Tax Type
Individual Income Tax
Description
Individual must meet two tests in order to be allowed a subtraction for disability income.
Topic
Exemptions
Persons Subject to Tax
Subtractions and Exclusions
Date Issued
07-07-2010
July 7, 2010
Re: § 58.1-1821 Appeal: Individual Income Tax
Dear *****:
This is in response to your letter in which you seek correction of the individual income tax assessments issued to ***** (the "Taxpayer") by the Department for the taxable years ended December 31, 2005 through 2007. I apologize for the delay in this response.
FACTS
For the taxable years at issue, the Taxpayer filed Virginia individual income tax returns claiming subtractions for disability income. Under review, the Department determined that the Taxpayer was employed full-time, disallowed the subtractions and issued assessments. The Taxpayer appeals the assessments, contending that the income received was treated as disability income under the Civil Service Retirement System (CSRS).
DETERMINATION
Under certain conditions, Va. 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 Revenue Code (IRC) § 22(c)(2)(B)(iii). "Disability income" is defined under this section of the IRC to be:
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- [t]he aggregate amount includable in the gross income of the individual for the taxable year under section 72 or 105(a) to the extent such amount constitutes wages (or payments in lieu of wages) for the period during which the individual is absent from work on account of permanent and total disability.
Based on the statutory requirements, an individual must meet two tests in order to be allowed a subtraction for disability income.
- The individual must receive disability income, and
The individual must be absent from work because of a permanent and total disability.
By reason of their character as legislative grants, statutes relating to deductions and subtractions allowable in computing income and credits 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 Department of Taxation, Circuit Court of the City of Roanoke, Law No. 82-0846 (10/27/1983).
The Taxpayer was terminated from employment with the United States government in 1998 and began receiving payments through CSRS designated as disability income.
Under IRC § 22(e)(3), "permanent and total disability" means:
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- [a]n individual is permanently and totally disabled if he is 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.
Treas. Reg. § 7.105-2 defines "substantial gainful activity" as "the performance of significant duties over a reasonable period of time in work for remuneration or profit." The regulation further sets out five general rules for what constitutes substantial gainful activity.
During the taxable years at issue, the Taxpayer was employed in the retail food industry. The nature of his employment required him to perform duties similar to any other employee. In addition, his annual wages exceeded that of a full-time individual employed at the minimum wage. Absent any evidence to the contrary, it appears the Taxpayer was engaged in employment under competitive circumstances. See Treas. Reg. § 7.105.2(c)(1).
Accordingly, the Taxpayer was not permanently and totally disabled as defined under IRC § 22(e)(3), and the income at issue does not qualify for the subtraction for disability income under Va. Code § 58.1-322 C 4 b. Therefore, the assessments for the 2005 through 2007 taxable years are upheld. A schedule is enclosed showing the current outstanding balance. No additional interest will accrue provided the total outstanding balance is paid within 30 days from the date of this letter. Payment should be sent to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23218-7203, Attention: *****.
The Code of Virginia section cited is 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 ***** at *****.
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- Sincerely,
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- Linda Foster
Deputy Tax Commissioner
- Linda Foster
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AR/1-3440658323.E
Rulings of the Tax Commissioner