Tax Type
Individual Income Tax
Description
Taxpayer employed off the reservation and receives pension income from that employer
Topic
Subtractions and Exclusions
Taxable Income
Date Issued
07-30-2010
July 30, 2010
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 "Taxpayer"), for the taxable years ended December 31, 2005 through 2007. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer resides on an Indian reservation located in Virginia. He is an Indian who received intangible income from sources off the reservation. The Taxpayer subtracted wages, interest, dividends and retirement income in computing his Virginia taxable income.
Under audit, a subtraction for wages was permitted for the 2005 taxable year. The information provided indicated that the wages were earned from pursuits on the reservation on which the Taxpayer resided. The Department disallowed the subtractions for interest, dividends and retirement income and issued assessments. The Taxpayer appeals the assessments, contending the income resulted from activities conducted on an Indian reservation.
DETERMINATION
Virginia Code § 58.1-301 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. For individual income tax purposes, Virginia "conforms" to federal law, in that it starts the computation of Virginia taxable income with federal adjusted gross income (FAGI). Income 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 Va. Code § 58.1-322.
Indian Treaty
The Taxpayer asserts that the treaty between Virginia and the Indians in 1677 remains in effect. According to the Taxpayer, the treaty exacts an annual tax on the Indians. The Taxpayer argues that, as wards of the Commonwealth, Virginia can impose no other tax on Indians in Virginia.
Indians are considered residents of the state in which their reservation is located. See Eastern Band of Cherokee Indians v. Mark G. Lynch, Secretary of Revenue for the State of North Carolina, 632 F.2d 373 (4th Cir 1980) (Cherokee Indians v. Lynch). An Indian residing on an Indian reservation located in Virginia, therefore, is a resident of Virginia. The Commonwealth's longstanding policy has been to refrain from imposing income tax on the income earned by an Indian residing on a reservation solely from pursuits on that reservation. See 1917 Report of the Virginia Attorney General 160 (1/26/1917) and 1918 Report of the Virginia Attorney General 86 (1/25/1918). This general state tax immunity, however, does not operate outside of the Indian reservation. Indians receiving income from outside of the reservation are subject to income taxes in the same manner as other residents of this state.
Situs for Income Tax Purposes
The Taxpayer asserts that he did not need to leave the reservation to receive pension, dividends or interest income. Further, he believes that, because intangible property, is considered to be sitused at the domicile of the owner for property tax purposes pursuant to 1970 Report of the Attorney General 277 (1/30/1970), these pursuits were conducted on the reservation.
While the Attorney General did opine that bank accounts are intangible property sitused at the domicile of the owner, the opinions addressed whether a county or the Commonwealth could impose probate tax on the bank accounts. Because income tax is not based on the situs of property, this opinion would not limit the Department's authority to impose income tax.
In Mary T. Ryan v. Commonwealth of Virginia, 169 Va. 414, 193 S.E. 534 (1937), the Virginia Supreme Court (the "Court") ruled that income tax is not a tax on property, but a tax levied on the individual measured by the net income received by that individual. The Court pointed to its decision in Eppa Hunton, IV v. Commonwealth, 166 Va. 229, 183 S.E. 873 (1936), when it held "the Virginia income tax is an excise tax and not a property tax that is not a tax on the property from which the income was derived." Thus situs of the property from which the income is derived does not necessarily determine where the income will be taxed.
Written Advice
The Taxpayer cites a notice of corrected assessment for the 1981 taxable year, issued by the Department to a relative who is also an Indian. This notice abates an income tax assessment with the simple explanation that the relative was "not liable for taxes."
Virginia Code § 58.1-1835 authorizes the Tax Commissioner to abate an assessment or a portion of an assessment that is attributable to erroneous advice furnished to taxpayers in writing by an employee of the Department acting in his official capacity. Thus, the Department would be required to abate an assessment or a portion of an assessment that is attributable to such erroneous advice. Such abatement, however, is limited to the taxpayer to whom the advice was given.
In this case, the abatement notice provided does not identify the income at issue or the specific reason for the abatement. While it is possible that the Department abated the relative's assessment because he was an Indian, the notice fails to articulate any particular reason.
