Memorandum; November 27, 1991; CONTROL NO: II 11-91-5-P

Topic Code: N111Nonresident Taxation (W/H)          Document Reference:

MEMORANDUM CONTROL NO: II 11-91-5-P

TO: PAM FLECKENSTEIN, SUPERVISOR, RETURN RESOLUTION SECTION

FROM: JAMES D. HAMILTON, TAX SPECIALIST, POLICY SECTION

DATE: November 27, 1991 RE: WHETHER OR NOT NONRESIDENT TAXPAYERS ARE GIVEN DOUBLE CREDITS FOR NONREFUNDABLE CREDITS WHEN THE TAXPAYERS ARE SUBJECT TO BOTH THE REGULAR IOWA INCOME TAX AND THE IOWA MINIMUM TAX

STATUTES: Iowa Code § 422.5(1) and 422.5(8)

ISSUE: Whether or not the current method for taxing nonresidents allows the taxpayers double credit against their total Iowa income tax liabilities in circumstances when the taxpayers are subject to both regular Iowa income tax and the Iowa minimum tax.

FACTS: The nonresident taxpayers in question had a negative Iowa source income in the tax year in question. Therefore, their total regular Iowa income tax liability of $2,084 was offset by a nonresident credit of $2,004 and the total nonrefundable credits of $80. In addition, the taxpayers also had an Iowa minimum tax liability of $611. This was 34% of the total computed minimum tax liability $1,797 that would have been imposed if the taxpayers had been Iowa residents in 1990.

DETERMINATION: I believe that there is statutory authority in paragraph "j" of Iowa Code § 422.5(1) for satisfying the regular income tax liability of a nonresident by the nonrefundable tax credits provided in Division II of Chapter 422. In addition, there is also authority in the last unnumbered paragraph of § 422.5(1) for reducing minimum tax liability by the tax credits given in Iowa Code § 422.10 through 422.12 before the computation is made to determine the portion of the minimum tax liability that is allocated to a nonresident. Thus, as I interpret the two pertinent statutes, nonresident taxpayers are allowed double tax credits in instances when taxpayers have a regular income tax liability and a minimum tax liability. This same potential problem does not occur in situations when a nonresident has a regular Iowa income tax liability and a liability for Iowa lump sum distribution tax granted in Iowa Code § 422.5(8). There is no separate application of tax credits against the lump sum tax before computation of the prorated lump sum tax for nonresident taxpayers as is provided in the statutes for imposition of the regular tax for nonresidents and the minimum tax for nonresidents.

However, in the case of the taxpayers whose return was sent with your request for policy determination, the taxpayers were not allowed double tax credits against their Iowa income tax liability. As I interpret the minimum tax statute for nonresidents, the minimum tax amount before proration of $1,797 should have been reduced by the $80 in tax credits available to the taxpayers before the remaining amount of $1,717 was multiplied by the nonresident minimum tax percentage of 34. Therefore, as I see it, the taxpayer's Iowa minimum tax liability should have been $584 instead of the $611 tax amount computed on form IA 6251.

Because only 34% of the total Iowa minimum tax liability was allocated to the taxpayers in this case, the taxpayers will get only 34% of the benefit of their personal exemption credits of $80.

Perhaps we should consider legislation to ensure that taxpayers are not given a double tax benefit for their tax credits. As the statute for the minimum tax for nonresidents now reads, the research activities credit in § 422.11A, the minimum tax credit in § 422.11B, the seed capital credit in § 422.11C and all the credits authorized under § 422.12 (personal exemption credits, dependent credits and the tuition and textbook credit) are allowed against a nonresident's minimum tax liability. We can consider revising the statute so that only nonrefundable credits are applicable toward the minimum tax of a nonresident, plus the minimum tax carryforward credit.

The IA 6251 form for 1991 will need to be revised so the statutory tax credits are allowed against the minimum tax liability of nonresident taxpayers.

Attached to this memo are the provisions in Iowa Code § 422.5 which apply to this determination.

James D. Hamilton