Document Number
95-83
Tax Type
Individual Income Tax
Description
Wages includable in gross income
Topic
Taxable Income
Date Issued
04-19-1995
April 19, 1995



Re: §58.1 -1821 Application: Individual Income Tax


Dear********************

This will reply to your letters of April 7, 1995 and December 7, 1994 concerning your 1990 and 1991 Virginia individual income tax assessments.
FACTS

You filed timely 1990 and 1991 Virginia individual income tax returns and were issued the requested refunds. Subsequently, for both years, the department was informed by the Internal Revenue Service (IRS) that certain business expenses and capital loss deductions claimed on the federal return were disallowed after the federal returns were examined. The department notified you of this federal examination and the potential impact to your Virginia tax liability. When you furnished no documentation to indicate that the! federal examination was incorrect, the department issued an assessment for tax and interest.

You deny any requirement to file an income tax return under Internal Revenue Code (I.R.C.) Subtitle A Chapters 1 or 3, as you do not have any "foreign earned income" and are not nonresident aliens, officers of a foreign corporation, or involved in any way with a foreign tax exempt organization. Further, you contend that the collection procedures authorized under I.R.C. 6012, 6211, and 6212 do not apply to income taxes collected under I.R.C. Subtitle C, Employment Taxes. Additionally, you contend that wages are not income; therefore, they are not subject to withholding taxes. You are requesting that the assessments be abated, the Memorandum of Lien be released, any payments against the assessments be refunded, and all taxes withheld from wages be refunded from 1961 to 1994.
DETERMINATION

Generally

It appears that you have misunderstood the principal of conformity of Virginia income taxation with the Internal Revenue Code. Code of Virginia §58.1-302, copy enclosed, provides 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 unless a different meaning is clearly required.

Virginia "conforms" to federal law because it starts the computation of Virginia taxable income with federal adjusted gross income (FAGI). Therefore, to the extent that wages, salaries or other income are included in FAGI, they are subject to taxation on the Virginia return. Section 61(a)(1) of the I.R.C and Treasury Regulation §1.62-2 clearly includes compensation for services, such as wages and salaries, in FAGI. Further, 61(b) of the I.R.C cross references other types of income that are included in the definition of gross income ( 71 through 90) as well as income that is excluded from gross income ( 101 through 136). A review of these sections indicates that wages is not excluded from the definition of gross income.

The department's collection procedures are not in conformity with the collection procedures of the IRS as Title 58.1 of the Code of Virginia has specific statutes authorizing the collection procedures for delinquent taxes.

Federal Audit Results in Virginia Assessment

Code of Virginia §58.1-341, copy enclosed, provides that a Virginia resident who is required to file a federal income tax return must file a Virginia income tax return, unless the resident is exempt from filing under Code of Virginia §58.1-321, copy enclosed. Further, Code of Virginia §58.1-311, copy enclosed, requires that any change made on the federal return must be reported to the department on an amended Virginia return within ninety (90) days from the final determination of such change on the federal return. If an amended return is not filed with the department, §6103 (d) of the I.R.C. authorizes the department to obtain information from the Internal Revenue Service that will assist in determining any additional tax liability.

The department received information from the Internal Revenue Service indicating that your income tax returns had been adjusted to disallow certain business expenses and capital loss deductions. By letter, the department notified you of this information and instructed you to file the necessary amended return or provide documentation to indicate the federal information was erroneous. As you did not furnish the requested information within the allotted time, an assessment for tax and interest was properly issued.

Pursuant to Code of Virginia §58.1-111, copy enclosed, the department has the authority to estimate tax liability when a person refuses to file a valid return. Code of Virginia § 58.1-205, copy enclosed, provides that any assessment shall be deemed prima facie correct. Code of Virginia §58.1-312, copy enclosed, provides that an assessment can be issued at any time if a change of the federal return is not reported to the department.

Collection Procedures

Contrary to your view on Virginia conformity, Virginia does not conform to the Internal Revenue Code in collection procedures. Virginia collection procedures are specifically set forth in the Virginia statutes. Code of Virginia §58.1-1805, copy enclosed, provides that if any tax assessed by the department is not paid within thirty days, a memorandum of lien may be filed in the circuit court clerks office of the county or city in which the taxpayer resides or his business is located. A notice of intent to file the lien must be sent the by the department to the taxpayer at the last known address at least 10 days prior to the filing of the lien.

