April 15, 2015
Re: § 58.1-1824 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek the correction of the individual income tax assessment issued to ***** (the "Taxpayer") for the taxable year ended December 31, 2010 through 2012. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer, a resident of Virginia, received pension income from her former employer in ***** (State A). The Taxpayer claimed a subtraction on her Virginia income tax returns for the entire amount received. Under audit, the Department disallowed the subtraction and issued assessments for the 2010 through 2012 taxable years. The Taxpayer paid the assessments and filed an appeal, contending the distributions should not subject to Virginia income tax.
DETERMINATION
Protective Claim
Virginia Code § 58.1-1824 permits any person who has paid an assessment of taxes administered by the Department of Taxation to file a protective claim for refund within three years of the date of an assessment. Pursuant to the authority granted the Tax Commissioner under Va. Code § 58.1-1824, a protective claim for refund can be held pending the outcome of another case before the courts or the claim may be decided based upon its merits pursuant to Va. Code § 58.1-1821. As permitted by statute, the Taxpayer's request has been treated as an appeal under Va. Code § 58.1-1821.
Retirement Subtraction
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 (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 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.
Virginia Code § 58.1-322 C 19 provides a subtraction for income received from certain pension and retirement plans when the contributions to the plans were taxed in prior years by another state, but not by the federal government. Taxpayers eligible for this subtraction are able to avoid taxation by both Virginia and another state on the same retirement savings. Because the Taxpayer provided no evidence of prior contributions being taxed by State A, the Taxpayer is not eligible for this subtraction.
With regard to the Taxpayer's argument that the income would not have been taxable in State A, it is 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, (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, Virginia may impose income tax on all the income received by the Taxpayer while she is a Virginia resident.
Further, Title 4 U.S.C. § 114 prohibits states from imposing an income tax on any retirement income of an individual who is neither an actual or domiciliary resident of such state. Under this federal statute, Virginia can only impose income tax on retirement income of individuals that are either actual or domiciliary residents of the Commonwealth.
In this case, the Taxpayer was a resident of Virginia and the pension income was included in FAGI for the taxable years at issue. The income was not eligible for the subtraction provided in Va. Code § 58.1-322 C 19. Therefore, the Department's adjustments to the 2010 through 2012 taxable year returns are correct and no refund will be issued.
The Code of Virginia sections 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 ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5744106685.D