Tax Type
Individual Income Tax
Description
Taxes paid by residents to other states; Taxes paid in a previous year
Topic
Credits
Date Issued
10-21-1994
October 21, 1994
Re: §58.1-1821 Application: Individual Income Tax
Dear**********
This in reply to your letter concerning the disallowance of a subtraction on the
1991 Virginia Individual Income Tax Return of *******(the "Taxpayer")
FACTS
The Taxpayer, while a domiciliary resident of another state, made contributions to a qualified retirement plan through payroll deductions. While the contributions were not taxed for federal purposes, the contributions were taxed by that state. After the Taxpayer moved to Virginia a lump sum distribution was received from the retirement plan. The distribution was reported on the federal and Virginia income tax returns. However, since the contributions were taxed in the other state, the distribution was subtracted on the Virginia return. The subtraction was disallowed by the department, and an assessment was issued. The Taxpayer contends that the same income has already been taxed by the other state, therefore, the subtraction should be allowed on the Taxpayer's Virginia return.
DETERMINATION
Code of Virginia, §58.1-301 provides that Virginia individual income taxation conforms with that of the Internal Revenue Code. Therefore, income of a Virginia resident included in federal adjusted gross income, is also subject to Virginia taxation. The federal adjusted gross income of a Virginia resident can be modified only by the additions, subtractions, deductions, and exemptions specifically indicated in Code of Virginia, § 58.1-322 when computing Virginia taxable income.
As a "conformity" state, Virginia based its tax on Taxpayer's federal adjusted gross income, including the lump sum distribution, despite the fact that the contributions were previously taxed by the other state. There is no provision in Code of Virginia, §58.1-322 to modify the federal adjusted gross income by allowing a subtraction for the lump sum distribution received from a retirement plan when the contributions were taxed by another state in prior periods. Therefore, the Taxpayer's lump sum distribution is not an allowable subtraction on the Virginia return when computing Virginia taxable income. As Virginia law is clear on this point, the department properly denied the Taxpayer's 1991 subtraction, and the assessment was correctly issued. This treatment of lump sum distributions is consistent with the federal treatment and with the method most other states use.
Virginia's current method of preventing "double taxation" is to allow an out-of-state tax credit. However, Code of Virginia. §58.1-332 only provides relief on earned income, business income, or a gain on the sale of a principal residence that is taxed by Virginia and another state in the same taxable year. In situations when the tax is paid to another state in prior years on income, including retirement income as in the Taxpayer's case, current Virginia law provides no relief.
The Taxpayer requested information on the appeal process if the case was not ruled in his favor. In that your case has been treated as an application for correction of an assessment under Code of Virginia § 58.1-1821, copy enclosed, the next recourse would be to apply to court for correction of the assessment as provided in Code of Virginia. §58.1-1825, copy enclosed. If you have any questions regarding this determination, you may contact**************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/7823N
Rulings of the Tax Commissioner