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
1
on unincorporated businesses," provided, for the years at issue,
1
Under 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
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
(..continued)
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.
2
D.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.
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