Further, even if erroneous written advice had been issued, the taxpayer receiving that information, not the Taxpayer, would have been entitled to relief pursuant to Va. Code § 58.1-1835.
In addition, the Department's established policy was publicly promulgated in Public Document (P.D.) 00-96 (5/25/2000). P.D. 00-96 directly supersedes any previously written advice, thereby nullifying any erroneous advice contained therein. P.D. 00-96 was issued well before the taxable years at issue and should have been followed by the Taxpayer.
Federally Recognized Tribes
The Taxpayers argue that the Department erred in relying on Cherokee Indians v. Lynch in P.D. 00-96 because the case involved federal government responsibilities and obligations for federally recognized tribes with a treaty with the federal government. The Indian tribe to which the husband belongs is not a federally recognized tribe and does not have a treaty with the federal government. Instead, the Indian tribe at issue has always related directly to the government of the Commonwealth.
Contrary to the assertion of the Taxpayers, the decision in P.D. 00-96 is not based on the ruling in Cherokee Indians v. Lynch. This case is cited for the sole purpose of pointing out that Indians are considered to be residents of the state in which they reside. Instead, the determination in P.D. 00-96 is based on 1917 Report of the Virginia Attorney General 160, which clearly limits the general state tax immunity for Indians to pursuits, activities, or operations that occur on the Indian reservation.
Income from Intangible Sources
The Taxpayer believes that because he did not have to leave the reservation to receive the dividend and interest income, these pursuits were followed on the reservation. In P.D. 00-96 (5/25/2000), the Department held that income resulting from activities conducted off an Indian reservation includes intangible source income from institutions or providers located outside the reservation. Under P.D. 00-96, when stock investments are held in corporations located outside the Indian reservation, and accounts are held at banks or other financial institutions located without the reservation, any resulting dividend and interest income is considered to have been earned without the reservation.
In this case, the Taxpayer has provided no evidence that the dividend or interest income resulted from pursuits conducted on the reservation. Stock was purchased in corporations, mutual funds from financial institutions, and monetary funds deposited in banks that were not located on the reservation. Because the corporations, financial institutions managing the mutual funds, and the banks were not located on the reservation, the income they generated did not result in income from pursuits conducted on the reservation
Income from Pensions
The Taxpayer also asserts that he could conduct the pursuits on the reservation and still receive pension income. He asserts that this income cannot be subject to Virginia income tax pursuant to 1917 Report of the Virginia Attorney General 160.
Pensions and employer provided retirement plans are generally considered to be payments made by an employer as a retirement benefit. In Black's Law Dictionary (Eighth Edition, 2004, p. 1170) a "pension plan" is defined as "any plan, fund, or program established or maintained by an employer or an employee organization that provides retirement income to employees or results in a deferral of income by employees extending to the termination of employment or beyond." Under this definition, pension income could be considered to be deferred compensation for providing job services to an employer.
This analysis is supported by Treas. Reg. §1.61-2(a)(1), which includes pensions in a list of the types of income that is considered to be compensation for services. Thus, pension income would be considered to be earned where the individual receiving the income performed their job functions resulting in the retirement income.
If an Indian retired from employment pursued on the reservation, any resulting employer-provided retirement income would be income from pursuits conducted on the reservation. If the Indian were employed off the reservation, any resulting pension would be considered to be income from pursuits conducted off the reservation.
In this case, it appears that the Taxpayer was employed off the reservation by the employer from whom he receives pension income. Accordingly, the pension income would not be eligible for subtraction for determining Virginia taxable income.
CONCLUSION
Based on the forgoing, the assessments for the 2005 through 2007 taxable years are upheld. Payment of the balance due, as shown on the enclosed schedule, should be made within 30 days from the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attention: *****. If payment is not received within the allotted time, additional interest will accrue and collection action will resume on the outstanding balance.
The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, please contact ***** at *****.
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- Sincerely,
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- Linda D. Foster
Deputy Tax Commissioner
- Linda D. Foster
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AR/1-3248074724.E
Rulings of the Tax Commissioner