08-103 | Virginia Tax

Tax Type

Individual Income Tax

Description

Taxpayer appeals the repeal of foreign source income subtraction in 2003

Topic

Constitutional Provisions

Federal Conformity

Subtractions and Exclusions

Date Issued

06-18-2008

June 18, 2008

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 "Taxpayer") for the 2006 taxable year. I note the assessment has been paid.

FACTS

The Taxpayer, a Virginia resident, subtracted income earned from Canada and Germany on his 2006 individual income tax return. Upon review, the Department disallowed the subtraction and issued an assessment. The Taxpayer appeals the assessment, contending that the income was taxable in the respective foreign countries under federal tax treaties and Virginia's taxation of such income constitutes prohibited double taxation.

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 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.

For many years, Va. Code § 58.1-322 provided individual income taxpayers a subtraction from FAGI for certain foreign source income. However, the General Assembly repealed the subtraction effective for taxable years beginning on and after January 1, 2003. See Chapter 980, 2003 Acts of Assembly.

The Taxpayer contends that Virginia's taxation of the foreign income constitutes double taxation because Canada and Germany have already taxed this income under international tax treaties. The tax treaties with both Canada and Germany include a provision setting forth the taxes to which they apply. Both treaties, in the case of the United States, limit the taxes to which they apply to federal income taxes imposed by the Internal Revenue Code. See Article 2 (1)(a)(aa) of the Convention Between the United States of America and The Federal Republic of Germany and Article II (2)(b) of the Convention Between the United States of America and Canada. As such, these conventions apply only to certain taxes imposed at the federal level by the governments of the United States, Canada, and Germany. Taxes imposed by provincial and state governments, including Virginia, are unaffected by the conventions. See Public Document (P.D.) 96-228 (9/9/1996) and P.D. 07-39 (4/20/2007).

Further, the 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 US 19 (1938), the United States Supreme Court held that the imposition of an income tax under Virginia laws on income received as beneficiary of 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.

Given the clear precedent established by the courts and the provisions of the treaties, the Department can only conclude that any double taxation of income earned by a resident of Virginia is not prohibited. The power to execute tax treaties with foreign nations rests with the government of the United States. Accordingly, the Commonwealth has not entered into tax agreements with Canada or Germany.

CONCLUSION

Virginia's authority to tax such income of its residents is not prohibited by the United States Constitution or United States tax treaties. The General Assembly, therefore, was well within its authority when it exercised its right to repeal the foreign source income subtraction in 2003. As such, because the foreign source income from Canada and Germany was included in the Taxpayer's FAGI and Virginia's statutes do not permit a subtraction for such income, the Department was correct in disallowing the subtraction on the 2006 income tax return. Accordingly, the assessment issued to the Taxpayer for the 2006 taxable year is upheld. The Taxpayer's request for refund is denied.

The Code of Virginia sections and public documents cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library 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,

- - - - Janie E. Bowen
        Tax Commissioner

AR/1-1994992211.o

Rulings of the Tax Commissioner