Tax Type
Individual Income Tax
Description
Back pay
Topic
Taxable Income
Date Issued
10-03-1997
October 3,1997
Re: § 58.1-1821 Application: Individual Income Tax
Dear*************
This will reply to your letter, dated September 16, 1997, in which you protest a portion of an assessment of individual income tax against you and your wife (the "Taxpayers") for the taxable year 1992.
FACTS
The Taxpayers moved to Virginia in September 1991. During 1992, the husband received a "back pay" award for work he performed from 1980 through 1986 while he was a Texas resident. This compensation was reported on the husband's 1992 W-2 form and included in the Taxpayers' 1992 federal adjusted gross income.
The Taxpayers contend that this income should be excluded from their 1992 Virginia individual income tax return because it was earned while the husband was a Texas resident. The Taxpayers have cited Title 60.2 of the Code of Virginia in support of their position.
DETERMINATION
Code of Virginia § 58.1-301, copy enclosed, provides 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. Accordingly, Virginia law provides that the starting point for computing Virginia taxable income is the federal adjusted gross income (FAGI) with certain additions, subtractions, exemptions, and deductions as specified in Code of Virginia § 58.1-322, copy enclosed.
IRC § 61, copy enclosed, specifically includes compensation for services in the definition of gross income. Although the husband's “back pay" compensation was earned during the years 1980 through 1986 in another state, it was included in the Taxpayers' 1992 federal adjusted gross income while they were Virginia residents. Code of Virginia § 58.1-322 does not provide a subtraction for compensation earned in another state during a previous year. Accordingly, to the extent the "back pay" compensation is included in FAGI, it is subject to Virginia taxation.
Virginia's method of preventing the taxation of income earned in another state is, typically, to allow an out-of-state tax credit. Code of Virginia § 58.1-332, copy enclosed, provides relief when earned or business income is taxed by Virginia and another state in the same year. In the instant case, the Taxpayers did not pay any income tax to another state on the "back pay" compensation received in 1992, as Texas does not have a personal income tax. Thus, the Taxpayers would not be entitled to an out-of-state tax credit for the income in question.
The Taxpayers have cited Title 60.2 of the Code of Virginia. This title, however, pertains to Virginia unemployment compensation. For purposes of computing an employer's liability for state unemployment taxes, "back pay" awards are allocated to the period in which such compensation was earned. See Code of Virginia §§ 60.2-229 and 60.2-515, copies enclosed. This application, however, does not relate to the taxation of such compensation on the Virginia individual income tax return.
While I sympathize with your situation, the department lacks the statutory authority to allow a subtraction or credit on your 1992 Virginia individual income tax return for the "back pay" award. Accordingly, the assessment is correct as issued. For your convenience, a schedule of the outstanding bill is enclosed. The amount due should be paid in full within 30 days to avoid the accrual of additional interest. Please forward your payment to the attention of ***** at the Department of Taxation, Office of Tax Policy, Post Office Box 1880, Richmond, Virginia 23218-1880. If you have any questions or need further assistance, please contact***** at********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12993M
Rulings of the Tax Commissioner