Tax Type
Individual Income Tax
Description
Converted traditional individual retirement account ("IRA") to a Roth IRA
Topic
Assessment
Taxability of Persons and Transactions
Date Issued
07-25-2005
July 25, 2005
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 year ended December 31, 2001. I note that the assessment has been paid in full.
FACTS
The Taxpayers are a husband and wife who resided in ***** ("State A") prior to 1999. In 1998, the husband converted a traditional individual retirement account ("IRA") to a Roth IRA. Pursuant to federal law, the husband elected to ratably include the converted amounts in federal gross income over a four-year period.
Subsequently, the Taxpayers moved to Virginia. The Taxpayers subtracted the ratable distribution included in 2001 federal gross income from their 2001 Virginia income tax return. The Department audited the Taxpayer's 2001 return, disallowed the subtraction, and assessed additional Virginia income tax and interest.
The Taxpayers appeal the Department's adjustment. The Taxpayers contend that the husband was not a resident of Virginia when the conversion took place, and the income used to fund the traditional IRA was earned in State A. In addition, they contest the assessment of interest on the basis that they could find no guidance issued by the Department regarding the proper tax treatment of converted IRA's.
DETERMINATION
Converting to a Roth IRA
Public Document ("P.D.") 98-44 (3/9/1998) addresses Virginia's treatment of distributions from a regular IRA that are rolled over into a Roth IRA. If the distribution occurs prior to January 1, 1999, and the distribution amounts are ratably reported over a four-year period, then they are similarly reported on the Virginia return over a four-year period.
The basis for the Tax Commissioner's decision in P.D. 98-44 is that Virginia Code § 58.1-301 provides that terminology and references used in Title 58.1 of the Virginia Code will have the same meanings 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"). As such, any income included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically excluded by a Virginia modification pursuant to Va. Code § 58.1-322.
In this case, a ratable portion of a distribution from a traditional IRA and rolled over to a Roth IRA was included in the Taxpayer's FAGI in 2001, pursuant to IRC § 408 A(d)(3)(A)(iii). The Taxpayers appropriately included the distribution in FAGI reported on the Virginia return.
Individual income taxpayers are limited to modifications to FAGI enumerated in Va. Code § 58.1-322. This section does not provide a subtraction for distributions when converting a traditional IRA to a Roth IRA where the contributions were made to the traditional IRA when the taxpayer resided in another state. Accordingly, the Department correctly disallowed the subtraction.
Interest
Under Va. Code § 58.1-104, the Department has three years from the last day prescribed by law for the timely filing of a return to make an assessment on such return. Further, Va. Code § 58.1-1812 mandates the application of interest to any assessment of tax. The application of interest to tax underpayments is mandatory under state law and cannot be waived unless the associated tax is adjusted. The interest in this case was correctly assessed under the law.
CONCLUSION
Based on the foregoing, the assessment issued to the Taxpayers for the taxable year ended December 31, 2001 is correct. Accordingly, the Taxpayers' request for a refund of Virginia income tax and interest paid for the 2001 taxable year is denied.
The Code of Virginia sections and public document cited 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 Office of Policy and Administration, Appeals and Rulings, at *****.
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Kenneth W. Thorson
Tax Commissioner
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AR/55159B
COMMONWEALTH OF VIRGINIA
Department of Taxation
Department of Taxation
TO WHOM IT MAY CONCERN:
Under the authority of §§ 58.1-1 and 58.1-110 of the Code of Virginia, I hereby delegate to Gerald Gwaltney, Deputy Tax Commissioner, the authority to sign for me, in my absence, any and all documents, including, but not limited to, affidavits, warrants, rulings, appeals, offers in compromise and sales tax revocations.
This authority shall not extend to matters or documents related to my service on any statutorily created board or commission, including, but not limited to, the Compensation Board and Treasury Board.
This authority shall become effective January 10, 2003, and shall remain in effect until revoked.
Done at Richmond, Virginia, this 13th day of January 2003.
Kenneth W. Thorson
Tax Commissioner
Acknowledgement: Gerald H. Gwaltney Date:
Done this 13th day of January 2003 in the City of Richmond, State of Virginia. My Commission expires 9-30-2003.
Sylvia J. Wesson
Notary Public Notary Seal
Rulings of the Tax Commissioner