September 8, 2017
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek a correction of an individual income tax assessment issued to ***** (the “Taxpayer”) for the taxable year ended December 31, 2015. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer was a resident of North Carolina during the 2015 taxable year. ***** (the “Trust”) distributed income to the Taxpayer. The Trust filed a Virginia resident fiduciary income tax return reporting income distributed to the Taxpayer derived from rental income of real property located in Virginia. The Taxpayer filed a Virginia nonresident income tax return reporting a tax liability on the distributed income; however, no tax was remitted. The Department issued an assessment for the income tax reported due. The Taxpayer appeals the assessment, contending he was not taxed on the Trust distributions in prior years.
DETERMINATION
Income of Nonresidents
Under Va. Code § 58.1-325, individuals who are neither domiciliary nor actual residents of Virginia and have income from Virginia sources are taxed as nonresidents, unless the individual meets the filing exception described in Va. Code § 58.1-321. The Virginia taxable income of a nonresident is computed by multiplying his Virginia taxable income (computed as if he were a resident) by the ratio of his net income, gain, loss, and deductions from Virginia sources to his net income, gain, loss, and deduction from all sources. Virginia Code § 58.1-302 limits the term income and deductions from Virginia sources to the items of income, gain, loss and deductions attributable to the ownership of property in Virginia or the conduct of a business, trade, profession or occupation in Virginia. For the taxable year at issue, the Taxpayer received income distributed from the Trust.
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 Internal Revenue Code (IRC) unless a different meaning is clearly required. As such, Virginia's conformity to federal law is limited to the actual use of a specific term in a Virginia tax statute. Further, conformity does not extend to terms, concepts, or principles not specifically provided in Virginia's tax statutes. 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). Pursuant to IRC § 61(a)(15), gross income used to compute FAGI includes income from an interest in an estate or trust.
Nonresidents, however, are only liable for Virginia income tax passed through from a trust or estate if it is derived from Virginia sources. See Public Document (P.D.) 91-226 (9/26/1991). The Trust's 2015 Virginia fiduciary income tax return included a Form VK-1 reporting Virginia source income.
Under Title 23 of the Virginia Administrative Code (VAC) 10-115-60, a nonresident beneficiary of a nonresident trust would determine his share of the trust by first determining the items of income, gain, loss and deduction derived from Virginia sources which enter into the computation of distributable net income of the trust for the taxable year. The modifications of the trust from Va. Code § 58.1-322 would then be applied to the extent relating to items of income, gain, loss and deduction derived from Virginia sources that enter into the computation of distributable net income. Finally, the resulting amounts would be allocated among the trust and its beneficiaries in proportion to their respective shares of distributable net income.
Income From Trusts
The Taxpayer contends he was never required to file a Virginia nonresident income tax return or pay the tax on Trust distributions in prior taxable years. Virginia Code § 58.1-381 provides that all resident trusts which are required to file a federal income tax return or that have any Virginia taxable income must file an income tax return in Virginia. Pursuant to Va. Code § 58.1-302, a resident estate or trust is one of the following:
- The estate of a decedent who at his death was domiciled in the Commonwealth;
- A trust created by will of a decedent who at his death was domiciled in the Commonwealth;
- A trust created by or consisting of property of a person domiciled in the Commonwealth; or
- A trust or estate which is being administered in the Commonwealth.
Even though the Trust appears to have been administered in ***** (State A), it could have been a resident trust if it met any one of the other conditions set forth above. Even if the Trust was a not a Virginia resident trust, it would still have been subject to Virginia fiduciary income tax as a nonresident trust because it had income attributable to Virginia sources. See Va. Code § 58.1-362.
Pursuant to Va. Code § 58.1-302, the Virginia taxable income of a nonresident estate or trust means its share of income, gain, loss and deduction attributable to Virginia sources increased or reduced, as the case may be, by:
- The amount derived from or connected with Virginia sources of any income, gain, loss and deduction recognized for federal income tax purposes but excluded from the computation of distributable net income of the estate or trust; and
- The net amount of any modifications as provided for in § 58.1-322 (not including subsection D thereof) with respect to the income or gain.. .
For the 2015 taxable year, the Trust filed a Virginia fiduciary income tax return reporting income from Virginia sources. A portion of the income was distributed to the Taxpayer and reported as income from Virginia sources on his nonresident return.
Contrary to his claim, the Taxpayer filed a 2014 Virginia nonresident return reporting an income tax liability. Because the tax was not remitted with the return, an assessment was issued and satisfied through a collection authorized under Virginia statute.
Further, the Taxpayer's filing requirements for previous taxable years is of little relevance to the 2015 taxable year. The Department's records indicate that the Trust reported losses in many prior taxable years. Losses passed through from the Trust would have resulted in no Virginia individual income tax liability. In addition, the Trust was a complex trust. The trustees of complex trusts are not required to distribute the income of a trust to its beneficiaries. See Treas. Reg. § 661(a)-1. As such, the Trust may not have distributed any income to the Taxpayer in the taxable years that it had income. It is also possible that the Taxpayer failed to properly file Virginia income tax returns to report the income from the Trust.
Self Assessments
Virginia's taxing system is based largely on the theory of self-assessment. The taxpayer is given the responsibility to compute, file and pay their own income tax. Virginia has implemented a self-assessment system based on the federal system because it is less intrusive upon the taxpayer, and less costly to the administration of the tax.
Pursuant to Va. Code § 58.1-1820, an assessment results when a notice is issued by the Department or a taxpayer self-assesses a tax by filing a Virginia return. Self-assessments are deemed to be made when a taxpayer pays a tax or when the return is filed. Under Title 23 of the Virginia Administrative Code 10-20-160 D 4, a self-assessment usually occurs when a tax return is filed by a taxpayer. By filing a 2015 Virginia nonresident income tax return reporting a balance due, the Taxpayer made a self-assessment of additional income tax. Because no payment for the tax liability reported on the return was remitted, the Department assessed the tax and interest pursuant to Va. Code § 58.1-1812.
CONCLUSION
Based on the foregoing, the assessment for the 2015 taxable year is upheld. An updated bill, with interest accrued to date, will be mailed to the Taxpayer. The Taxpayer should remit payment for the outstanding balance on the revised bill within 30 days from the date of the bill to avoid the accrual of additional interest and possible collection actions by the Department.
The Code of Virginia sections, regulations, and public document 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/1105.B