Tax Type
Individual Income Tax
Description
Taxpayers received the nonqualified retirement distribution as residents of Virginia.
Topic
Domicile
Federal Conformity
Taxable Transactions
Date Issued
06-11-2013
June 11, 2013
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 "Taxpayers") for the taxable year ended December 31, 2010.
FACTS
The Taxpayers, a husband and wife, were residents of ***** (State A). On March 1, 2010, the husband retired from a corporation operating in State A. On March 7, 2010, the Taxpayers moved to Virginia and established domicile. A lump sum non-qualified pension distribution was earned and payable to the husband as of the date of his retirement. However, because the retirement election was either not timely received or processed, the distribution was not made until April 2010.
The Taxpayers filed a 2010 Virginia part-year individual income tax return that attributed the pension distribution to State A. The Department audited the Taxpayers' 2010 return and adjusted their Virginia taxable income to include the husband's pension distribution, resulting in the assessment of additional tax. The Taxpayers appeal the assessment, contending the pension distribution was constructively received prior to the residence change.
DETERMINATION
Under Va. Code § 58.1-303 A, a person who becomes a resident of Virginia is subject to taxation during the period of Virginia residency. Title 23 of the Virginia Administrative Code (VAC) 10-110-40 B further provides that for part-year residents, "[i]ncome attributable to Virginia is that which is received during the portion of the year in which the individual is a Virginia resident; . . ." [Emphasis added.]
The Taxpayers contend that because the starting point of Virginia taxable income is federal adjusted gross income (FAGI), the distribution was constructively received on the date of the husband's retirement. According to documentation provided by the husband's former employer, the distribution was fully earned and payable as of March 1, 2010. As such, the Taxpayers contend that the distribution was constructively received by the husband prior to becoming a Virginia resident.
Virginia Code § 58.1-301 provides, with certain exceptions, that terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the 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 FAGI. Conformity does not extend to terms, concepts, or principles not specifically provided in Title 58.1 of the Code of Virginia. 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.
Under § 451(a) of the Internal Revenue Code (IRC), gross income is included in the gross income for the taxable year in which it is received by a taxpayer. Under Treas. Reg. § 451-2(a), income is constructively received by a taxpayer when it is "credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time . . . ." Thus, if a taxpayer had an item of income that was constructively received in 2011, but actually received in 2012, such income would be included as gross income in 2011 for federal income tax purposes. Under conformity, Virginia generally follows constructive receipt rules in that, income is subject to Virginia tax for the same taxable year as it is be included in FAGI.
In Public Document (P.D.) 02-118 (9/3/2002), the Department addressed the issue of when retirement income is considered to have been received by a taxpayer. The taxpayers, who moved into Virginia in 1999, asserted the income from a qualified retirement plan and a supplemental retirement plan had been received while they still resided outside Virginia under the "all events test" even though the income was included in their 2000 FAGI. Under Treas. Reg. § 1.451-1(a), a taxpayer who uses the accrual method of accounting will recognize income when all of the events have occurred that fix such taxpayer's right to receive such income and an accurate amount of the income can reasonably be determined. See Rev. Rul. 2004-52 (5/6/2004). In P.D. 02-118, the Department determined that the "all events test" would not apply because the pension income was included in FAGI when the taxpayers had actually received it in 2000.
In addition, the Department ruled that the all events test is superseded by Public Law (P.L.) 104-95, codified at Title 4 U.S.C. § 114, which prohibits a state from imposing an income tax on any retirement income received by an individual who is not a resident or domiciliary of that state. Under the Department's interpretation, P.L. 104-95 prohibited the retirement income from being included in FAGI until the taxpayers had actually received the income. The same reasoning would be applied to the concept of constructive receipt for cash basis taxpayers.
In this case, the Taxpayers assert the retirement income was constructively received in 2010, but prior to when the husband moved into Virginia in March 2010. Under these circumstances, the retirement income would have been included in FAGI for 2010, regardless of whether the income was considered to be constructively received or actually received. However, because P.L. 104-95 only allows taxpayers to be taxed on retirement income in their state of residency when such income is actually received, the Department must conclude that the Taxpayers received the nonqualified retirement distribution on or around April 1, 2010, when the Taxpayers were residents of Virginia. Accordingly, the assessment for the 2010 taxable year is upheld.
The Code of Virginia sections, regulation and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions regarding this response, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-5286175171.B
Rulings of the Tax Commissioner