Title: Mathy v. Virginia Dept. of Taxation

State: virginia

Issuer: Virginia Supreme Court

Document:

Present:  All the Justices 
 
JOSEPH J. MATHY, ET AL. 
 
v. 
Record No. 961290 
OPINION BY JUSTICE BARBARA MILANO KEENAN 
                                       April 18, 1997 
COMMONWEALTH OF VIRGINIA 
DEPARTMENT OF TAXATION 
 
 
FROM THE CIRCUIT COURT OF FAIRFAX COUNTY 
 
Gerald B. Lee, Judge 
 
 
In this appeal, we consider whether two Virginia taxpayers 
are entitled to a credit under Code § 58.1-332(A) for taxes paid 
to the District of Columbia on income received from a partnership 
conducted in the District of Columbia. 
 
The facts in this case are not in dispute.  The appellants, 
Joseph J. Mathy and Sarah G. Mathy, are residents of Fairfax 
County.  Joseph Mathy is a general partner in The Mills Building 
Associates, a District of Columbia general partnership (the 
partnership).  The partnership's sole source of income during the 
relevant years was rental income earned from the operation of an 
office building in the District of Columbia. 
 
The partnership filed District of Columbia tax returns for 
1991, 1992, and 1993 and paid the taxes due on the income earned 
from the commercial office rental pursuant to D.C. Code Ann. 
§§ 47-1808.1 to -1808.6 (1990).  This subchapter, labelled "[t]ax 
on unincorporated businesses,"
1 provided, for the years at issue, 
                     
     
1Under D.C. Code Ann. § 47-1808.1 (1990), the term 
"unincorporated business" is defined, in relevant part, as 
 
 
any trade or business, conducted or engaged in by any 
individual, whether resident or nonresident, statutory or 
common-law trust, estate, partnership, or limited or special 
partnership . . . other than a trade or business conducted 
 
 
 
 
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(..continued) 
that "for the privilege of carrying on or engaging in any trade 
or business within the District and of receiving income from 
sources within the District, there is levied . . . a tax at the 
rate of 10 per centum upon the taxable income of every 
unincorporated business," plus a surtax between 2.5% and 5% of 
the taxes due.  D.C. Code Ann. § 1808.3 (1990) (amended 1994) 
(the UB tax).  "Taxable income" is defined as "the amount of net 
income derived from sources within the District . . . in excess 
of the exemption granted under § 47-1808.4"  D.C. Code Ann. 
§ 47-1808.2(1). 
 
Under the District of Columbia Code, these taxes may be 
assessed in the name of the unincorporated business, but are 
payable by the persons conducting the business.  D.C. Code Ann. 
§ 47-1808.5.  As a general partner, Joseph Mathy was personally 
liable for payment of these taxes.
2
 
The Mathys filed Virginia income tax returns for 1991, 1992, 
and 1993, and reported Joseph Mathy's share of the net income 
from the District of Columbia partnership.  When the Mathys filed 
those returns, they did not claim an out-of-state tax credit 
or engaged in by any corporation and include[s] any trade or 
business which if conducted or engaged in by a corporation 
would be taxable under subchapter VII of this chapter.  
     
2D.C. Code Ann. § 41-114(2) provides that "[a]ll partners 
are liable . . . [j]ointly for all other debts and obligations of 
the partnership." 
 
 
 
 
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against their Virginia taxes for the taxes paid pursuant to the 
UB tax. 
 
In 1994, the Mathys filed amended Virginia income tax 
returns for the tax years 1991, 1992, and 1993, claiming an out-
of-state tax credit pursuant to Code § 58.1-332(A) and requesting 
refunds from Virginia for each of the tax years in issue.  Code 
§ 58.1-332(A) provides: 
 
 
Whenever a Virginia resident has become liable to 
another state for income tax on any earned or business 
income for the taxable year, derived from sources 
outside the Commonwealth and subject to taxation under 
this chapter, the amount of such tax payable by him 
shall, upon proof of such payment, be credited on the 
taxpayer's return with the income tax so paid to the 
other state. 
 
 
 
However, no franchise tax, license tax, excise 
tax, unincorporated business tax, occupation tax or any 
tax characterized as such by the taxing jurisdiction, 
although applied to earned or business income, shall 
qualify for a credit under this section, nor shall any 
tax which, if characterized as an income tax or a 
commuter tax, would be illegal and unauthorized under 
such other state's controlling or enabling legislation 
qualify for a credit under this section. 
 
