May 23, 2017
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, 2007 and 2011 through 2013.
FACTS
The Department received information from the Internal Revenue Service (IRS) indicating that the Taxpayer may have been required to file Virginia individual income tax returns for the 2011 through 2013 taxable years. The Department requested information to verify whether the Taxpayer was subject to Virginia income tax. When an adequate response was not received, the Department issued assessments for the 2011 through 2013 taxable years. An examination of the Taxpayer's account also indicated that he underpaid his 2007 Virginia income tax liability. The Taxpayer appealed, contending he owed no Virginia income tax because wages and salaries are not income subject to taxation.
DETERMINATION
Time for Filing an Amended Return
Virginia Code § 311 requires individuals to report a change or correction in federal taxable income within one year of the final determination of such change or correction by filing an amended return with the Department. If the taxpayer fails to file an amended return, Va. Code § 58.1-312 A 3 permits the Department to assess the appropriate tax at any time. Where the IRS has audited the federal taxable income of a taxpayer, the Department typically does not look behind the IRS' final determination. See Public Document (P.D.) 11-107 (6/14/2011).
The Department's records indicate that the Taxpayer paid the federal income tax assessed for the 2007 taxable year in full via a payment plan. The Taxpayer, however, did not file an amended Virginia return reporting the increase in FAGI within the one year period or pay the additional Virginia income tax due.
Time for Filing an Appeal
Virginia Code § 58.1-1821 provides that “any person assessed with any tax administered by the Department of Taxation may, within ninety days from the date of such assessment, apply for relief to the Tax Commissioner.” Title 23 of the Virginia Administrative Code (VAC) 10-20-165 provides additional requirements regarding the timely filing of administrative appeals. This regulation provides information to taxpayers about the process for appealing tax assessments, including how to file a complete and timely administrative appeal.
The Taxpayer filed an appeal for the taxable years at issue with the Department by letter received on January 17, 2017. An appeal must be filed within 90 days of the date of the assessment. The assessments for the 2011 and 2012 taxable years were issued on June 13, 2014 and April 20, 2015 respectively. The Taxpayer's appeal letter was filed well outside the 90-day period provided in Va. Code § 58.1-1821.
Taxation of Residents
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 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.
Virginia Code § 58.1-341 provides that a Virginia resident who is required to file a federal income tax return is also required to file a Virginia income tax return, unless the resident is exempt from filing under Va. Code § 58.1-321. When a resident does not file a proper Virginia return, IRC § 6103(d) authorizes the Department to obtain information from the IRS that will help in determining the resident's tax liability. See P.D. 14-33 (3/7/2014) and P.D. 15-49 (4/3/2015).
In addition, the Virginia Supreme Court has held “the power of the State of Virginia to levy taxes is not derived from the Constitution of the United States as interpreted by the Supreme Court. On the contrary, the State has the inherent and unlimited power of taxation unless restrained by its Constitution or the Constitution of the United States.” See Colonial Pipeline Company v. Commonwealth of Virginia, 206 Va. 517, 145 S.E.2d 227 (1965). Thus, the fact that Virginia starts with the IRC to determine Virginia taxable income does not in any way inhibit the Commonwealth's authority to impose an income tax on its citizens.
The Taxpayer quotes three cases that purportedly state that wages and salaries are not income subject to income tax. These quotes are not in the cited cases. Two of the cases, Connor v. United States, 27 AFTR 2d. 71-858, 439 f.2d. 974 (1971) and Doyle v. Mitchell Bros. Co., 247 U.S. 179, 38 S. Ct. 467 (1918) do not address wages and salaries. The holding in the third case, Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241 (1930) is contrary to the Taxpayer's position. It held that:
[T]here is no doubt that the [income tax] statute could tax salaries to those who earned them and provide that the tax could not be escaped by anticipatory arrangements and contracts however skillfully devised to prevent the salary when paid from vesting even for a second in the man who earned it. [Inserts Added]
Although the Taxpayer does not deny that he was a Virginia resident or that he had income during the taxable year at issue, he states that his income was not subject to federal and Virginia income tax. The information available shows that the Taxpayer received Virginia taxable income during the 2013 taxable year. Because the amount of such income exceeded the applicable filing threshold under Va. Code § 58.1-321, the Taxpayer was required to file a Virginia return. See also P.D. 14-33 (3/7/2014).
CONCLUSION
The claim that the Taxpayer's income was not subject to Virginia taxation has no basis in fact or Virginia law. An individual who fails to file Virginia income tax returns based solely on such claims has intentionally understated his or her income tax liability with the intent to evade tax and is subject to a 100% fraud penalty pursuant to Va. Code § 58.1-308.
The Taxpayer has not timely filed his 2007 amended Virginia income tax return, nor did he timely file an appeal for the 2011 and 2012 assessments. He was subject to Virginia income tax on his wages as a Virginia resident during all the taxable years at issue. Based on the applicable law cited above and the information presented, the Department finds no basis on which to abate the assessments issued for the 2007 and 2011 through 2013 taxable years. Accordingly, the assessments are upheld. An updated bill will be mailed shortly, which will include accrued interest to date. Payment of the outstanding balance of the bill should be made within 30 days of the bill date in order to avoid the accrual of additional interest.
The Code of Virginia sections and public document 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/1138.B