Was a nonresident baseball player's signing bonus Virginia-source income when the bonus was earned by signing, not by performing services in Virginia?

Subject

Bonus not Virginia source income for purposes of the nonresident apportionment factor

Plain-English summary

Virginia concluded that the nonresident player's signing bonus was not Virginia-source income because the bonus was earned by signing the Major League Baseball contract, not by performing services in Virginia. The contract permitted forfeiture only if he failed to report or abandoned the team without permission.

The Department had correctly disallowed the player's subtraction of the bonus from federal adjusted gross income because Virginia law provided no specific subtraction for a baseball signing bonus. But that did not make the bonus Virginia-source income. For a nonresident, the source-income numerator was a separate question.

Because the player was a State A resident when he signed and the payment was not predicated on Virginia services, he could amend his 2006 Virginia nonresident return to remove the bonus from the Virginia-source portion of the apportionment factor.

What this means for you

• A deduction or subtraction issue is separate from whether income is sourced to Virginia for a nonresident.
• Compensation tied to signing a contract may be sourced differently from pay tied to services performed in Virginia.
• The controlling contract terms matter, including performance conditions and forfeiture provisions.
• An amended nonresident return may correct the Virginia-source apportionment factor.

Common questions

Q: Did Virginia allow a special subtraction for the signing bonus?
A: No. The Department correctly disallowed that subtraction.

Q: Why was the bonus still excluded from Virginia-source income?
A: It was awarded for signing and was not conditioned on actual services in Virginia.

Q: Could the player recover the reduced refund?
A: The ruling allowed him to file an amended 2006 nonresident return with a corrected apportionment factor.

Citations and references

• Va. Code §§ 58.1-325, 58.1-301, and 58.1-322.
• P.D. 07-59.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-61

Original ruling text

May 19, 2008

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you contest the Department's adjustment to the individual income tax return filed by * (the "Taxpayer") for the taxable year ended December 31, 2006. The Department's adjustment resulted in a reduced refund paid to the Taxpayer.

FACTS

The Taxpayer is a resident of * (State A). In June 2006, the Taxpayer signed a contract with a Major League Baseball team. Pursuant to this contract, the Taxpayer was offered a signing bonus paid in two installments, one in 2006 and one in 2007. At the time of the signing, the Taxpayer was sent to a location outside Virginia for a brief instructional period, and then assigned to a minor league team operating in Virginia. In July 2006, the Taxpayer was reassigned to another minor league team located outside Virginia.

In 2006, the Taxpayer's W-2 statement issued by the Virginia minor league team reported the Taxpayer's 2006 bonus installment as Virginia source income. The Taxpayer filed a nonresident Virginia individual income tax return that reported the signing bonus as Virginia source income in the return's apportionment factor and subtracted the signing bonus.

The Department audited the Taxpayer and disallowed the subtraction, resulting in the Taxpayer's refund being reduced. The Taxpayer contends that none of the signing bonus should be subject to Virginia income tax and requests that the entire refund claimed on his return be allowed.

DETERMINATION

Individuals who are neither domiciliary nor actual residents of Virginia and have income from Virginia sources are taxed as nonresidents. The Virginia taxable income of a nonresident is defined under Va. Code § 58.1-325 as "an amount bearing the same proportion to his Virginia taxable income, computed as though he were a resident, as the net amount of his income, gain, loss and deductions from Virginia sources bears to the net amount of his income, gain, loss and deductions from all sources." (Emphasis added.)

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 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 Va. Code § 58.1-322.

Virginia Code § 58.1-322 provides numerous additions, subtractions and deductions that modify FAGI. Virginia income tax statutes do not include a subtraction or deduction for signing bonuses paid by Major League Baseball teams. As such, the Department correctly disallowed the subtraction.

Public Document (P.D.) 07-59 (5/10/07), however, provides that a signing bonus for a nonresident athlete is Virginia source income only if it is predicated upon the performance of actual services in Virginia. In the instant case, the Taxpayer was awarded the bonus upon signing his contract with a Major League Baseball team. According to the contract, his signing bonus could only be forfeited for failing to report to, or abandoning the team without permission. As such, this signing bonus was not predicated upon his performing his services in Virginia.

Because the Taxpayer was a resident of State A at the time the contract was signed, the bonus was not Virginia source income for purposes of the nonresident apportionment factor. As such, the Taxpayer may file an amended 2006 Virginia nonresident individual income tax return to correct the nonresident apportionment factor to remove the signing bonus from income from Virginia sources. The amended return may be sent to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attn: *.

The Code of Virginia sections and public document cited, along with other reference documents, are available on-line at ww.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact * at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2098744803B