January 25, 2022
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 year ended December 31, 2018.
FACTS
The Taxpayer filed a Virginia resident income tax return for the 2018 taxable year claiming a subtraction for an individual retirement account (IRA) distribution. Under audit, the Department disallowed the subtraction and issued an assessment. The Taxpayer filed an appeal in which she makes a number of arguments in seeking adjustments to the assessment. She asserts that the distribution was earned in ***** (State A). Further, she contends that, because State A did not have an income tax and she did not receive a state tax benefit when making contributions, no other state should penalize her for taking out a distribution. In addition, she questions whether Virginia has the ability to tax that half of the distribution she claims was considered the community property of her spouse in State A. In the alternative, she requests an interest waiver on the basis that her tax preparer received erroneous advice regarding the taxation of the distribution from the Department and that had he not received that advice, she would have paid the tax at that time and not incurred additional interest. Finally, she argues that imposition of tax in this case goes beyond the actions allowed by Virginia’s “long-arm statute.”
DETERMINATION
Taxation of Virginia Residents
Two classes of residents, a domiciliary resident and an actual resident, are set forth in Virginia Code § 58.1-302. The domiciliary residence of a person means the permanent place of residence of a taxpayer and the place to which he intends to return even though he may reside elsewhere. An actual resident of Virginia means a person who, for an aggregate of more than 183 days of the taxable year, maintained his place of abode within Virginia.
The Taxpayer asserts she retained State A as her official residence of record and the IRA was composed primarily of rollover contributions from an employer plan funded while she was a State A resident. By “official residence of record,” the Department assumes the Taxpayer meant that she considered State A to be her state of domicile. The Taxpayer, however, lived and worked in Virginia for the entire 2018 taxable year. She was therefore taxable as an actual Virginia resident regardless of whether she retained a State A domicile. 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.”
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 federal adjusted gross income (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 Chapter 3 of Title 58.1 of the Code of Virginia.
Virginia Code § 58.1-322.02 11 provides a subtraction for certain distributions received from “an individual retirement account or annuity established under IRC § 408 . . . the contributions to which were deductible from the taxpayer’s federal adjusted gross income, but only to the extent the contributions to such plan or program were subject to taxation under the income tax in another state.”
The Taxpayer asserts that she should be eligible to subtract her IRA distribution as she did not obtain a state tax benefit when funds were contributed to the IRA because she lived in State A which did not have a state income tax. Regardless of whether the Taxpayer received a state tax benefit, the contributions were not subject to a state income tax as required by the clear language of the statute. The distribution was, therefore, not eligible for the subtraction.
Community Property
The Taxpayer also claims that because the IRA was community property under State A law, only one-half of the distribution should be taxable to her and the remaining one-half to her spouse. Because the Taxpayer’s spouse was not subject to Virginia income tax in the 2018 taxable year, this would mean only one-half of the distribution would be taxable in Virginia. Under IRC § 408(g), IRAs are taxed without regard to community property laws. This means that the Taxpayer’s IRA distribution was treated as her separate income for purposes of determining her separate FAGI. See also Bunney v. Comm’r of Internal Revenue, 114 T.C.259, 114 T.C. 17 (U.S.T.C. 2000). Because the computation of Virginia taxable income begins with FAGI, the entire distribution was taxable by Virginia.
Written Advice
The Taxpayer stated that her preparer relied on advice received during a telephone call with a Department agent during which the agent allegedly told the preparer that the IRA distribution would not be taxable in Virginia. The Taxpayer submitted a copy of contemporaneous notes taken by her preparer during this conversation. Virginia Code § 58.1-1835 provides that the Tax Commissioner shall abate any portion of tax, interest and penalty attributable to erroneous written advice by the Department under the following conditions:
- The written advice was reasonably relied upon by the taxpayer and was in response to a specific written request by the taxpayer;
- The portion of the penalty or tax did not result from a failure by the taxpayer to provide adequate or accurate information; and
- The facts of the case described in the written advice and the request thereof are the same, and the taxpayer’s business or personal operations have not changed since the advice was rendered.
Based on the above statutory provision, the erroneous advice must be reasonably relied upon by the taxpayer, and such advice must be in writing. In addition, such written advice must be provided based on a specific written request by a taxpayer who has provided sufficient and accurate facts so that the Department may issue a correct decision. In this case, the Taxpayer’s preparer did not make a written request as to whether she could claim the subtraction. Further, no written advice was provided by a Department tax official. The Taxpayer, accordingly, is not entitled to abatement of the assessment or accrued interest based on the reliance on erroneous advice.
Long-Arm Statute
The Taxpayer argues that Virginia’s taxation of her IRA distribution goes beyond the actions permitted under Virginia’s “long-arm statute.” Virginia’s long-arm statute, codified at Virginia Code § 8.01-328.1, governs the circumstances under which a Virginia court can exercise jurisdiction over a person. This statute has no bearing on whether a person is subject to taxation under Title 58.1 of the Code of Virginia. Even if the long-arm statute were relevant to the case at hand, the Virginia courts would have jurisdiction over the Taxpayer for causes of action relating to her incurring a liability for tax in Virginia. See Virginia Code § 8.01-328.1 A 10.
CONCLUSION
Because the Taxpayer was an actual resident of Virginia for the 2018 taxable year, she was subject to tax on her Virginia taxable income. The Taxpayer’s IRA distribution was properly included in her Virginia taxable income and was not eligible for any subtraction. State A’s community property laws also did not affect the taxation of the distribution under Virginia law. Further, the Department is unable to abate the assessment based on the Taxpayer’s alleged reliance on erroneous advice or the application of Virginia’s long-arm statute.
Based on the foregoing, the Taxpayer’s request for relief cannot be granted and the assessment is upheld. An updated bill will be issued shortly. The Taxpayer should remit payment of the balance due within 30 days of the bill date to avoid the accrual of additional interest and possible collections actions.
Last, the Taxpayer requests information concerning further remedies beyond this appeal. The Taxpayer is referred to Title 23 of the Virginia Administrative Code 10-20-165 F for information regarding a request for reconsideration of this decision and to Virginia Code § 58.1-1825 for information regarding an application for relief that may be filed with a Virginia circuit court.
The Code of Virginia sections and regulations 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/3936.X