In that you have refused paying the income taxes assessed as a result of information furnished to the department by the Internal Revenue Service, the department notified you that a memorandum of lien would be filed if the assessments were not paid. After continued refusal to pay the assessments, the memorandum was properly filed.

Wages as Income

You contend that 61(a) of the I.R.C. list wages as a "source" of "income" and which should not be taxed since it is received in exchange for labor. However, Code of Virginia §58.1460, copy enclosed, in part, defines wages to conform with the definition of wages as provided in 3401(a), 3402, and 3405 of the I.R.C, which as previously indicated, are part of gross income and included in FAGI. Further, Code of Virginia §58.1-461, copy enclosed, requires an employer who pays wages to a Virginia resident to deduct Virginia income tax from those wages and pay the deducted taxes to the department. Code of Virginia §58.1 -480, copy enclosed, provides that the taxes withheld may be claimed as a credit against the employee's income tax liability for the calendar year - typically a Wage and Tax Statement, Form W-2, is used to claim the credit. The taxes deducted from your wages were properly withheld by your employer and credited against your income tax liability when your income tax returns were filed.

Internal Revenue Code Subtitles A and C

You deny any requirement to file a tax return under I.R.C., Subtitle A, Chapters 1 and/or 3 as you did not have any "Foreign Earned Income" and were not nonresident aliens, officers of a foreign corporation, or involved in any way with a foreign tax exempt organization. You contend that I.R.C. Subtitle C is not authorized by Sections 6012, 6211, and 62112 of the I.R.C. Further, you contend that the department is basing its actions on the provisions of I.R.C., Subtitle C; therefore, the department's actions are outside the authority Sections 6211 and 6212.

While you may not have received foreign earned income as provided in Chapter 3 of Subtitle A of the I.R.C., you received gross income as provided in Chapter 1 of Subtitle A, which consisted of wages and business income. As a result, a federal return was required to be filed as provided in Section 6012. Based on information provided by the IRS, you, in fact, filed these returns for the years 1990 and 1991. Further the wife has filed returns for 1992 and 1993 although the husband has refused to file returns for those years. Consequently, the Internal Revenue Code sections for Definition of Deficiency ( 6211) and Notice of Deficiency ( 6212) would be applicable to your situation. Additionally, as discussed in previous sections, you were required to file Virginia returns, and the collections procedures enforced by the department were proper.

Conclusion and Appeal Rulings

Based on the information provided, the department has properly applied the provisions of Title 58.1 of the Code of Virginia to your case. Consequently, there is no basis to abate the 1990 and 1991 assessments, release the Memorandum of Lien, issue 1992 and 1993 refunds that were applied to any assessments, or refund any withholding taxes deducted from your wages for the periods 1961 through 1994. The 1990 assessment amounting to******** (including updated interest of***********the 1991 assessment amounting to***including updated interest of are due within the next 30 days. After this period, all actions to collect your delinquent assessments will resume. In addition, within 60 days from the date of this letter, the husband must file Virginia income tax returns for all relevant years that have not been filed. Based on your continued residence in Virginia, these returns must be filed consistent with the Code of Virginia and the Internal Revenue Code. Continued refusal to file these returns will justify the 100% fraud penalty, pursuant to Code of Virginia §58.1-308, copy enclosed, and other legal actions to collect the proper tax. Income tax returns and payment of your assessments should be forwarded to*************who may be contacted at*****************.

You have requested information on your appeal rights. Your case is currently being handled as an appeal pursuant to Code of Virginia §58.1-1821, copy enclosed. If you are not satisfied with this determination, you may apply to the circuit court for relief pursuant to Code of Virginia §58.1-1825, copy enclosed. However, the application should be filed within three years from the date the assessments were made. Additionally, the assessments must be paid or the appropriate bond posted before the court application is deemed filed.
                        • Sincerely,



                          Danny M. Payne
                          Tax Commissioner


OTP9492N

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46