Document Number
14-33
Tax Type
Individual Income Tax
Description
The State has the inherent and unlimited power of taxation unless restrained by its Constitution or the Constitution of the United States
Topic
Court Case
Federal Conformity
Records/Returns/Payments
Taxable Income
Date Issued
03-07-2014

March 7, 2014



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 taxable year ended December 31, 2010.

FACTS


The Department received information from the Internal Revenue Service (IRS) indicating that the Taxpayer may have been required to file a Virginia individual income tax return for the 2010 taxable year. The Department requested information to verify whether the Taxpayer was subject to Virginia income tax. When an adequate response was not received, the Department issued an assessment. The Taxpayer filed an appeal, asserting that she was exempt from filing federal and Virginia income tax returns and that Virginia has taken her property fraudulently and in violation of her due process rights. The Taxpayer also contends that the assessment was erroneous because it was based on documents that did not have the approval of the federal Office of Management and Budget.

DETERMINATION


Taxability of Income

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 (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). Income properly 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. A resident of Virginia includes any natural person domiciled in Virginia at any time during a taxable year or who, for an aggregate of more than 183 days of the taxable year, maintained his place of abode within Virginia.

Virginia Code § 58.1-341 provides that a Virginia resident who is required to file a federal income tax return is also required to file a Virginia income tax return, unless the resident is exempt from filing under Va. Code § 58.1-321. Additionally, even if a resident is not required to file a federal return but has Virginia adjusted gross income that exceeds the filing threshold, the resident is required to file a Virginia individual income tax return. When a resident does not file a proper Virginia return, IRC § 6103(d) authorizes the Department to obtain information from the IRS that will enable the Department to determine the resident's tax liability.

In addition, the Virginia Supreme Court has held "the power of the State of Virginia to levy taxes is not derived from the Constitution of the United States as interpreted by the Supreme Court. On the contrary, the State has the inherent and unlimited power of taxation unless restrained by its Constitution or the Constitution of the United States." See Colonial Pipeline Company v. Commonwealth of Virginia, 206 Va. 517, 145 S.E.2d 227 (1965). Thus, the fact that Virginia starts with the IRC to determine Virginia taxable income does not in any way inhibit the Commonwealth's authority to impose an income tax on its citizens.

Further, it has been well-established that a state may tax all the income of its residents, even income earned outside the taxing jurisdiction. In New York ex rel. Cohn v. Graves, 300 U.S. 308, 57 S.Ct. 466 (1937), the United States Supreme Court explained "[t]hat the receipt of income by a resident of the territory of a taxing sovereignty is a taxable event is universally recognized." Thus, any individual who has Virginia taxable income as determined under Virginia's statutes is subject to Virginia income tax.

Although the Taxpayer does not deny that she was a Virginia resident or that she had income during the taxable year at issue, she states that she was exempt from filing federal and Virginia income tax returns. The information available shows that the Taxpayer received income from employment. Such income would be included in the taxpayer's federal gross income under IRC § 61. As such, it would also be taxable income for Virginia income tax purposes. Because the amount of such income exceeded the applicable filing threshold under Va. Code § 58.1-321, the Taxpayer was required to file a Virginia return.

Federal Information

The Taxpayer contends that the assessment was erroneous because it was based on federal documents that did not have the approval of the federal Office of Management and Budget. Under IRC § 6103(d), the Department and the IRS have entered into a coordination agreement. When a resident does not file a proper Virginia return, IRC § 6103(d) authorizes the Department to obtain information from the IRS that will enable the Department to determine that resident's tax liability.

In addition, when a taxpayer fails or refuses to provide documentation sufficient to calculate an accurate liability, Va. Code § 58.1-111 permits the Department to make an estimate of the amount of taxes due from any information in its possession and issue an assessment to such taxpayer. In this case, the Department made an assessment under Va. Code § 58.1-111 based on federal information obtained from the IRS pursuant to IRC § 6103(d), and the Taxpayer has provided no evidence that would show the IRS information is in error.

Virginia Code § 58.1-205 provides that in any proceeding relating to the interpretation of the tax laws of Virginia, an "assessment of a tax by the Department shall be deemed prima facie correct." As such, the burden of proof is on the Taxpayer to show she was not subject to income tax in Virginia.

Further, the claim that the Taxpayer's income is not subject to Virginia taxation has no basis in fact or Virginia law. An individual who fails to file income tax returns based solely on such a claim has intentionally understated his or her income tax liability with the intent to evade tax and is subject to a 100% fraud penalty pursuant to Va. Code § 58.1-308.

Court Case

The arguments raised by the Taxpayer have been addressed by a Virginia court. In sustaining the Department's demurrer, the court found that the plaintiff's complaint failed to state a claim upon which relief could be granted and dismissed the complaint with prejudice. See Betsy Nicholson v. Commonwealth, Circuit Court of Loudon County, CL00060701-00 (6/24/2011).

CONCLUSION


Based on the applicable law cited above and the information presented, there is no basis to abate the Department's assessment. Accordingly, the assessment for the 2010 taxable year is correct and remains due and payable. An updated bill will be issued shortly, which will include accrued interest. Payment of the assessment should be made within 30 days of the bill date in order to avoid the accrual of additional interest.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions 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,



Craig M. Burns
Tax Commissioner



AR/1-5573045989.M

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46