("taxpayers"), legal residents of Wisconsin, sold short
28,600 shares of stock for $928,280. On March 12, 1991, the transaction was closed out when
the taxpayers purchased the 28,600 shares at a cost of $1,173,789. The loss of $242,509 on the
transaction will be reported as a short-term capital loss. This loss is not connected with any
business of the taxpayers. Since the taxpayers have no capital gains in 1991, the loss for federal
income tax purposes will be limited to $3,000 and the remainder will be carried over to
subsequent years. For Wisconsin income tax purposes, the loss will be limited to $500.
Also in 1991, while residents of Wisconsin, the taxpayers sold stock in a Wisconsin corporation
on the installment method. Although the sale took place during 1991, the contract provides that
payments be made for 5 years beginning in 1992. They will not elect out of the installment
method; therefore, pursuant to Internal Revenue Code 453, the gain of $435,000 on the sale will
be recognized in the following manner: $195,000 in the first year; $69,112 in years 2 through 4;
and $69,113 in the last year. Since the stock has been held for several years, the gain will be a
long-term capital gain. Although the taxpayers are reporting the gain on the sale on the
installment basis for federal income tax purposes, for Wisconsin income tax purposes they may
either elect to report the total gain in 1991 or report the gain on the installment method.
During 1991 the taxpayers will move to South Carolina and become residents.
Discussion:

1. The first issue concerns the type of income tax return the taxpayers may file with South
   Carolina for 1991 - a resident or part-year resident return.
   S.C. Code 12-7-445 answers this question by providing that a taxpayer who is a part-year
   resident of South Carolina may elect to:
   (a)

Report and compute his South Carolina tax as if he were a resident for the entire
year and take the applicable credit as provided in [12-7-1240]; or

(b)

Report and compute his South Carolina tax as if he were a nonresident for the
entire year, except that for purposes of this computation the South Carolina
taxable income for that period during which the individual was a resident
includes all items of income, gain, loss, or deductions whether or not derived
from sources within South Carolina with the modifications specified in 12-7430 and 12-7-435.

2. & 3. The next two issues concern whether gains/losses on sales of intangible assets are taxable
   to South Carolina when the transactions which gave rise to such gains/losses take place in
   another state.
   In the present case, the taxpayers have 1) a capital loss carryover and, 2) a capital gain which is
   to be recognized for federal income tax purposes over the next 5 years. S.C. Code 12-7-1120(5)
   provides:
   2

Gains and losses from sales of intangible personal property not connected with the
business of the taxpayer other than any intangible personal property held for sale to
customers in the regular course of business, less all related expenses, shall be allocated to
the state of a corporation taxpayer's principal place of business or of an individual
taxpayer's domicile.
S.C. Code 12-7-410 provides that South Carolina gross income, adjusted gross income, and
taxable income of an individual is the same as determined under the Internal Revenue Code, with
the modifications provided in 12-7-430 and 12-7-435. Neither of these sections provides for any
adjustment to be made to the computation of a capital loss carryover or of a capital gain because
the taxpayer changed domicile or otherwise.
Although not directly on point, this reasoning is further supported by the principle that the
character of income is determined at the time it is reported rather than at the time the transaction
giving rise to the income occurred. In Picchione et al. v. Commissioner of Internal Revenue, 440
F.2d 170, (1st Cir. 1971), the United States Court of Appeals held that payments received on the
installment basis for a copyright constituted ordinary income in the current year even though
such payments were correctly reported as capital gain in preceding years. A change in the
definition of capital assets which excluded copyrights from this category applied to the payments
currently being received even though the copyright constituted a capital asset at the time the sale
took place. In Snell v. Commissioner of Internal Revenue, 97 F.2d 891 (5th Cir. 1938), the court
held that in the case of installment sales, the law in effect at the time the payment is received, not
at the time of the sale, determines the character of the income. South Carolina's adoption of the
Internal Revenue Code warrants compliance with these cases at the state level.
Although South Carolina taxable income is defined as federal taxable income, certain deductions
with respect to capital gains are allowed to be subtracted from South Carolina taxable income.
S.C. Code §12-7-437 provides:
A There is allowed a deduction from the South Carolina taxable income of individuals,
partnerships (including S corporations), estates, and trusts equal to the following
amounts of net long term capital gain recognized during the below-referenced taxable
years:
(1)
(2)
(3)

fourteen percent for taxable years beginning in 1990;
twenty-nine percent for taxable years beginning in 1991;
forty-four percent for taxable years beginning after 1991.

B. For purposes of this section, net long term capital gain is as defined in the Internal
Revenue Code of 1986, as amended through December 31, 1988, except that the
required holding period is two or more years.
C. The commission may promulgate regulations necessary to implement the provisions
of this section.

3

Therefore, the capital loss carryover and the net long term capital gain are computed in the same
manner as for federal income tax purposes but the net long term capital gain is decreased by the
applicable percentage for the given taxable year.
S.C. Code 12-7-1240 grants a credit for income taxes paid by a resident of South Carolina to
another state subject to certain conditions. S.C. Code 12-7-1240(1) provides that the credit is
limited to taxes paid to another state on income derived from sources within the state which is
taxed under the laws of that state irrespective of the residence of the recipient. Wisconsin Code
of Laws 71.04 states:
All other income or loss of nonresident individuals . . . including income or loss derived
from land contracts, mortgages, stocks, bonds and securities or from the sale of similar
intangible personal property, shall follow the residence of such persons . . .
Hence, the taxpayers do not qualify for a credit even if they elect to pay taxes in Wisconsin due
to the fact that the gain from the sale of the stock is not taxed by Wisconsin irrespective of the
residence of the taxpayers.
Conclusions:

1. The South Carolina income tax laws will allow Mr. and Mrs. X to file a 1991 South
   Carolina income tax return in one of the following manners:
   a. They may file a resident South Carolina income tax return for 1991, reporting all
   income earned.
   b. They may file a nonresident South Carolina income tax return for 1991. They
   must report and compute their South Carolina tax as if they were nonresidents for
   the entire year, except that for purposes of this computation the South Carolina
   taxable income for the period during which they were residents must include all
   items of income, gain, loss, or deductions whether or not derived from sources
   within South Carolina.
2. The amount of Mr. and Mrs. X's capital loss carryover resulting form the sale of shares of
   stock is the same for South Carolina income tax purposes as for federal income tax
   purposes. The limitation on the amount of the loss which Wisconsin will allow them to
   deduct will not affect the amount of the loss carryover available for South Carolina
   income tax purposes.
3. A capital gain from the sale of shares of stock reported on the installment method for
   federal income tax purposes must be reported in the same manner for South Carolina
   income tax purposes. Accelerating the recognition of the gain into the current taxable
   year for Wisconsin income tax purposes will have no bearing on this treatment; hence,
   Mr. and Mrs. X will recognize the same amount of gain on their South Carolina income
   tax return as they report on their federal return, notwithstanding the manner in which they
   reported the gain on their Wisconsin income tax return. Any net long term capital gain
   should be reduced by the applicable percentage as provided in 12-7-437.
   4