Did part-year Virginia residents have to prorate S-corporation capital gain that documentation showed arose after they moved away?

Subject

Documents placed the S-corporation gain after the couple left Virginia

Plain-English summary

Virginia reconsidered its earlier ruling and abated the 2004 assessment. The couple moved from Virginia to State A in April 2004. The husband's State A S corporation sold its assets in September and generated capital gain.

Virginia had originally prorated the gain according to the number of days the couple lived in Virginia. Its general rule treated property and business income as generated evenly during a part-year unless the taxpayer documented a different timing.

On reconsideration, the couple supplied documents clearly specifying when the asset-sale gain occurred. Because it was received after the move, Virginia attributed it to State A rather than prorating it to the Virginia-resident portion of the year.

What this means for you

• Part-year business or property income could be prorated when timing was not specifically proven.
• Transaction records could establish a clear cutoff instead of an even-year allocation.
• Reconsideration succeeded because the new documentation resolved the timing issue.
• The result depended on the gain arising after Virginia residency ended.

Common questions

Why did Virginia reverse P.D. 08-8?

The later submission clearly documented that the capital gain occurred after the couple moved.

Was every S-corporation item automatically assigned to the residence on the payment date?

No. The ruling emphasized specific documentation; absent proof, Virginia generally spread business income through the year.

Citations and references

• Va. Code § 58.1-303.
• 23 VAC 10-110-40.
• P.D. 00-212, 06-99, and the reconsidered P.D. 08-8.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-78

Original ruling text

May 26, 2009

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter seeking reconsideration of the Department's determination letter, published as Public Document (P.D.) 08-8 (1/11/2008), issued to your clients, * (the "Taxpayers").

FACTS

In April 2004, the Taxpayers, a husband and wife, abandoned their Virginia residency and established residence in (State A). The husband was the sole shareholder of an S corporation (Corporation A) located in State A. In September 2004, Corporation A sold its assets and realized a capital gain through the resulting distribution. The Taxpayers filed a part-year Virginia individual income tax return for the 2004 taxable year and attributed all of the gain to State A.

The Taxpayers were audited and the auditor attributed a portion of the gain to Virginia in proportion to the number of days the Taxpayers resided in Virginia. The Taxpayers contested the assessment, asserting that because the sale occurred after they moved to State A, no part of the gain should be included in Virginia taxable income. They argued they were not required to prorate the income from the gain from the sale of Corporation A because there was a clearly defined cut-off of activity as described in P.D. 95-184 (7/14/1995).

In P.D. 08-8, the Department disagreed with the Taxpayers' interpretation of the P.D. 95-184. Further, the Department determined that the gain must be prorated in accordance with the number of days the Taxpayers resided in Virginia in 2004. The Taxpayers have asked the Department to reconsider its determination in P.D. 08-8, contending that the capital gain should be attributed to State A because they resided in State A when the capital gain was realized.

DETERMINATION

Virginia Code § 58.1-303 and Title 23 of the Virginia Administrative Code (VAC) 10-110-40 were designed to tax only the portion of income attributable to the time a taxpayer lived in Virginia during a taxable year. See P.D. 00-212 (12/7/2000). In the case of income from property owned or from any business, trade, profession or occupation, the Department will consider income to be generated evenly throughout the year unless specifically documented otherwise. See P.D. 06-99 (9/29/2006).

In the instant case, documentation has been provided clearly specifying when the capital gain from sale of Corporation A's assets occurred. Based on this documentation, the Taxpayers received the gain after they moved to State A. As such, the capital gain should be attributed to State A. Accordingly, the assessment of individual income tax for the 2004 taxable year has been abated.

The Code of Virginia section, regulation and public document cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions regarding this determination, please contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2933461097.B