July 27, 2021
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 assessment issued to ***** (the “Taxpayer”) for the taxable years ended December 31, 2017, and 2019.
FACTS
The Department received information from the Internal Revenue Service (IRS) indicating that the Taxpayer may have been required to file a Virginia individual income tax return for the 2017 taxable year. Because no return was on file, the Department requested additional information in order to determine if her income was taxable in Virginia. When a response was not received, the Department issued an assessment. The Taxpayer appeals, contending she was a resident of ***** (State A) and paid tax on all her income in State A. In addition, the Taxpayer contests the penalty for the underpayment of estimated tax assessed for the 2019 taxable year.
DETERMINATION
Nonresident Income
Virginia Code § 58.1-301 provides, with certain exceptions, that the 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. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia. For individual income tax purposes, Virginia “conforms” to federal law, in that it starts the computation of Virginia taxable income (VTI) 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 Chapter 3 of Title 58.1 of the Code of Virginia.
Individuals who are neither domiciliary nor actual residents of Virginia and have income from Virginia sources are taxed as nonresidents, unless the individual meets the filing exception described in Virginia Code § 58.1-321. See Virginia Code § 58.1-325. The Virginia taxable income of a nonresident is computed by multiplying her Virginia taxable income (computed as if she were a resident) by the ratio of her net income, gain, loss, and deductions from Virginia sources to her net income, gain, loss, and deductions from all sources. Virginia Code § 58.1-302 limits the term income and deductions from Virginia sources to the items of income, gain, loss, and deductions attributable to (1) the ownership of any interest in real or tangible personal property in Virginia, (2) a business, trade, profession or occupation carried on in Virginia, or (3) prizes paid by the Virginia Lottery Department, and gambling winnings from wagers placed or paid at a location in Virginia. Thus, a nonresident with Virginia source income is required to file a nonresident Virginia income tax return unless the filing exemption applies. See Virginia Code § 58.1-341 A 2.
The Department’s records indicate that the Taxpayer received income from an ownership interest in an S corporation that apportioned all of its income to Virginia for the 2017 taxable year. As such, this income was from Virginia sources. Virginia Code § 58.1-325 B provides statutory guidance for the treatment of a nonresident shareholder of an S corporation with Virginia activity. It has been the Department’s longstanding policy that income received by an S corporation, which is determined to be income from Virginia sources, will remain Virginia source income in the hands of the shareholders. In addition, the amount of income in question exceeded the filing threshold set forth in Virginia Code § 58.1-321. The Taxpayer, therefore, was required to file a Virginia nonresident income tax return.
Underpayment of Estimated Tax Penalty
Virginia Code § 58.1-492 provides for an “addition to tax” (commonly called the estimated tax underpayment penalty) in the event of an underpayment of estimated tax. Under current law, taxpayers are required to make timely income tax payments throughout the year by having tax withheld from wages or making estimated payments. Taxpayers who do not have enough tax withheld from their income must make four estimated tax payments throughout the taxable year. The penalty is computed by applying a detailed formula set forth in Virginia Code § 58.1-492. The Department’s records indicate that the Taxpayer did not make sufficient estimated tax payments during the 2019 taxable year to avoid imposition of the penalty under the statutory formula. Accordingly, when she filed her 2019 Virginia return and paid the balance of tax due, the estimated tax underpayment penalty was assessed.
CONCLUSION
Although it appears that the Taxpayer was not a resident of Virginia during the 2017 taxable year, she had sufficient income from Virginia sources to require the filing of a nonresident Virginia income tax return and payment of the tax due on such income. Although the Taxpayer may have reported this income on her 2017 State A return, she was still liable for Virginia income tax on any income from Virginia sources. The Department requested that the Taxpayer file a 2017 Virginia nonresident return in its letters dated May 1, 2020, and March 1, 2021. To date, no return has been filed.
The Taxpayer, however, will be given one final opportunity to file a nonresident Virginia income tax return for the 2017 taxable year. The return should be submitted 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 23161-7203, Attention: *****. Upon receipt, the return will be reviewed and the assessment will be adjusted, as appropriate. If the return is not received within the allotted time, the assessment will be adjusted based on the information available and collection actions will resume. In addition, the penalty for the underpayment of estimated tax issued for the 2019 taxable year remains due and payable.
The Code of Virginia sections 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/3636.B