Tax Type
Individual Income Tax
Description
Taxpayer received Virginia source income passed through from State B's association
Topic
Pass-Through Entities
Persons Subject to Tax
Statute of Limitations
Date Issued
09-20-2012
September 20, 2012
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.
FACTS
For the taxable years at issue, the Taxpayer, a resident of ***** (State A), was a bay pilot licensed in the state of ***** (State B). While piloting vessels, the Taxpayer's route brought him from State B into Virginia waters on a regular basis.
The Taxpayer is a member of State B's association. The association, which is treated as a partnership for federal income tax purposes, filed a Virginia partnership return for each of the taxable years at issue that included a schedule showing the Taxpayer's share of the income and Virginia modifications.
The Taxpayer did not file Virginia income tax returns for the 2005 through 2007 taxable years. Based on the return filed by State B's association, the Department requested information concerning the Taxpayer's liability for Virginia income tax. The Taxpayer responded that he was not required to file a Virginia income tax return. After reviewing the information provided by the Taxpayer, the Department concluded that he was subject to Virginia income tax on the income passed through from State B's association and issued assessments based on the available information.
The Taxpayer appeals the assessments, contending he is subject to tax on all of his piloting income in his state of residence, State A. He also questions how the Department generated the assessment and asserts that the 2006 and 2007 assessments were issued beyond the statute of limitations.
DETERMINATION
Statute of Limitations
Virginia Code § 58.1-104 generally requires the Department to make an assessment of underpaid tax within three years from the last day prescribed by law for the timely filing of the return. When a taxpayer fails to file a required Virginia return, however, Va. Code § 58.1-312 A 1 permits the Department to assess the appropriate tax at any time. Because the Taxpayer did not file Virginia returns to report his Virginia source income from State B's association, the Department acted within its authority under Va. Code § 58.1-312 A 1 to issue the assessments for the 2006 and 2007 taxable years.
Estimated Assessments
The Taxpayer raises questions in his appeal concerning how the Department could compute a liability without knowing if he was eligible for any deductions. When a taxpayer fails or refuses to provide documentation sufficient to calculate an accurate liability, Va. Code § 58.1-111 permits the Department to make an estimate of the amount of taxes due from any information in its possession and issue an assessment to such taxpayer.
Upon its review of the information submitted by the Taxpayer, the Department requested that the Taxpayer file Virginia nonresident income tax returns. When the Taxpayer failed to comply, the Department issued assessments based on the available information as permitted under Va. Code § 58.1-111.
Income of a Nonresident
Pursuant to Va. Code § 58.1-325, a nonresident individual who has income from carrying on a business, trade, profession, or occupation within Virginia is required to file a Virginia individual income tax return, unless the individual meets the filing exception described in Va. Code § 58.1-321. The Virginia taxable income of a nonresident is computed by multiplying his Virginia taxable income (computed as if he were a resident) by the ratio of his net income, gain, loss, and deductions from Virginia sources to his net income, gain, loss, and deduction from all sources. Under Va. Code § 58.1-302, "income and deductions from Virginia sources" includes income from "a business, trade, profession or occupation carried on in Virginia." In addition, Va. Code § 58.1-341 requires every nonresident individual having Virginia taxable income to file an income tax return.
Virginia's conformity to federal law is set forth in Va. Code § 58.1-301, which provides that the terms used in the Virginia income tax statutes will have the same meanings as used in the Internal Revenue Code (IRC), Title 26 of the United States Code (U.S.C.), unless a different meaning is required. As such, Virginia's conformity to federal law is limited to the actual use of a specific term in a Virginia statute. Further, conformity does not extend to terms, concepts, or principles specifically provided for in Title 58.1 of the Code of Virginia.