 
The Virginia Department of Taxation (the Department) 
determined that the Mathys were not entitled to the tax credit 
under Code § 58.1-332(A).  The Mathys then filed in the trial 
court this application for relief from erroneous assessments of 
Virginia income taxes. 
 
The trial court granted the Department's motion for summary 
judgment, holding that the Mathys were not entitled to a credit 
against their Virginia taxes for payment of the UB tax.  The 
court stated that a plain reading of D.C. Code Ann. § 47-1808.3 
 
 
 
 
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indicates that the tax imposed is not an income tax subject to 
credit under Code § 58.1-332(A), but is an unincorporated 
business tax on income imposed for the privilege of conducting 
business in the District of Columbia.  Thus, the court held that 
Code § 58.1-332(A) does not provide a credit for payment of this 
tax. 
 
On appeal, the Mathys argue that the trial court's ruling 
conflicts with the decisions of this Court in King v. Forst, 239 
Va. 557, 391 S.E.2d 60 (1990), and the District of Columbia Court 
of Appeals in Bishop v. District of Columbia, 401 A.2d 955 (D.C. 
1979), aff'd en banc, 411 A.2d 997 (1980).  The Mathys contend 
that both cases held that the UB tax is an income tax, and not an 
unincorporated business tax, franchise tax, or privilege tax. 
 
In response, the Department contends that the UB tax is an 
unincorporated business tax within the meaning of Code 
§ 58.1-332(A), and is characterized as such by the District of 
Columbia.  In the alternative, the Department argues that even if 
this tax is characterized as an income tax, it is illegal under 
the District of Columbia Self-Government and Governmental 
Reorganization Act (the Home Rule Act), Pub. L. No. 93-198, 87 
Stat. 774 (1973) (codified in part in Title I, D.C. Code Ann. 
(1992)), and, thus, the Mathys are not entitled to a credit under 
Code § 58.1-332(A). 
 
The District of Columbia Court of Appeals, the highest court 
of that jurisdiction, examined the UB tax in Bishop v. District 
 
 
 
 
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of Columbia, 401 A.2d at 958-61.  The court held that the tax is 
an income tax, explaining that "a tax on gross receipts is not an 
income tax; a tax on net income is so, regardless of its 
nomenclature."  Id. at 960. 
 
In reaching this conclusion, the court emphasized that a tax 
must be characterized based on its nature and effect, rather than 
on any label or title affixed to its provisions.  Id. at 958.  
The court noted that, by its terms, the UB tax is a net income 
tax because it is levied on taxable income, which is defined as 
that amount of net income in excess of the exemption granted by 
D.C. Code Ann. § 47-1808.4.  Id. at 960. 
 
Under principles of comity, we applied the rule of Bishop in 
King v. Forst.  There, we explained: 
 
[T]he decisions of the highest court of a jurisdiction, 
interpreting the law of that jurisdiction, are 
controlling authority in the courts of all other States 
as well as in the Federal courts.  This principle  
applies even where the construction given by the 
foreign court to its law is directly opposite to the 
construction the domestic court gives to its own law. 
 
239 Va. at 561, 391 S.E.2d at 62 (citations omitted). 
 
Applying the construction given D.C. Code Ann. § 47-1808.3 
by the District of Columbia Court of Appeals, we held that the UB 
tax is an income tax.  King, 239 Va. at 561, 391 S.E.2d at 62.  
Thus, we concluded that the Virginia taxpayer, a sole proprietor 
of an unincorporated printing business located in the District of 
Columbia, was entitled to a credit under former Va. Code § 58.1-
332 for payment of the UB tax.  Id.
 
 
 
 
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Our decision in King is dispositive of the issue whether the 
UB tax is an income tax.  We find no merit in the Department's 
argument that the second paragraph of Code § 58.1-332(A), added 
by the General Assembly in 1991, effectively overrules King.  The 
"taxing jurisdiction," as the term is used in that paragraph, is 
the District of Columbia, which has characterized the tax as an 
income tax, irrespective of its title, "[t]ax on unincorporated 
businesses."  Bishop, 401 A.2d at 960.  Thus, the second 
paragraph of Code § 58.1-332(A) does not affect our ruling in 
King that the UB tax is an income tax. 
 
