Was a Virginia resident entitled to larger credits for New York income tax on his 2012 and 2014 Virginia returns?

Subject

Out-of-State Tax Credit; Appeals

Plain-English summary

A Virginia resident claimed credits for New York income tax on his 2012 and 2014 resident returns. He argued that Virginia had improperly excluded dividend and capital-gain income when limiting the credit and filed protective refund claims in January 2016.

The claims were timely because a filed return counts as a self-assessment and both returns had been filed within the relevant three-year periods. Virginia treated the request as an administrative appeal.

For 2012, however, the Department had neither issued an assessment nor denied a refund claim. It therefore had nothing to decide in an assessment appeal for that year.

For 2014, Virginia applied its longstanding method for measuring the New York nonresident income used in the credit-limitation fraction. No particular income items were excluded; the allocation method itself reduced the credit. Virginia found the adjustment proper and denied the 2014 refund claim.

Citations and references

• Va. Code §§ 58.1-1820, 58.1-1824, 58.1-1821, 58.1-1822, and 58.1-332 A.
• 23 VAC 10-20-165 A.
• P.D. 94-91 and P.D. 97-301.
• Howell's Motor Freight, Inc. v. Virginia Department of Taxation, Law No. 82-0846 (Roanoke Cir. Ct. Oct. 27, 1983).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-52

Original ruling text

April 11, 2016

Re: § 58.1-1824 Application: Individual Income Tax

Dear *:

This will reply to your letter in which * (the "Taxpayer") requests a refund of individual income taxes paid for the taxable years ended December 31, 2012 and 2014.

FACTS

On each of his 2012 and 2014 Virginia resident individual income tax returns, the Taxpayer claimed a credit for income tax paid to New York. The Department adjusted the credit claimed on the 2014 return. No assessment was issued, but the Taxpayer's refund was reduced. The Department's records do not indicate an adjustment to the 2012 return. The Taxpayer filed claims for refunds as to the 2012 and 2014 taxable years, contending that in each case, the Department improperly excluded dividend and capital gain income from the amount of New York income that was used to compute the credit limitation.

DETERMINATION

Protective Claim

Virginia Code § 58.1-1824 permits any person who has paid an assessment of taxes administered by the Department of Taxation to file a protective claim for refund within three years of the date of an assessment. Self-assessments made by a taxpayer upon the filing of a return are considered assessments for purposes of applying the protective claim provisions. See Va. Code § 58.1-1820. In the case of taxes requiring an annual or monthly return, self-assessments are deemed made when the return is filed. The Taxpayer filed his 2012 and 2014 returns in May 2013 and May 2015. The protective claims were filed in January 2016. Therefore, the protective claims were timely filed.

Pursuant to the authority granted the Department under Va. Code § 58.1-1824, a protective claim for refund can be held pending the outcome of another case before the courts or the claim may be decided based upon its merits pursuant to Va. Code § 58.1­1821. As permitted by statute, the Taxpayer's request has been treated as an appeal under Va. Code § 58.1-1821.

Appeals

Virginia Code § 58.1-1821 permits taxpayers to appeal assessments issued by the Department. If the Department finds that an assessment was erroneously or improperly made, then it may be corrected pursuant to Va. Code § 58.1-1822. Under Title 23 of the Virginia Administrative Code (VAC) 10-20-165 A, the denial of a refund claim is deemed to be an assessment and a taxpayer may file an appeal in response to the denial of such claim.

In this case the Department did not issue an assessment to or deny a refund claim for the 2012 taxable year. Therefore, the Department cannot respond to the Taxpayer's appeal of a 2012 assessment.

Out-of-State Tax Credit

As a matter of fairness and equity most states, including Virginia, provide a mechanism to relieve residents from being taxed by both their state of residence and the state in which the income was derived. Virginia's method of limiting taxation of income by more than one state has been to permit a credit for taxes paid to other states pursuant to Va. Code § 58.1-332. By reason of their character as legislative grants, however, statutes relating to deductions and subtractions allowable in computing income and credits allowed against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See Howell's Motor Freight, Inc., et al. v. Virginia Department of Taxation , Circuit Court of the City of Roanoke, Law No. 82-0846 (10/27/1983).

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 or gain on the sale of a capital asset. Virginia law does not necessarily allow a taxpayer to claim a credit for the total amount of tax paid to another state. Rather, the credit is limited to the lesser of the amount of tax actually paid to the other state or the amount of Virginia income tax actually imposed on the taxpayer on the income earned or derived in the other state. See Public Document (P.D.) 97-301 (7/7/1997). The limitation is computed by multiplying the individual's Virginia tax liability by a fraction, the numerator of which is the income upon which the other state's tax is imposed, and the denominator of which is Virginia taxable income.

For the purposes of calculating the Virginia credit, P.D. 94-91 (3/29/1994) provides a calculation to determine the amount of income on which the New York nonresident tax is based. According to this ruling, the allocation percentage calculated on the New York nonresident return, which is used to convert the resident tax to the nonresident tax, must be applied to the New York taxable income calculated as a resident in order to determine the New York nonresident taxable income. The result is used in the numerator of the fraction to compute the limitation imposed by Va. Code § 58.1-332 A.

For the 2014 taxable year, the Department adjusted the numerator of such fraction according to the methodology described in P.D. 94-91. The adjustment reduced the Taxpayer's credit for tax paid to New York. No specific items of income were excluded from the computations. Because the credit was properly adjusted in accordance with the Department's longstanding policy, the Taxpayer's claim for refund of income tax paid for the 2014 taxable year is denied. For the Taxpayer's reference, a schedule is enclosed showing how the adjusted credit was computed.

The Code of Virginia sections, regulation and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. 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

AR/1-6231652150.M