Tax Type
Individual Income Tax
Description
Unreported income
Topic
Appropriateness of Audit Methodology
Computation of Income
Returns/Payments/Records
Date Issued
08-30-1982
August 30, 1982
Re: § 58-1118 Application/Individual Income Tax
Taxable Year 1978
Dear ********************
This letter will reply to your correspondence of June 23, 1982 in which you apply for correction of additional individual income tax assessed for taxable year 1978.
Facts
******* both Virginia residents for the full period of taxable year 1978, reported federal adjusted gross income of ****** on the Virginia return, Form 760. Subsequent information from the Internal Revenue Service indicated that federal adjusted gross income of ********* was reported on the 1978 federal income tax return. An assessment was issued for the tax due on the**** in income which was not reported to Virginia.
The additional assessment is contested on the basis that the unreported income resulted from investments made in 1964, prior to the time at which Virginia residence was obtained (1967), and therefore cannot properly be taxed in Virginia.
Determination
For Virginia purposes, income is subjected to taxation based primarily upon residency. Thus, full-year residents, part-year residents, and nonresidents are taxed differently. The taxable income of a Virginia resident is defined by Virginia Code § 58-151.013 as federal adjusted gross income, subject to certain additions, subtractions and modifications.
Thus, absent a specific addition, subtraction, or modification, income items subject to federal taxation in any given taxable year will likewise be subject to taxation in Virginia. You have not indicated that the income in question represents federally exempted interest or dividend income on U.S. obligations or interest income on obligations of this Commonwealth or its political subdivisions. Since these are the only types of "investment income" subtractable from FAGI in computing Virginia taxable income, I must conclude that such income should have been included in Virginia taxable income.
For purposes of tax equity, Virginia Code § 58-151.015(a) allows Virginia residents a credit against their Virginia tax liability for tax paid to another state on earned or business income derived from outside Virginia. Earned income is basically wage or personal service income while business income is that of a nature requiring separate reporting (e.g, Schedule C) for federal income tax purposes. Had the income in question been earned or business income from non-Virginia sources, you would have been required to include such income in Virginia taxable income but would have been allowed a credit for tax paid on such income to the state from which it was derived.
Finally, in conforming to federal tax laws by adopting FAGI as the starting point for computation of Virginia taxable income, we have also implicitly adopted the federal laws, regulations, and theories relating to income taxation. Central among these is the concept of when income is received. Federal tax law apparently required the inclusion of the investment income in question in FAGI in taxable year 1978. Therefore, the presumption is that for federal purposes, the income was deemed to have been received during taxable year 1978. This being the case, the income was received during the period in which you have been a resident of Virginia and must similarly be taxed at the state level at that time.
Therefore, based upon the foregoing, I find no basis for granting relief from the assessment in question.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner