April 3, 2015
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the Virginia individual income tax assessment issued to ***** (the "Taxpayers") for the taxable year ended December 31, 2011.
FACTS
The Taxpayers, a husband and wife, moved to Virginia from ***** (Country A) in late 2010 when the husband was transferred by his employer. The Taxpayers filed their 2011 Virginia resident individual income tax return claiming several subtractions and deductions of income. The Department audited the 2011 return and disallowed certain subtractions for income the Taxpayer's attributed to Country A. The Department also disallowed a subtraction of a distribution of income resulting from the conversion of a traditional individual retirement account (IRA) into a Roth IRA. The Taxpayers paid the assessment in full and filed an appeal, contending that the subtractions and deductions disallowed by the Department were for income attributable to the 2010 taxable year.
DETERMINATION
Taxability of Income
The Taxpayers subtracted a portion of the husband's base salary, incentive maintenance payments, foreign tax paid by his employer, and bonus derived from the husband's work performed in Country A during the 2010 taxable year.
It has been well established that a state may tax all the income of its residents, even income earned outside the taxing jurisdiction. In New York ex rel. Cohn v. Graves, 300 U.S. 308, 57 S.Ct. 466 (1937), the United States Supreme Court explained "[t]hat the receipt of income by a resident of the territory of a taxing sovereignty is a taxable event is universally recognized." Thus, any resident who has Virginia taxable income as determined under Taxpayer was not a resident of Virginia for the 2011 taxable year and was not required to file a Virginia Resident Incomeirginia's statutes is subject to Virginia income tax.
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 IRC 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 properly 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. A resident of Virginia includes any natural person domiciled in Virginia at any time during a taxable year or who, for an aggregate of more than 183 days of the taxable year, maintained his place of abode within Virginia.
Accordingly, any income that the Taxpayers received while they were Virginia residents in 2011 was subject to Virginia income tax even if attributable to income earned in Country A during the 2010 taxable year unless it was specifically exempt as a Virginia modification pursuant to Va. Code § 58.1-322. Because Va. Code § 58.1-322 does not provide modifications for base salary, incentive maintenance payments, and foreign tax paid by an employer, the subtractions and deductions from the Taxpayers' 2011 FAGI that they attributed to Country A were properly disallowed by the Department.
Capital Gains from Foreign Investments
In addition, the Taxpayers subtracted a portion of their capital gains from investments in foreign entities because they came from funds which did not "have a Virginia participation." The Department disallowed the capital gains subtracted by the Taxpayers for the 2011 year.
At one time, Va. Code § 58.1-322 did provide a subtraction from FAGI for certain foreign source income. However, the General Assembly specifically repealed the subtraction effective for taxable years beginning on and after January 1, 2003. Because the foreign gain was included in the Taxpayers' FAGI and the Code of Virginia does not permit a subtraction for such income, the Department was correct in disallowing the subtraction on the 2008 income tax return. Virginia's policy has been consistently articulated in P.D. 03-54 (5/3/2003), P.D. 07-1 (2/22/2007), P.D.08-103 (6/18/2008), and P.D. 09-50 (4/27/2009).
Roth IRA
The Taxpayers claimed a subtraction for a 2010 distribution that was ratably included in the Taxpayers' FAGI when converting a traditional IRA into a Roth IRA. The Taxpayers contend they should be able to claim a subtraction for the 2011 distribution.
Beginning in 2010, IRC § 408 A(d)(3)(A)(iii) permits a ratable portion of a distribution from a traditional IRA and rolled over to a Roth IRA to be included in FAGI over the two taxable year period. In accordance with this provision, the Taxpayers appropriately included the distribution in FAGI reported on the Virginia return. However, they erroneously claimed a subtraction for the amount of the distribution.
The Department has issued rulings to address similar provisions in the past. See P.D. 98-44 (3/9/1998) and P.D. 05-124 (7/25/2005). In fact, P.D. 05-124 specifically states that no subtraction is permitted for distributions when converting a traditional IRA to a Roth IRA where the contributions were made to the traditional IRA when the taxpayer resided in another state.
CONCLUSION
Individual income taxpayers are limited to modifications to FAGI enumerated in Va. Code § 58.1-322. As indicated above, this section does not provide subtractions or deductions for the types of income claimed by the Taxpayers on their 2011 income tax return. Accordingly, the Department correctly disallowed the subtractions and deductions. The assessment, therefore, is upheld and your request for a refund must be denied.
The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5888720829.B