August 15, 2019
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will respond 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, 2015.
FACTS
The Taxpayer filed a 2015 Virginia resident individual income tax return, claiming an unspecified subtraction. The Department requested additional information to determine if the Taxpayer qualified for a subtraction. When an adequate response was not received, the Department disallowed the subtraction and issued an assessment for the 2015 taxable year. The Taxpayer conceded the Department’s disallowance of the subtraction and paid the assessment. The Taxpayer subsequently filed an appeal, contending she was entitled to a foreign income tax credit. The Taxpayer also asserts the income was not subject to Virginia income taxation pursuant to the United States – Mexico Income Tax Convention (the “Convention”).
DETERMINATION
Credit for Tax Paid to Another State
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. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia. 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 eligible for a Virginia modification pursuant to Virginia Code §§ 58.1-322.01 through 58.1-322.04.
The Taxpayer agrees that neither the out-of-state tax credit in Virginia Code § 58.1-332, nor the credit for taxes paid to a foreign country on retirement income in Virginia Code § 58.1-332.1 apply in this case. The Taxpayer asserts that since Virginia individual income taxation “conforms” to federal law, then Virginia is obligated to honor the elimination of double taxation provisions of the Convention by allowing a subtraction, deduction, or credit on the Virginia return for those taxes paid to Mexico on rental income earned in Mexico.
IRC §§ 901 et seq. allow taxpayers to claim a credit against their federal tax liability for taxes paid to a foreign country in certain circumstances. Pursuant to those IRC sections, the Taxpayer claimed a credit on her 2015 federal income tax return for rental income earned in Mexico. The Taxpayer contends that she should be entitled to claim the remaining amount as a Virginia foreign tax credit because she could not claim the full amount of the foreign tax as a credit on her federal return.
By reason of their character as legislative grants, statutes relating to deductions and subtractions allowable in computing income and credits allowed 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 Dep’t of Taxation, Circuit Court of the City of Roanoke, Law No. 82-0846 (10/27/1983).
Virginia Code § 58.1-332.2 provides a definition of the term “income tax” as used in Virginia Code §§ 58.1-332 and 58.1-332.1. As a definitional section, it does not authorize a taxpayer to claim a credit. Because the rental income the Taxpayer received was properly included in FAGI, it is also included in Virginia taxable income unless specifically exempted by Virginia Code §§ 58.1-322.01 through 58.1-322.04. As noted above, however, Virginia law does not allow a subtraction, deduction, or credit for foreign taxes paid on this type of income.
Convention
Article 2 of the Convention states in pertinent part, “The existing taxes to which this Convention shall apply are … in the United States, the Federal income taxes imposed by the Internal Revenue Code…” Pursuant to this article, the Convention applies only to certain taxes imposed at the federal level by the United States and the Mexican national governments. Taxes imposed by state and local governments, including Virginia, are unaffected by the Convention. See Public Document (P.D.) 96-228 (9/9/1996), P.D. 07-39 (4/20/2007), P.D. 13-232 (12/18/2013), and P.D. 18-75 (5/2/2018).
CONCLUSION
After carefully considering the information provided, the Department properly disallowed the Taxpayer’s subtraction for the 2015 taxable year. The Taxpayer was also unable to show that she was entitled to an income tax credit or that her income was not taxable pursuant to the Convention. Accordingly, the assessment is upheld. Because the assessment has been paid in full, no further action is required.
The Code of Virginia sections and public documents 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/1971C