Could a Virginia partner claim resident credits for Arizona and California tax paid through unified nonresident partnership returns?

Subject

Virginia partner may claim credit on income tax return for tax paid to each state

Plain-English summary

Virginia allowed the resident partner to claim credits for her prorata Arizona and California income taxes paid through partnership unified nonresident returns. The key was that those unified returns did not provide the partner with a substantially similar other-state credit.

Virginia generally denied its resident credit when the other state offered a similar credit. Although Arizona and California practiced reciprocity on individual nonresident returns, their unified partnership returns did not allow the credit.

The partner had to attach statements verifying her share of the unified return's taxable income and tax paid on her behalf, plus documentation showing that each other state would not grant the credit.

What this means for you

• Analyze the specific composite or unified return, not only the other state's general individual-credit rule.
• Obtain partnership statements showing each owner's income and tax share.
• Document that the other state will not provide the reciprocal credit before claiming Virginia's credit.

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. 07-207

Original ruling text

December 5, 2007

Re: Request For Ruling: Individual Income Tax

Dear *:

This will reply to your letter in which you seek a ruling regarding application of the credit for taxes paid to other states on a unified nonresident income tax return. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is an individual domiciled in Virginia who 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 Arizona and California, both of which are reciprocity states for purposes of Va. Code § 58.1-332. Neither State allows credit on the unified nonresident return for individual income tax paid by the individual partners.

A ruling is requested to determine if a credit is allowable under Va. Code § 58.1-332 for the Taxpayer's prorata share of the individual income tax paid to each state on the composite nonresident income tax returns filed with those states.

RULING

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.

Both Arizona and California practice reciprocity with Virginia for purposes of claiming the individual tax credit on their nonresident individual income tax returns, but neither state provides for this credit on its unified nonresident income tax return. As such, the Virginia resident partner may claim the credit on the Virginia individual income tax return for individual income tax paid to each state.

When claiming the credit with respect to Va. Code § 58.1-332 for individual income taxes paid to another state with a composite return, a statement must be attached verifying (1) the individual's prorata portion of the unified return's taxable income, and (2) the individual's prorata portion of the tax paid to the applicable state by the partnership on the individual's behalf. In addition, documentation must be attached to the Virginia return to verify that the other state will not grant this credit. See P.D. 94-355.

The Code of Virginia section and public document cited 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/1-1192139133E