December 8, 2016
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the individual income tax assessment issued to ***** (the “Taxpayers”) for the taxable years ended December 31, 2012 through 2014. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayers, a husband and wife, filed Virginia individual income tax returns for the 2012 through 2014 taxable years and claimed a subtraction for disability income. The wife received a federal Wage and Tax Statement (Form W-2) reporting third-party sick pay. The Taxpayers subtracted this income as disability income on their Virginia individual income tax returns. The Department disallowed the subtraction claimed each year and issued assessments for additional tax, concluding that the third-party sick pay was not disability income subject to the subtraction. The Taxpayers appeal the assessments, contending that the income constitutes disability income because the wife was permanently disabled.
DETERMINATION
Virginia Code § 58.1-301 provides 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. 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 included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Va. Code § 58.1-322.
Virginia Code § 58.1-322 C 4 b provides an individual income tax subtraction for up to $20,000 of disability income as defined under Internal IRC § 22(c)(2)(B)(iii). This IRC section provides a federal income tax credit for a portion of disability income as defined under IRC § 72 or §105(a) to the extent such income constitutes wages, or payments in lieu of wages, for the period of time during which an individual is absent from work due to permanent and total disability.
In Public Document (P.D.) 06-63 (8/6/2006) and P.D. 10-139 (7/14/2010), the Department addressed the scope of the subtraction, concluding that disability income eligible for the Virginia subtraction is reported on the federal form for distributions from pensions, annuities, retirement or profit-sharing plans, IRAs, and insurance contracts (Form 1099-R). Sick pay (including third-party sick pay) reported as wages under IRC § 3402(o)(2)(C) and reported on Form W-2 typically does not qualify for the Virginia subtraction for disability income.
The wife provided a letter from the Social Security Administration (SSA) issued in November 2004 stating that she was permanently and totally disabled. A copy of a letter from the wife's insurer was also submitted in 2004, stating that the benefits were being issued as a result of the wife being found permanently and totally disabled.
In this case, the Department finds it necessary to modify its determination in P.D. 06-63. Although income was reported on a W-2, the insurance company verified that the payments resulted from a long-term disability certificate of insurance. The Department finds that this fact pattern is significantly different from the cases that resulted in the prior rulings. Thus, income reported on a W-2 will not generally be considered to qualify for the disability subtraction unless the taxpayer can prove the income resulted from a long-term disability certificate of insurance.
The determination of whether income qualifies for the Virginia subtraction is based on the classification of the income, not just whether an individual is disabled or not. See P.D. 10-39. In this case, the Taxpayers’ documentation shows that the wife's income derived from the insurer was classified as disability income even through it was reported on a Form W-2. However, the documentation only shows that the wife was found to be permanently and totally disabled in 2004. It does not show whether she was still disabled as of the taxable years at issue.
By reason of their character as legislative grants, statutes relating to deductions and subtractions allowable in computing income and credits allowed against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See Howell's Motor Freight, Inc., et al. v. Virginia Dep't of Taxation, Circuit Court of the City of Roanoke, Law No. 82-0846 (10/27/1983).
Under IRC § 22(e)(3), an individual is “permanently and totally disabled” if they are “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.” Under IRC § 22, individuals claiming to be disabled may be required to provide proof of such disability to the IRS in order to show they are still eligible for the federal credit.
The evidence provided indicates wife was declared to be permanently and totally disabled in 2004. As permitted by statute, the Department requested the Taxpayers provide documentation to verify the wife's disability through the 2014 taxable year. To date, the Taxpayers have failed to provide sufficient documentation on which the Department could make an informed decision concerning the disability subtraction.
When a taxpayer fails or refuses to provide documentation sufficient to calculate an accurate liability, Va. Code § 58.1-111 permits the Department to make an estimate of the amount of taxes due from any information in its possession and issue an assessment to such taxpayer. Further, under the provisions of Va. Code § 58.1-205 any proceeding relating to the interpretation of the tax laws of Virginia, an “assessment of a tax by the Department shall be deemed prima facie correct.” As such, the burden of proof is on the Taxpayer to show he was not subject to income tax in Virginia.
Based on the applicable law cited above and the information presented, I find no basis to abate the Department's assessments for the 2012 through 2014 taxable years. I will, however, grant the Taxpayers one final opportunity to provide sufficient evidence regarding the wife's disability status for the years at issue. Such evidence should be provided within 30 days from the date of this letter to: Virginia Department of Taxation, Appeals and Rulings, Attention: *****, Post Office Box 27203, Richmond, Virginia 23261-7203. If the requested information is not provided within the allotted time, the assessment will be considered correct and collection action will resume.
The Code of Virginia sections and public documents 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/1-6240530648.B