Our conclusion is not altered by the fact that Bishop was 
based on a challenge to the UB tax as applied to professionals 
and personal services businesses, rather than to other types of 
unincorporated businesses such as the one in which Joseph Mathy 
is a general partner.  The court's holding in Bishop was based on 
the inherent nature of the UB tax, rather than on the type of 
unincorporated business income at issue. 
 
In addition, in King, we applied the rule of Bishop to 
income derived from a printing business conducted in the District 
of Columbia, which did not involve professional or personal 
services.  Our holding was based on the structure and effect of 
the tax, as characterized by the District of Columbia Court of 
Appeals, rather than on the type of unincorporated business 
conducted by the taxpayer.  See King, 239 Va. at 560, 391 S.E.2d 
at 62. 
 
 
 
 
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Since the UB tax is an income tax, the Mathys are entitled 
to a credit under Code § 58.1-332(A) unless the tax "would be 
illegal and unauthorized under such other state's controlling or 
enabling legislation."  Code § 58.1-332(A).  Therefore, in the 
present case, we must determine whether the UB tax would be 
illegal and unauthorized under the District of Columbia's Home 
Rule Act. 
 
In the Home Rule Act, the United States Congress gave the 
District of Columbia Council legislative authority over most 
matters involving the District.  See D.C. Code Ann. §§ 1-201 to  
- 229.7.  However, the Home Rule Act expressly prohibits the 
Council from imposing a "commuter tax," defined as "any tax on 
the whole or any portion of the personal income . . . of any 
individual not a resident of the District . . . ."  D.C. Code 
Ann. § 1-233(a)(5); see Bishop, 401 A.2d at 957-58.  Neither the 
Home Rule Act nor any other portion of the District of Columbia 
Code defines the term "personal income."  
 
The Department argues that if D.C. Code Ann. § 47-1808.3 is 
an income tax, it violates this restriction in the Home Rule Act 
as a tax on the personal income of a nonresident of the District. 
 In response, the Mathys argue that the tax does not violate the 
Home Rule Act, but "is a perfectly legal income tax which does 
not tax personal income, the only kind of income protected by 
[the above] section of the Home Rule Act."  The Mathys further 
contend that the tax is imposed on their District of Columbia 
 
 
 
 
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rental business income, not on their personal income.  We 
disagree with the Mathys. 
 
The rationale advanced by the Mathys was directly addressed 
and rejected in Bishop.  The court concluded that "[t]he tax is 
levied upon personal income.  If we dealt here with a corporate 
franchise tax, the result would be different."  Id. at 961.  The 
court noted that the scheme of the tax illustrates its nature as 
a personal net income tax, and that since the tax is imposed on 
unincorporated businesses, it is "in reality a tax on the 
associates or partners who run the business."  Id. at 961 n.18. 
 
In District of Columbia v. Califano, 647 A.2d 761, 763 (D.C. 
1994), the District of Columbia Court of Appeals again recognized 
that the UB tax is a personal income tax.  The court explained, 
"in the language of Bishop," that this tax personally burdens the 
individuals who comprise the unincorporated business and operates 
as an income tax on them individually.  Califano, 647 A.2d at 
763-64.  Since both Bishop and Califano instruct that the UB tax 
imposes a tax on personal income, we must conclude that the tax 
imposed on the Mathys is illegal and unauthorized under the Home 
Rule Act for purposes of qualifying for a credit under Code 
§ 58.1-332(A), because the Home Rule Act prohibits the imposition 
of "any tax on the whole or any portion of the personal income 
. . . of any individual not a resident of the District . . ."  
D.C. Code Ann. § 1-233(a)(5).  Thus, the Mathys are not entitled 
to a credit under Code § 58.1-332(A), based on the plain language 
 
 
 
 
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of the second paragraph of that statute. 
 
This is a case in which the trial court has reached the 
correct result but has given the wrong reason.  We will sustain 
the result on the grounds assigned above.  Doswell Ltd. 
Partnership v. Virginia Elec. & Power Co., 251 Va. 215, 225, 468 
S.E.2d 84, 90 (1996); Richmond, Fredericksburg & Potomac R.R. v. 
Metropolitan Washington Airports Auth., 251 Va. 201, 214, 468 
S.E.2d 90, 98 (1996);  Robbins v. Grimes, 211 Va. 97, 100, 175 
S.E.2d 246, 248 (1970). 
 
For these reasons, we will affirm the trial court's 
judgment. 
 
Affirmed.