Tax Type
Individual Income Tax
Description
Disability Income Subtraction
Topic
Prohibited Activity
Records/Returns/Payments
Subtractions and Exclusions
Taxable Income
Date Issued
04-24-2013
April 24, 2013
Re: § 58.1-1821 Application: 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, 2008 through 2010. I apologize for the delay in responding to your letter.
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 received income from substantial gainful activity and, therefore, did not qualify for the Virginia subtraction. The Taxpayer appeals the assessments, contending the income received was treated as disability income under the Civil Service Retirement System (CSRS) and the tax preparation software used to complete the tax return automatically claimed the subtraction.
DETERMINATION
Disability Income Subtraction
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.
- 1. The individual must receive disability income, and
2. 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. While the Department acknowledges that the Taxpayer did receive disability income, the Taxpayer must also be permanently and totally disabled in order to qualify for the Virginia subtraction.
Under IRC § 22(e)(3), "permanent and total disability" is defined as follows:
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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.
The Department determined that the Taxpayer was not permanently and totally disabled because he engaged in substantial gainful activity during the taxable year at issue. 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." Treas. Reg. § 7.105-2(c) sets out six general rules for consideration in determining substantial gainful activity. These rules include:
- 1. Full-time work under competitive circumstances would indicate ability to engage in substantial gainful activity.
2. Work performed by an individual in self-care or for his own household tasks, and- nonremunerative work performed in connection with hobbies, institutional therapy or training, school attendance, clubs, social programs, and similar activities would not generally be considered to be substantial gainful activity. However, the nature of the work performed could be evidence of the ability to engage in substantial gainful activity.
4. Regular performance of duties in a full-time, competitive work situation at a rate of pay at or above the minimum wage will conclusively establish the ability to engage in substantial gainful activity.
5. Regular performance of duties in a part-time, competitive work situation at a rate of pay at or above the minimum wage will conclusively establish the ability to engage in substantial gainful activity, if the duties are performed at the employer's convenience.
6. In situations other than work situations, other factors, such as the nature of the duties performed, may establish a taxpayer's ability to engage in substantial gainful activity.
During the taxable years at issue, the Taxpayer was employed in the service industry where he was paid at the minimum wage rate. The nature of his employment required him to perform duties similar to any other employee.
The Taxpayer was employed on a trial basis by three employers in 2008 and worked in excess of 1200 hours. He was employed in excess of 1700 hours during 2009 and 2010. In accordance with Treas. Reg. § 7.105.2(c), the Taxpayer was engaged in part-time employment in a competitive work situation at a rate of pay equal to or greater than minimum wage. Accordingly, the Taxpayer was not permanently and totally disabled for the 2008 through 2010 taxable years, and the income at issue does not qualify for the subtraction for disability income under Va. Code § 58.1-322 C 4 b.
The Taxpayer contends that his wages for the taxable years at issue did not constitute substantial gainful employment because they were only equivalent to 25% of his pre-retirement income. The amount of income an individual earns, however, is not one of the general considerations included in Treas. Reg. § 7.105-2.
Tax Preparation Software
The Taxpayer contends that the tax software used to prepare his returns automatically computed the disability subtraction upon entry of the Taxpayer's annual income statement. Tax preparation software is commonly used by tax professionals and individuals for tax return completion. The fact that a particular software program has been approved by the Department is not meant to imply its computational accuracy. Software presented to the Department for approval is reviewed to test conformity to the Department's processing requirements. The Department provides test case specifications, but does not guarantee computational accuracy of the software.
CONCLUSION
Based on the information provided, the assessments for the 2008 through 2010 taxable years are upheld. Updated bills will be issued, which will include interest accrued to date. Payment of the assessments should be made within 30 days of the bill date in order to avoid the accrual of additional interest.
The Code of Virginia section cited and 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 *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-4994800818.o
Rulings of the Tax Commissioner