Could a Virginia resident claim credit for California tax paid through a partnership's unified nonresident return when California gave no credit there?

Subject

Out of state tax credit allowed

Plain-English summary

Virginia allowed a resident partner credit for California income tax paid through the partnership's unified nonresident return and abated the 2005 assessment.

Virginia normally denied its credit when the other state offered the resident a substantially similar credit. California generally did so on an individual nonresident return, but it did not allow partners to claim that credit through the unified nonresident return used here.

The taxpayer supplied a statement showing his proportional share of the partnership's California taxable income and the tax paid on his behalf. That satisfied the documentation standard from the earlier ruling cited by the Department.

What this means for you

• Analyze the specific return actually filed in the other state, not only that state's general credit rule.
• A unified or composite return may deny partner-level credits available on a separate return.
• Keep schedules showing each owner's share of income and tax paid by the entity.
• Virginia's credit remains limited by the statutory requirements and current reciprocity rules.

Common questions

Why did Virginia initially deny the credit? California generally allowed nonresidents an out-of-state credit, which ordinarily blocked the reciprocal Virginia credit.

What changed the result? California did not allow that credit on this unified nonresident return, and the taxpayer documented his share.

What happened to the assessment? Virginia adjusted the credit and abated the assessment.

Citations and references

• Va. Code § 58.1-332(A).
• P.D. 94-355 (November 23, 1994).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-154

Original ruling text

October 10, 2007

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 against * (the "Taxpayers") for the 2005 taxable year.

FACTS

The Taxpayer, a resident of Virginia, is a partner in a partnership that has offices and conducts business both within and without Virginia. The Taxpayer participated in the filing of a unified nonresident individual income tax return with California, a reciprocity state for purposes of Va. Code § 58.1-332. California does not allow credit on the unified nonresident return for individual income tax paid to other states by the individual partners.

Generally, California allows an out-of-state tax credit on a nonresident income tax return. On this basis, the Department disallowed the credit claimed on the Taxpayers' Virginia individual income tax return for income tax paid to California. An assessment was issued as a result of the adjustment.

The Taxpayers contend that because a nonresident credit was not granted on the California return, they are eligible for an out-of-state credit on their Virginia return. Accordingly, they request abatement of the assessment.

DETERMINATION

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. Further, this Code section states:

The credit . . . shall not be granted to a resident individual when the laws of another state, under which the income in question is subject to tax assessment, provide a credit to such resident individual substantially similar to that granted by . . . this section.

The Department has previously addressed this issue in Public Document (P.D.) 94-355 (11/23/1994). In that ruling, the Department determined that when a reciprocity state does not allow credit on a unified nonresident return for individual income tax paid to another state, the individual may claim the credit on the Virginia resident income tax return.

California practices reciprocity with Virginia for purposes of claiming the individual tax credit on their nonresident individual income tax returns. However, additional information provided with the Taxpayer's appeal confirms that California does not allow credit on its unified nonresident income tax return for individual income tax paid to Virginia.

A statement attached to the 2005 return shows the Taxpayer's prorata portion of the taxable income and share of the tax paid to California by the partnership on behalf of the taxpayer. As such, the Taxpayer has met the documentation requirements set forth in P.D. 94-355. Accordingly, a credit for tax paid to California on the California unified nonresident income tax return will be allowed. The Department will adjust the Taxpayer's out-of-state tax credit accordingly and abate the assessment.

The Code of Virginia section cited and public documents are available online at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this ruling, you may contact * in the Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1368429871E