Did a disabled taxpayer lose Virginia's disability-income subtraction by spending a few hours per week stocking an antique-shop stall?

Subject

Limited antique-stall work did not defeat the disability-income subtraction

Plain-English summary

Virginia allowed the taxpayer's disability-income subtraction because her limited antique-shop activity was not substantial gainful activity. She had retired from a full-time Postal Service position after the Social Security Administration determined that she was totally and permanently disabled, and she received disability payments beginning in March 2005.

The taxpayer later rented an antique-shop stall and sold vintage collectibles. She spent three to five hours per week obtaining inventory and arranging or restocking the display, worked at irregular times, and paid the shop to handle sales, cleaning, and display maintenance. Based on that evidence, the Commissioner found that the activity did not involve significant duties over a reasonable period for remuneration or profit.

Virginia abated the 2005 and 2006 assessments and ordered refunds with applicable interest. The Department had already allowed the subtraction on the amended 2007 return, so no further 2007 adjustment was needed.

What this means for you

• Virginia's subtraction covered up to $20,000 of qualifying disability income under the rules cited in the ruling.
• A taxpayer had to receive disability income and be absent from work because of permanent and total disability.
• Limited or irregular activity did not automatically establish an ability to perform substantial gainful work.
• Time spent, duties performed, work setting, compensation, and outside support all mattered to the analysis.
• A later IRS determination that the payments were not qualifying disability income had to be reported to Virginia.

Common questions

Did selling collectibles automatically count as substantial gainful activity?

No. The Commissioner evaluated how the activity actually operated and found the taxpayer's limited involvement insufficient.

How much time did the taxpayer spend on the stall?

The ruling says three to five hours per week obtaining inventory and arranging or stocking merchandise.

What happened for each tax year?

Virginia abated the 2005 and 2006 assessments and issued refunds with interest. The subtraction had already been allowed for 2007.

Could the IRS reach a different result?

Yes. The ruling expressly warned that a contrary federal determination would have to be reported to Virginia.

Citations and references

• Va. Code §§ 58.1-322(C)(4)(b) and 58.1-311.
• IRC §§ 22(c)(2)(B)(iii) and 22(e)(3).
• Treas. Reg. § 7.105-2.
• Howell's Motor Freight, Inc. v. Virginia Department of Taxation, Circuit Court of the City of Roanoke, Law No. 82-0846 (Oct. 27, 1983).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-113

Original ruling text

July 1, 2010

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This is in response to your letter in which you seek correction of the individual income tax assessments issued to * (the "Taxpayer") by the Department for the taxable years ended December 31, 2005 through 2007. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer claimed a subtraction for disability income on her Virginia individual income tax returns filed for the 2005 through 2007 taxable years. The Department disallowed the subtraction after concluding the Taxpayer was engaged in substantial gainful activity during those years, and the Department issued assessments for additional tax and interest. The Taxpayer paid the assessments and filed an appeal, contending she was not engaged in a substantial gainful activity and she is entitled to the subtraction for disability income.

DETERMINATION

Under certain conditions, Va. Code § 58.1-322 C 4 b provides an individual income tax subtraction for up to $20,000 of disability income as defined under Internal Revenue Code (IRC) § 22(c)(2)(B)(iii). "Disability income" is defined under this section of the IRC to be:

[t]he aggregate amount includable in the gross income of the individual for the taxable year under section 72 or 105(a) to the extent such amount constitutes wages (or payments in lieu of wages) for the period during which the individual is absent from work on account of permanent and total disability.

Based on the statutory requirements, an individual must meet two tests in order to be allowed a subtraction for disability income.

1. The individual must receive disability income, and

2. The individual must be absent from work because of a permanent and total disability.

By reason of their character as legislative grants, statutes relating to deductions and subtractions allowable in computing income and credits against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See Howell's Motor Freight, Inc., et al. v. Virginia Department of Taxation , Circuit Court of the City of Roanoke, Law No. 82-0846 (10/27/1983).

In this case, the Taxpayer retired from a full-time position with the United States Postal Service when the Social Security Administration determined she was totally and permanently disabled. The Taxpayer began receiving disability income payments from the Social Security Administration in March 2005. The Taxpayer claimed a subtraction for this disability income on her 2005 individual income tax return.

Under IRC § 22(e)(3), an individual is permanently and totally disabled if "he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months."

The Taxpayer has provided sufficient evidence to show that she suffered from a medically determinable physical or mental impairment that had lasted for a continuous period of not less than 12 months. The Department's auditor, however, concluded that the Taxpayer had engaged in a substantial gainful activity and was not, therefore, permanently and totally disabled.

In June 2005, the Taxpayer rented a stall at an antique shop and began selling vintage collectables. The Taxpayer spent 3 to 5 hours a week obtaining inventory and arranging and stocking the merchandise in the stall. She paid the antique shop a fee to operate the stall. The antique shop sold the merchandise for a commission paid by the Taxpayer. The Taxpayer also paid a fee for the antique shop to clean and maintain the displays.

Pursuant to Treas. Reg. § 7.105-2, "substantial gainful activity" means "the performance of significant duties over a reasonable period of time in work for remuneration or profit." Full or part time work done at an employer's convenience in a competitive work environment for at least the minimum wage would conclusively show that an individual is able to engage in substantial gainful activity.

Further, substantial gainful activity is not considered to be activity engaged in for personal care or maintaining a home. It also does not include unpaid work on hobbies, institutional therapy or training, school attendance, clubs, social programs, and similar activities. Such activities, however, may show that an individual is able to engage in substantial gainful activity. In addition, the simple fact that an individual has not worked for a long period of time is not, by itself, conclusive evidence that such individual is not able to engage in substantial gainful activity.

Engaging in a business or even a hobby involving the sale of tangible personal property would generally be done for the purpose of making a profit. The Taxpayer asserts, however, that she was not involved in a competitive work situation and did not spend a significant amount of time engaged in the vintage collectables sales activity. She did not have a set work schedule and performed work at irregular times and intervals. The Taxpayer contracted for full sales service from the antique shop in regard to attending and selling her items. The Taxpayer worked at the stall on occasion only to replace inventory and arrange displays, and she prepared and filed monthly and annual tax reporting documents for the activity. Based on the preponderance of evidence provided, I find that the Taxpayer's activity at the antique shop did not constitute a substantial gainful activity.

Accordingly, the assessments for 2005 and 2006 have been abated. Refunds with applicable interest will be issued shortly. Department records show that the disability subtraction was initially disallowed, but later permitted on the Taxpayer's amended 2007 taxable year return, and a refund has been issued. As such, no further adjustments will be made to the Taxpayer's 2007 return with regard to the disability subtraction.

The Taxpayer should be aware that the Internal Revenue Service (IRS) may come to a different conclusion with regard to her disability income. Should the IRS determine that the Taxpayer's income for which she claimed a deduction under Va. Code § 58.1-322 C 4 b is not disability income as defined IRC § 22(c)(2)(B)(iii), Va. Code § 58.1-311 requires that the change be reported to the Department.

If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Linda Foster

Deputy Tax Commissioner

AR/1-3240634884.o