March 10, 2020
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek a correction to the individual income tax assessments issued ***** (the “Taxpayer”) for the taxable years ended December 31, 2015, through 2018.
FACTS
The Taxpayer filed a Virginia nonresident income tax return for the 2015 taxable year, a Virginia part-year resident income tax return for the 2016 taxable year, a Virginia resident income tax return for the 2017 taxable year, and a part-year Virginia income tax return for the 2018 taxable year. Under audit, the Department determined that the Taxpayer did not include all of his income that was subject to taxation in Virginia. As a result, the Taxpayer’s refund for the 2015 taxable year was reduced, and assessments were issued for the 2016 through 2018 taxable years. The Taxpayer appeals, contending the Department included wages that were not income and requests the assessments be abated and refunds of overpayments be issued.
DETERMINATION
Virginia Code § 58.1-301 provides, with certain exceptions, that the 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 (VTI) 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 Virginia Code § 58.1-322.01 through § 58.1-322.04.
IRC § 61(a) defines gross income as income from whatever source derived, including (but not limited to) “compensation for services, including fees, commissions, fringe benefits, and similar items.” Wages are reported to the IRS on Form W-2 and are generally considered income to the recipient for federal income tax purposes. See Treas. Reg. 1.61-2(a)(1). Thus, wages that are, by definition, included in FAGI are also included in the computation of VTI.
2015 Taxable Year
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 Virginia Code § 58.1-321. See Virginia Code § 58.1-325. 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 deductions 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 (1) the ownership of any interest in real or tangible personal property in Virginia, (2) a business, trade, profession or occupation carried on in Virginia, or (3) prizes paid by the Virginia Lottery Department, and gambling winnings from wagers placed or paid at a location in Virginia. Thus, a nonresident with Virginia source income is required to file a nonresident Virginia income tax return unless the filing exemption applies. See Virginia Code § 58.1-341 A 2.
The Taxpayer filed a Virginia nonresident income tax return for the 2015 taxable year. The Department received additional information from the IRS that included a Form W-2 indicating Virginia taxable wages. The Department adjusted the Taxpayer’s return to include the omitted wages and reduced the Taxpayer’s refund. Without additional information to verify that the wages were not earned while carrying on a business, trade, profession or occupation in Virginia or that the wages do not meet the definition of compensation under IRC § 61(a), the Department must rely on the information included on the W-2.
2016-2018 Taxable Years
Taxation of Residents
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 Virginia 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.
In New York ex rel. Cohn, 300 U.S. at 312, 57 S.Ct. at 467, 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 resident who has Virginia taxable income as determined under Virginia’s statutes is subject to Virginia income tax regardless of whether they reported income on their federal income tax return.
Taxation of Part-Year Residents
Virginia Code § 58.1-303 provides that a taxpayer who becomes a resident of another state during the taxable year is subject to taxation for the period in which he was a Virginia resident. Accordingly, Virginia taxable income is computed by determining income, deductions, subtractions, additions and modifications attributable to the period of residence in Virginia. In addition, part-year residents may claim a portion of their Virginia personal exemptions, but the exemptions will be prorated based upon the number of days that the taxpayer was a Virginia resident. Further, part-year residents may claim a prorated Virginia standard deduction if they claim the standard deduction for federal income tax purposes.
The Department received information from the IRS that included a W-2 showing the Taxpayer earned taxable wages in Virginia for the 2017 taxable year. The Department adjusted the Taxpayer’s return to include this income and issued an assessment. In addition, the Department adjusted the Taxpayer’s part-year returns for the 2016 and 2018 taxable years to match Virginia state wages reported on his respective W-2s.
CONCLUSION
Under the provisions of Virginia Code § 58.1-205, in any proceeding related to the interpretation of the tax laws of Virginia, an “assessment of a tax by the Department shall be deemed prima facia correct.” As such, the burden of proof is on the Taxpayer to show the Department’s assessment is incorrect.
The Department adjusted the Taxpayer’s returns based on the information available as permitted by Virginia statute. See Virginia Code § 58.1-111. Furthermore, Virginia Code § 58.1-1826 precludes a court from gaining relief to taxpayers seeking correction of erroneous state tax assessments in cases in which the erroneous assessment is attributable to the taxpayers’ willful failure or refusal to provide the Department with necessary information as required by law. The Taxpayer has provided no objective evidence to show that the Department’s assessments are incorrect. Therefore, I find no basis to abate the assessments for the 2015 through 2018 taxable years.
The Taxpayer, however, will be given one final opportunity to file proper Virginia income tax returns for the 2015 through 2018 taxable years based on the methodologies described by Virginia statutes, as set forth above. The returns should be submitted within 30 days from the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond Virginia 23161-7203, Attention: *****. Upon receipt, the returns will be reviewed and the assessments will be adjusted, as appropriate. If the information is not received within the allotted time, the assessments will be considered correct and collection actions will resume. The Taxpayer is encouraged to review and follow the instructions provided for each type of return he was required to file. These instructions are available under Forms & Instructions in the Forms and Filing section of the Department’s website. Alternatively, the Taxpayer may consider seeking the advice and assistance of a tax professional with experience preparing Virginia individual income tax returns.
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/2175.A