April 28, 2022
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 assessments issued to ***** (the “Taxpayers”) for the taxable years ended December 31, 2017, and 2018.
FACTS
The Taxpayers filed Virginia resident individual income tax returns for the 2017 and 2018 taxable years. The Department received information from the Internal Revenue Service (IRS) indicating the IRS adjusted the Taxpayers’ 2017 and 2018 federal adjusted gross income (FAGI). The Department’s records, however, indicated the Taxpayers had not filed amended Virginia returns to report the federal changes. As a result, the Department issued assessments for additional tax and interest. The Taxpayers appeal, asserting that their earnings are not subject to income tax.
DETERMINATION
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 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 Chapter 3 of Title 58.1 of the Code of Virginia.
Virginia Code § 58.1-311 requires that any change made on the federal return must be reported to the Department on an amended Virginia return within one year from the final determination of such change on the federal return. If an amended return is not filed with the Department, IRC § 6103(d) authorizes the Department to obtain information from the IRS that will assist in determining any additional tax liability.
The Department received information from the IRS indicating that the Taxpayers’ income had been underreported for the 2018 and 2019 taxable years and their FAGI had been adjusted accordingly. Because Virginia’s taxable income begins with FAGI, the Virginia return was properly adjusted based on federal information obtained under IRC § 6103(d).
The Taxpayers contend that their wages do not qualify as income for purposes of the federal income tax. Courts have consistently held that the argument that wages are not income is without merit. See, e.g., Broughton v. U.S., 632 F.2d 706 (1980). Further, the Taxpayers contend that the federal income tax is actually an excise tax and thus is not a tax on all earnings, rather it is specific to receipts of a federal nature. Courts have also held that this argument is without merit. See, e.g., George J. Smith, et ux., TC Memo 2019-111.
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 mere fact that Virginia starts with terms defined in 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, 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.
The Taxpayers resided in Virginia and would be considered to be natural persons that meet the definition of a resident of Virginia pursuant to Virginia Code § 58.1-302. As stated above, income properly included in the FAGI of a Virginia resident is subject Virginia taxation unless specifically exempt as a modification pursuant to Chapter 3 of Title 58.1 of the Code of Virginia. Accordingly, the Taxpayers’ argument that their income is not subject to Virginia taxation has no basis in fact or Virginia law. An individual who fails to file correct Virginia income tax returns based solely on such claims has intentionally understated his income tax liability with the intent to evade tax and is subject to a 100% fraud penalty pursuant to Virginia Code § 58.1-308.
Therefore, the assessments for the 2017 and 2018 taxable years are upheld. The Taxpayers will receive an updated bill that will include accrued interest to date. The Taxpayers should remit the balance due within 30 days of the bill date to avoid the accrual of additional interest and the initiation of collection actions.
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/4088.X