Tax Type
Individual Income Tax
Description
Divorce settlement, FAGI adjusted by IRS
Topic
Taxable Income
Date Issued
05-10-1999
May 10, 1999
Re: § 58.1-1821 Application: Individual Income Tax
Dear*************
This will reply to your letter concerning the 1992 through 1994 Virginia individual income tax assessments for ***** (the "Taxpayers). I apologize for the delay in responding to your letter.
FACTS
The Taxpayers, a husband and wife, were contacted by the department concerning adjustments made to their federal adjusted gross income (FAGI) for the 1992 through 1994 taxable years. The Internal Revenue Service (IRS) adjusted the Taxpayers' federal returns to include retirement pay as pension income. The department adjusted the Taxpayers' Virginia returns based on the IRS corrections.
In 1989, the wife divorced her former spouse. According to the divorce decree, the wife and former spouse entered into a property settlement agreement. Under the property settlement agreement, the wife is to receive fifty per cent (50%) of the former spouse's net monthly military retirement pay. The Taxpayers did not include this retirement pay on their 1992 through 1994 income tax returns.
The Taxpayers believe that Virginia is bound by the divorce decree which requires the former spouse to pay tax on all of the retirement income. Accordingly, the Taxpayers contest the adjustment and request abatement of taxes assessed.
DETERMINATION
Pursuant to Code of Virginia § 58.1-301, terms used in the chapter relating to the Virginia income tax have the same meaning as the terms used in the Internal Revenue Code (IRC). Accordingly, Virginia law provides that the starting point for state income tax is federal adjusted gross income with certain modifications as specified in Code of Virginia § 58.1-322, copy enclosed. Based on this, any adjustment in federal adjusted gross income must coincide with an adjustment to Virginia taxable income.
Code of Virginia § 58.1-311, copy enclosed, requires that if FAGI is changed by the IRS, taxpayers are required to report such changes to the department within 90 days. If such changes are not reported, the department is authorized to make adjustments to the Virginia returns at any time.
In the Taxpayers' case, FAGI was adjusted by the IRS for taxable years 1992 through 1994. Under IRC §6103(d), the department obtained information from the IRS reflecting changes made to the Taxpayers' tax liability for 1992 through 1994 and issued a notice indicating the amount of tax due.
The Taxpayers argue that the property settlement from the wife's divorce relieves them of this tax liability. The property settlement states that the wife will receive 50% of the former spouse's net military retirement pay, which is net of federal and state taxes. In Virginia, property settlement agreements are contracts and subject to the same rules of formation, validity, and interpretation as other contracts. Smith v. Smith, 3 Va. App. 510, 351 S.E.2d 593 (1986). A contract cannot relieve a party from its responsibility under the laws of the United States and Virginia. This includes the duty to pay taxes.
The Taxpayers further assert that because the property settlement was created under Virginia law, the department should be bound by its provisions. However, in order to be bound by a contract, an entity must be a party to that contract. The only parties to this contract are the wife and her former spouse. The Commonwealth's role in the making of this contract was merely to oversee the equitable distribution of the marital property. Because the department is not a party to the contract, it is not bound by its provisions. The role of the department in this situation is to properly administer the laws regarding taxation. The only possible party from whom the Taxpayers could seek relief from the tax would be the other party to the contract, the former spouse.
Accordingly, the assessments for the 1992 through 1994 taxable years are correct. If you have any questions regarding this determination, you may call *************** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12475G
Re: § 58.1-1821 Application: Individual Income Tax
Dear*************
This will reply to your letter concerning the 1992 through 1994 Virginia individual income tax assessments for ***** (the "Taxpayers). I apologize for the delay in responding to your letter.
FACTS
The Taxpayers, a husband and wife, were contacted by the department concerning adjustments made to their federal adjusted gross income (FAGI) for the 1992 through 1994 taxable years. The Internal Revenue Service (IRS) adjusted the Taxpayers' federal returns to include retirement pay as pension income. The department adjusted the Taxpayers' Virginia returns based on the IRS corrections.
In 1989, the wife divorced her former spouse. According to the divorce decree, the wife and former spouse entered into a property settlement agreement. Under the property settlement agreement, the wife is to receive fifty per cent (50%) of the former spouse's net monthly military retirement pay. The Taxpayers did not include this retirement pay on their 1992 through 1994 income tax returns.
The Taxpayers believe that Virginia is bound by the divorce decree which requires the former spouse to pay tax on all of the retirement income. Accordingly, the Taxpayers contest the adjustment and request abatement of taxes assessed.
DETERMINATION
Pursuant to Code of Virginia § 58.1-301, terms used in the chapter relating to the Virginia income tax have the same meaning as the terms used in the Internal Revenue Code (IRC). Accordingly, Virginia law provides that the starting point for state income tax is federal adjusted gross income with certain modifications as specified in Code of Virginia § 58.1-322, copy enclosed. Based on this, any adjustment in federal adjusted gross income must coincide with an adjustment to Virginia taxable income.
Code of Virginia § 58.1-311, copy enclosed, requires that if FAGI is changed by the IRS, taxpayers are required to report such changes to the department within 90 days. If such changes are not reported, the department is authorized to make adjustments to the Virginia returns at any time.
In the Taxpayers' case, FAGI was adjusted by the IRS for taxable years 1992 through 1994. Under IRC §6103(d), the department obtained information from the IRS reflecting changes made to the Taxpayers' tax liability for 1992 through 1994 and issued a notice indicating the amount of tax due.
The Taxpayers argue that the property settlement from the wife's divorce relieves them of this tax liability. The property settlement states that the wife will receive 50% of the former spouse's net military retirement pay, which is net of federal and state taxes. In Virginia, property settlement agreements are contracts and subject to the same rules of formation, validity, and interpretation as other contracts. Smith v. Smith, 3 Va. App. 510, 351 S.E.2d 593 (1986). A contract cannot relieve a party from its responsibility under the laws of the United States and Virginia. This includes the duty to pay taxes.
The Taxpayers further assert that because the property settlement was created under Virginia law, the department should be bound by its provisions. However, in order to be bound by a contract, an entity must be a party to that contract. The only parties to this contract are the wife and her former spouse. The Commonwealth's role in the making of this contract was merely to oversee the equitable distribution of the marital property. Because the department is not a party to the contract, it is not bound by its provisions. The role of the department in this situation is to properly administer the laws regarding taxation. The only possible party from whom the Taxpayers could seek relief from the tax would be the other party to the contract, the former spouse.
Accordingly, the assessments for the 1992 through 1994 taxable years are correct. If you have any questions regarding this determination, you may call *************** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12475G
Rulings of the Tax Commissioner