The Taxpayer asserts that Virginia is prohibited from imposing income tax on his income by federal law. Under 46 U.S.C. § 11108(b)(2)(A), an individual performing assigned duties on a vessel in more than one state as a pilot, licensed under 46 U.S.C § 7101, is not subject to the income tax laws of a state other than the state in which the individual resides with regard to compensation received for the performance of his piloting duties. Because he is a licensed pilot, the Taxpayer argues that the only state that can impose income tax on the income he earned from piloting is State A.
The Department has previously addressed this issue in Public Document (P.D.) 11-12 (1/21/2011). In this ruling, the Department found that the term "compensation" for federal income tax purposes did not include income from partnerships and a nonresident pilot is required to file Virginia individual income tax returns to report income from Virginia sources and pay the tax, liability on such income. In addition, the out-of-state pilots association that operated in Virginia waters is required to file a Virginia pass-through entity return in order to report the amount of its Virginia source income passed through to its pilots.
The term "compensation" is not defined in either 46 U.S.C. § 11108 or Title 58.1 of the Code of Virginia. In such circumstances, Virginia's conformity dictates it first look to the IRC in determining how a particular item would be treated for Virginia income tax purposes. Under IRC § 61(a)(1), "compensation for services" is included in a taxpayer's gross income. Compensation for services is further explained in Treas. Reg. §1.61-2(a)(1) to include:
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- Wages, salaries, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses (including Christmas bonuses), termination or severance pay, rewards, jury fees, marriage fees and other contributions received by a clergyman for services, pay of persons in the military or naval forces of the United States, retired pay of employees, pensions, and retirement allowances are income to the recipients unless excluded by law.
Gross income under IRC F3 61(a)(13) also includes a taxpayer's distributive share of partnership gross income. Generally, a partner's distributive share of partnership gross income is determined under IRC § 702. See Treas. Reg. §1.61-13(a). For federal income tax purposes, State B's association filed partnership returns for the taxable years at issue and reported the fees earned by its pilots less operating expenses as ordinary income.
Under IRC § 702(b), "The character of any item of income, gain, loss, deduction, or credit included in a partner's distributive share . . . shall be determined as if such item were realized directly from the source from which realized by the partnership or incurred in the same manner as incurred by the partnership." Each item of pass-through entity income, gain, loss or deduction has the same character for an owner for Virginia income tax purposes as for federal income tax purposes. See Va. Code § 58.1-391 B. This would include an association treated as a partnership.
In this case, State B's association reported the fees as ordinary income, not compensation. As such, the income passed through to the Taxpayer would be considered to be ordinary income and not compensation. Because State B's association operates in Virginia, it would be required to apportion income in the same manner as corporations. See P.D. 88-165 (6/29/1988) and P.D. 07-150 (9/21/2007). An amount of the income passed through from State B's association was properly reported as ordinary income on its federal income tax return. Pursuant to Va. Code § 58.1-391 B, the character of that income passed through to the Taxpayer would be the same as that by State B's association.
CONCLUSION
Based on the evidence provided, the Taxpayer received Virginia source income passed through from State B's association. As such, he was required to file Virginia nonresident income returns for the 2005 through 2007 taxable years. Because such returns were not filed, the Department acted within its authority to issue the assessments against the Taxpayer.
The assessments were made based on the best information available to the Department. The Taxpayer may have additional information that more accurately reflects his Virginia taxable income. Accordingly, the Taxpayer is hereby requested to file Virginia nonresident individual income tax returns for the 2005 through 2007 taxable years to more accurately reflect his Virginia income tax liability.
The Taxpayer should file the requested returns within 30 days of the date of this letter. Please send the returns, along with payments for the corresponding liability, to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23218-7203, Attention: *****. Once the returns are received, they will be processed and the assessments will be adjusted accordingly. If such returns are not filed within the allotted time, the assessments will be considered to be correct and collection action will resume.
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 regarding this determination, you may contact ***** at *****.
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Sincerely,
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Craig M. Burns
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- Tax Commissioner
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AR/1-5130740557.o
Rulings of the Tax Commissioner