How would Virginia tax installment gain from an S-corporation stock sale before and after the seller became a nonresident?

Plain-English summary

Installment gain recognized while the shareholder remained a Virginia resident would be fully taxable by Virginia because it entered federal adjusted gross income.

After the shareholder genuinely became a nonresident, later installments from the stock sale would not be Virginia-source income. Corporate stock was an intangible asset, and the ruling found this stock was not employed in a trade or business the shareholder carried on in Virginia. The corporation's own 10% Virginia apportionment did not change that conclusion for the shareholder's stock.

The answer could differ if the parties made an IRC § 338(h)(10) election treating the stock transaction as an asset sale. The taxpayer represented that no such election would be made.

What this means for you

Installment timing can cause different state treatment as residency changes, but only if the domicile change is real and the intangible asset is not employed in a Virginia business. Transaction elections can also recharacterize the analysis.

Common questions

Was gain taxable while the seller lived in Virginia? Yes, to the extent included in FAGI.

Were later nonresident installments Virginia-source income? No under the stated stock-sale facts.

Did the S corporation's Virginia activity make the stock a Virginia business asset for the shareholder? No.

What election could change the result? An IRC § 338(h)(10) election.

Citations and references

• Va. Code § 58.1-301 and §§ 58.1-322.01 through 58.1-322.04 — resident conformity and modifications.
• Va. Code §§ 58.1-302, 58.1-321, and 58.1-325 — nonresident Virginia-source income.
• IRC §§ 61, 1001, 1221, and 338(h)(10).
• P.D. 11-48, cited for nonresident gain from intangible property.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-23

Original ruling text

December 13, 2019

Re: Request for Ruling: Individual Income Tax

Dear *:

This will respond to your letter in which you request a ruling regarding the Virginia income tax consequences of an installment sale of the stock of an S corporation.

FACTS

The Taxpayer is a Virginia resident who owns stock in an S corporation that apportions approximately 10% of its income to Virginia. The Taxpayer intends to sell all his stock in the corporation in an installment sale. Seven percent of the principal purchase price will be paid in the first year, then no principal payments will be made for five years, and the remaining principal payments will be paid in installments over the next five years or until fully paid. The Taxpayer intends to become a nonresident of Virginia some time after the first year of the installment sale. The Taxpayer requests a ruling regarding the Virginia income tax treatment of any capital gains attributable to the installment sale.

RULING

Virginia Code § 58.1-301 provides, with certain exceptions, that terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia . For individual income tax purposes, Virginia “conforms” to federal law, in that it starts the computation of Virginia taxable income with federal adjusted gross income (FAGI). Income properly included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically subject to a Virginia modification pursuant to Virginia Code § 58.1-322.01 through § 58.1-322.04.

The stock of a corporation is a capital asset in the hands of its owner. See IRC § 1221. The owner would recognize gain for federal income tax purposes upon sale to the extent the value of the stock exceeded the owner’s basis in it. See IRC § 1001. The gain would be included in the owner’s federal gross income as a gain from a dealing in property. See IRC § 61. Therefore, while the Taxpayer is a Virginia resident, to the extent the capital gain from the installment sale is reflected in his FAGI, it will also be fully taxable by Virginia because the computation of the taxable income of a Virginia resident begins with FAGI, as explained above. If the Taxpayer ceases to be an actual or domiciliary resident of Virginia, however, then he will only be taxable on his Virginia source income as a nonresident.

Pursuant to Virginia Code § 58.1-325, a nonresident individual who has income from carrying on a business, trade, profession, or occupation within Virginia is required to file a Virginia individual income tax return, unless the individual meets the filing exception described in Virginia Code § 58.1-321. The Virginia taxable income of a nonresident is computed by multiplying his Virginia taxable income (computed as if he were a resident) by the ratio of his net income, gain, loss, and deductions from Virginia sources to his net income, gain, loss, and deduction from all sources. Under Virginia Code § 58.1-302, “income and deductions from Virginia sources” includes income from “intangible personal property, including annuities, dividends, interest, royalties and gains from the disposition of intangible personal property to the extent that such income is from property employed by the taxpayer in a business, trade, profession, or occupation carried on in Virginia.”

To the extent payments result from the sale of an intangible asset not employed in a trade or business carried on in Virginia, such payments would not be subject to Virginia income tax when received by a nonresident of Virginia. See Public Document (P.D.) 11-48 (3/11/2011). In this case, the stock itself would not be considered to be an intangible asset employed in a trade or business carried on in Virginia, so gain from the sale of the stock would not be taxable income to a nonresident. The result, however, may be different if an election is made under IRC § 338(h)(10) to treat the stock sale as an asset sale for federal income tax purposes. See P.D. 11-48. The Taxpayer represents that such an election has not been made.

This ruling is based on the facts presented as summarized above. Any change in the introduction of new facts may lead to a different result.

The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department’s web site. If you have any questions regarding this ruling, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/2095B.M

Related Documents

11-48