June 1, 2022
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the assessment of individual income tax issued to ***** (the “Taxpayers”) for the taxable year ended December 31, 2018.
FACTS
During 2018, the Taxpayers, a husband and wife, were residing in Virginia when the husband separated from his Virginia employer. He received both severance pay and pay for unused vacation for ten years of accredited service. The Taxpayers filed a joint Virginia resident individual income tax return for the 2018 taxable year, claiming a subtraction for a proportional amount of the severance and vacation pay they attributed to a period of time the husband worked outside of Virginia during the ten year service period.
The Taxpayers claimed the subtraction as income derived from a retirement plan, the contributions to which had been taxed in another state. The Department disallowed the subtraction, and issued an assessment, on the basis that the income subtracted was not retirement income. The Taxpayers paid the assessment and appealed. The Taxpayers concede that they were not eligible for the retirement income subtraction, but they contend that the subtraction should be allowed because the income the subtraction was based on was earned when the husband was not a resident of Virginia.
DETERMINATION
Virginia Code § 58.1-301 provides, with certain exceptions, that the 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 (VTI) 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 exempt as a Virginia modification pursuant to Chapter 3 of Title 58.1 of the Code of Virginia.
Treas. Reg. § 1.61-2(a) provides that wages and termination pay are income subject to taxation. In Public Document (P.D.) 97-123 (3/10/1997) and P.D. 10-37 (4/8/2010), the Department determined that severance pay is considered Virginia source income to a nonresident individual when paid by a Virginia employer. Typically, this situation arises when a taxpayer, who previously resided and worked in Virginia but later became a nonresident, had severance pay attributable to income from Virginia sources. Once again, the husband received severance payments from a Virginia employer, but claims that part of the payment should be attributable to work performed outside of Virginia.
Treas. Reg. § 1.61-21(a) provides that employer provided vacations constitute income subject to taxation. In P.D. 97-337 (8/25/1997), an individual subtracted payments she received for unused vacation time that accrued from her work in a prior year in another state. The subtraction was disallowed by the Department because the Code of Virginia did not provide a subtraction for compensation earned in another state in a previous year. Like the individual in P.D. 97-337, the Taxpayers in this case have subtract a proportional amount of unused vacation pay attributable to work performed in another state.
Courts have long recognized that the receipt of income by a resident of the territory of a taxing sovereignty is a taxable event. It is also a long established principle that the risk of double taxation does not violate a taxpayer’s constitutional rights. In Guaranty Trust Co. of New York v. Commonwealth of Virginia, 305 U.S. 19 (1938), the United States Supreme Court held that the imposition of an income tax under Virginia laws on income received as beneficiary of a trust established in New York did not violate the Due Process Clause of the Constitution, notwithstanding that the trust was also subject to tax in New York. Nor did such treatment deny equal protection under the United States Constitution.
Here, the severance and vacation payments were received by a Virginia resident from a Virginia employer. Under these circumstances, all of the income, including the severance and vacation payments, reported in the Taxpayers’ FAGI would be subject to Virginia income tax unless specifically exempt pursuant to Virginia statutes. Because the Code of Virginia does not include a subtraction for either type of payment, the subtraction was properly disallowed.
The Department’s records indicate the assessment has been paid. Therefore, no further action is required.
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/4025.B