Could an Arizona resident included on a Virginia unified pass-through return also claim the entity payment and an Arizona tax credit on a separate return?

Plain-English summary

The taxpayer was an Arizona resident whose Virginia-source pass-through income was included on the entity's unified Virginia nonresident return. He then filed his own Virginia nonresident return and claimed both the entity-level payment and a credit for tax paid to Arizona.

Virginia denied the refund. Participation in the unified return was elective and eliminated the need for a separate owner return, but it also required accepting the unified-return restrictions. The entity's payment was not owner withholding, and the taxpayer had relinquished the separate Arizona credit by joining the unified return.

Citations and references

• Va. Code § 58.1-332 B
• Va. Code §§ 58.1-395 and 58.1-320
• P.D. 15-240, Guidelines for Pass-Through Entity Withholding

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-26

Original ruling text

March 14, 2018

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek a refund of individual income tax paid by * (the “Taxpayer”) for the taxable year ended December 31, 2015.

FACTS

The Taxpayer filed a 2015 Virginia nonresident individual income tax return and claimed credit for income tax paid on his behalf by a pass-through entity (PTE) filing a unified Virginia return for its nonresident owners. The Taxpayer also claimed a credit for income tax paid to Arizona, his state of residence. The Department denied the refund due because his income had been included in a unified nonresident return. The Taxpayer appealed, contending that even though he participated in the unified nonresident return, he was permitted to file his own return and claim credit for both income tax paid by the PTE and credit for income tax paid to Arizona.

DETERMINATION

Under Virginia Code § 58.1-332 B, a nonresident is permitted to claim a credit against tax on income from Virginia sources when their state of residency provides a substantially similar credit to Virginia residents or imposes a tax upon their income derived from Virginia sources but does not tax income earned in the state by Virginia residents. Because it is dependent on another state granting a similar or reciprocal credit, it may be limited by the credit permitted by the other state. Currently, only residents of Arizona, California, Oregon, and the District of Columbia may qualify for this credit.

Virginia Code § 58.1-395 grants discretionary authority to the Department to permit unified filing under terms acceptable to the Department. The Virginia income tax on the unified return must be computed at the highest rate under V irginia Code § 58.1-320 without the benefit of itemized deductions, standard deductions, personal exemptions, credits for income taxes paid to states of residence, any tax credit carryover amounts, or any other tax credits that are not attributable to the pass-through entity. See Guidelines for Pass-Through Entity Withholding , published as Public Document (P.D.) 15-240 (12/22/2015). The pass-through entity is required to obtain the qualified nonresident owner's consent to be included on the unified return and be subject to the same restrictions as described above. See id .

A unified return is an administrative convenience that allows nonresident partners to pay their respective Virginia tax at the entity level. The need for filing a separate Virginia return for each partner is eliminated. It is a privilege extended by the Department to taxpayers at the taxpayers' election. The convenience to the nonresident partners usually outweighs any benefits that may be lost.

The Taxpayer contends that he was permitted under the Guidelines to file a nonresident return and claim credit for income tax paid by the PTE and income tax paid to his state of residence, Arizona. Under the Guidelines , however, a nonresident owner is only permitted to claim credit for withholding tax paid by the PTE. Nonresident owners included on a unified return are exempt from the PTE withholding requirements. Therefore, there was no PTE withholding tax for which the Taxpayer could claim credit on his nonresident return. In addition, as a participant on the unified Virginia return, the Taxpayer relinquished his claim to further benefits such as the credit for income tax paid to his state of residence. Therefore, the denial of the refund for income tax paid for the 2015 taxable year is upheld.

The Code of Virginia sections and public document 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/1457.M