Tax Type
Individual Income Tax
Description
Recovery of assets or funds by a taxpayer in a lawsuit is not included in FAGI
Topic
Taxable Income
Taxpayers' Remedies
Date Issued
07-18-2005
July 18, 2005
Re: § 58.1-1821 Application: Individual Income Tax
Dear *******************:
This will reply to your letter in which you seek correction of the Virginia individual income tax assessment issued to ***** (the "Taxpayer"), for the taxable year ended December 31, 2001. I apologize for the delay in responding to your letter.
FACTS
The Department obtained information from the Internal Revenue Service ("IRS") indicating that the Taxpayer received income for the 2001 taxable year. A review of the Department's records indicated that the Taxpayer had not filed a Virginia individual income tax return for that taxable year. The Department determined that the income was taxable and issued an assessment for the 2001 taxable year based on the available information.
The Taxpayer indicates that he was not required to file a federal or Virginia individual income tax return for the 2001 taxable year. He states that his income for that year consisted solely of nontaxable Title II Social Security Act payments. During 2001, he also received, as an out-of-court settlement, a refund of payments made to a mortgage refinance company. The Taxpayer asserts that the amount received is not taxable by Virginia because the settlement amount consists of payments made from his income, which was subject to income taxation when earned. He requests abatement of the assessment issued for the 2001 taxable year.
DETERMINATION
Virginia Code § 58.1-301 provides that terminology and references used in Title 58.1 of the Code of Virginia 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.
The income at issue resulted from a settlement of a lawsuit against a mortgage company. While the suit requested general and punitive damages, the Taxpayer accepted an out-of-court settlement that amounted to the recovery of prior payments made to the mortgage company.
As a general rule, the recovery of assets or funds by a taxpayer in a lawsuit is not included in FAGI. Documents obtained from the IRS indicate that the amount received in the settlement is not included in the Taxpayers' FAGI for the 2001 taxable year. Accordingly, the settlement amount will not be included Virginia taxable income. The assessment for the 2001 taxable year, therefore, will be abated.
It should be noted that Va. Code § 58.1-311 requires individuals to file an amended Virginia income tax return if their federal taxable income is changed by the IRS. A taxpayer is required to file the return within 90 days after the final determination and either concede the accuracy of the IRS determination or state why it is erroneous. If the IRS determines that the settlement is not a recovery of cash payments, the Taxpayer will be required to file a Virginia income tax return to report this change. If such changes are not reported, the Department is authorized to make adjustments to the Virginia returns at any time.
The Code of Virginia sections cited and other reference documents are available on-line in the Tax Policy Library section of the Department's web site, located at www.policylibrary.tax.Virginia.gov. If you have any questions regarding this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
-
-
-
-
-
-
-
- Sincerely,
-
-
-
-
-
-
-
-
-
-
-
-
-
- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
-
-
-
-
-
-
AR/53667E
Rulings of the Tax Commissioner