Could a partner support Virginia credits for taxes paid through state composite returns with a per-state allocation schedule?

Subject

Taxpayer claimed credit for income taxes paid on a composite nonresident return to two reciprocity states, which do not allow credits to be claimed on the composite returns.

Plain-English summary

A Virginia-resident partner claimed credits for income taxes paid to several states. Virginia initially allowed credits supported by the partner's own nonresident returns but disallowed amounts paid through composite returns filed by the partnership.

Virginia required a state-by-state statement showing the partner's share of composite taxable income and the tax the partnership paid on his behalf. For reciprocity states, the records also had to show that the composite return did not itself grant a credit for Virginia tax.

The partner's schedule separately listed his income and tax for each state and met the allocation requirement. He supplied Arizona guidance showing no composite-return credit, and Virginia independently confirmed the same 2014 rule for Oregon.

The schedule was sent for review and processing, with the assessment to be adjusted as warranted.

Citations and references

• Va. Code § 58.1-332 A.
• P.D. 07-207 and P.D. 10-68.
• Arizona Individual Income Tax Ruling ITR 13-2.
• Or. Admin. R. 150-314.778.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-91

Original ruling text

May 19, 2016

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the individual income tax assessment issued to * (the "Taxpayer") for the taxable year ended December 31, 2014.

FACTS

The Taxpayer was a partner in a partnership (the “Partnership”) that conducted business throughout the United States. The Taxpayer filed a Virginia resident individual income tax return for the 2014 taxable year and claimed credit for income taxes paid to a number of different states. Under review, the Department allowed the credit as to states in which the Taxpayer had filed individual income tax returns but disallowed the credit as to states for which he had participated in composite income tax returns the Partnership filed on behalf of nonresident partners. The Taxpayer appealed, contending that the schedule he provided is sufficient documentation of that portion of the credit that was attributable to the composite nonresident returns.

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. A taxpayer claiming the out-of-state tax credit for income taxes paid to another state on a unified return must attach a statement to his return verifying: (1) the taxpayer's pro rata Portion of the unified return's taxable income, and (2) the taxpayer's pro rata portion of the tax paid to the applicable state by the partnership on the individual's behalf. See Public Document (P.D.) 07-207 (12/5/2007). When a unified return is filed in several states by a pass-though entity, a taxpayer's pro rata portion of the unified return's taxable income for each state and the taxpayer's pro rata portion of the tax paid to each applicable state must be listed separately in order to properly compute the limitation for each state's credit. See P.D. 10-68 (5/12/2010). In addition, if a taxpayer claims a credit for income tax paid to a state that is a reciprocity state for purposes of Va. Code § 58.1-332, documentation must be attached to the Virginia return to verify that the other state does not grant a credit on the composite return to the Virginia resident for tax paid to Virginia. See P.D. 07-207.

In this case, the Taxpayer claimed credit for income taxes paid on a composite nonresident return to two reciprocity states, Arizona and Oregon. The Taxpayer provided documentation indicating Arizona does not allow credits to be claimed on the composite returns. See Arizona Individual Income Tax Ruling (ITR) 13-2 (5/6/2013). The Taxpayer, however, did not provide such documentation with respect to Oregon. The Department, however, has confirmed that Oregon did not allow credit for taxes paid to other states to be claimed on its 2014 composite return. See Or. Admin. R. 150-314.778.

With respect to the other states for which the Taxpayer claimed credit, the Taxpayer's schedule separately lists his pro rata taxable income and tax paid per state. As such, the schedule conforms to the requirements of P.D. 10-68. Accordingly, the Taxpayer's schedule will be forwarded for review and processing and the assessment will be adjusted as warranted.

The Code of Virginia sections 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/1-6253720895.M