Could reservation residents subtract the husband's interest, dividends, and pension when the sources were outside the reservation?

Subject

Indian reservation residence subtracted wages, interest, gains, dividends and retirement income

Plain-English summary

Virginia upheld tax on a reservation resident's interest, dividends, and pension because the income arose from sources and employment outside the reservation. The Commonwealth's policy protected income earned by a reservation resident solely from pursuits on that reservation, but did not create blanket immunity for all income received there.

The husband held stock, mutual funds, and deposits through corporations, financial institutions, and banks outside the reservation. Virginia treated their income as arising off the reservation. Rules placing intangible property at the owner's domicile for property-tax purposes did not govern income tax.

The pension was treated as deferred compensation earned where the underlying employment services occurred. Because the husband appeared to have worked off the reservation for the pension-paying employer, the pension was taxable.

A 1977 Department letter to the husband's father did not protect the couple. Written-advice relief is limited to the taxpayer who received the advice, and Virginia said its 2000 published policy directly superseded the earlier letter. The 2005 through 2007 assessments were upheld.

What this means for you

• Reservation residence does not exempt income arising from off-reservation pursuits.
• Outside bank, fund, and corporate investment income remains taxable under this ruling.
• Pension treatment depends on where the employment producing the benefit was performed.
• A Department letter to a family member does not provide another taxpayer with written-advice protection.

Common questions

Why did receiving the income on the reservation not make it exempt?

Virginia looked to the income-producing pursuits, not the recipient's physical location when payment arrived.

Why did the father's 1977 letter not control?

It was issued to someone else, and the Department said later published guidance superseded it.

What was the outcome?

Virginia upheld the 2005 through 2007 assessments.

Citations and references

• Va. Code §§ 58.1-301, 58.1-322, and 58.1-1835.
• Treas. Reg. § 1.61-2(a)(1).
• Virginia Public Document 00-96.
• Eastern Band of Cherokee Indians v. Lynch, 632 F.2d 373 (4th Cir. 1980).
• Mary T. Ryan v. Commonwealth, 169 Va. 414, 193 S.E. 534 (1937).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-158

Original ruling text

July 30, 2010

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 assessments issued to * (the "Taxpayers") for the taxable years ended December 31, 2005 through 2007. I apologize for the delay in responding to your letter.

FACTS

The Taxpayers, a husband and wife, reside on an Indian reservation located in Virginia. On their individual income tax returns for the taxable years at issue, the Taxpayers subtracted interest, dividends and retirement income in computing their Virginia taxable income. The Department disallowed the subtractions and issued assessments. The Taxpayers appeal the assessments, contending the income resulted from activities conducted by an Indian on an Indian reservation.

DETERMINATION

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.

Indians are considered residents of the state in which their reservation is located. See Eastern Band of Cherokee Indians v. Mark G. Lynch, Secretary of Revenue for the State of North Carolina , 632 F.2d 373 (4th Cir 1980) ( Cherokee Indians v. Lynch ). An Indian residing on an Indian reservation located in Virginia, therefore, is a resident of Virginia. The Commonwealth's longstanding policy has been to refrain from imposing income tax on the income earned by an Indian residing on a reservation solely from pursuits on that reservation. See 1917 Report of the Virginia Attorney General 160 (1/26/1917) and 1918 Report of the Virginia Attorney General 86 (1/25/1918). This general state tax immunity, however, does not operate outside of the Indian reservation. Indians receiving income from outside the reservation are subject to income taxes in the same manner as other residents of this state.

Situs for Income Tax Purposes

The Taxpayers assert that the husband does not need to leave the reservation to receive his pension, dividends or interest income. Further, they believe that, because intangible property is considered to be sitused at the domicile of the owner for property tax purposes pursuant to 1970 Report of the Attorney General 277 (1/30/1970), these pursuits were conducted on the reservation.

While the Attorney General has opined that bank accounts are intangible property sitused at the domicile of the owner, the opinion cited addressed whether a county or the Commonwealth could impose probate tax on the bank accounts. Because income tax is not based on the situs of property, this opinion would not limit the Department's authority to impose income tax.

In Mary T. Ryan v. Commonwealth of Virginia , 169 Va. 414, 193 S.E. 534 (1937), the Virginia Supreme Court (the "Court") ruled that income tax is not a tax on property, but a tax levied on the individual measured by the net income received by that individual. The Court pointed to its decision in Eppa Hunton, IV v. Commonwealth , 166 Va. 229, 183 S.E. 873 (1936), when it held "the Virginia income tax is an excise tax and not a property tax that is not a tax on the property from which the income was derived." Thus, situs of the property from which the income is derived does not necessarily determine where the income will be taxed.

Written Advice

The Taxpayers cite a letter from an employee of the Department addressed to the husband's father in 1977. This letter advised that income from intangible sources, including retirement benefits, are unearned income exempt from taxation by Virginia when received by an Indian who resides on an Indian reservation.

Virginia Code § 58.1-1835 authorizes the Tax Commissioner, to abate an assessment or a portion of an assessment that is attributable to erroneous advice furnished to taxpayers in writing by an employee of the Department acting in his official capacity. Thus, the Department would be required to abate an assessment or a portion of an assessment that is attributable to such erroneous advice. Such abatement, however, is limited to the taxpayer to whom the advice was given. In this case the husband's father, not the Taxpayer, received the written advice and might have been entitled to relief pursuant to Va. Code § 58.1-1835.

Further, the Department's established policy was publicly promulgated in Public Document (P.D.) 00-96 (5/25/2000). The document directly contradicts and supersedes the 1977 letter, thereby nullifying any erroneous advice contained therein. P.D. 00-96 was issued well before the taxable years at issue and should have been followed by the Taxpayers.

Federally Recognized Tribes

The Taxpayers argue that the Department erred in relying on Cherokee Indians v. Lynch in P.D. 00-96 because the case involved federal government responsibilities and obligations for federally recognized tribes with a treaty with the federal government. The Indian tribe to which the husband belongs is not a federally recognized tribe and does not have a treaty with the federal government. Instead, the Indian tribe at issue has always related directly to the government of the Commonwealth.

Contrary to the assertion of the Taxpayers, the decision in P.D. 00-96 is not based on the ruling in Cherokee Indians v. Lynch . This case is cited for the sole purpose of pointing out that Indians are considered to be residents of the state in which they reside. Instead, the determination in P.D. 00-96 is based on 1917 Report of the Virginia Attorney General 160, which clearly limits the general state tax immunity for Indians to pursuits, activities, or operations that occur on the Indian reservation.

Income from Intangible Sources

The Taxpayers believe that because the husband did not have to leave the reservation to receive the dividend and interest income, he followed these pursuits on the reservation. In P.D. 00-96 (5/25/2000), the Department held that income resulting from activities conducted off an Indian reservation includes intangible source income from institutions or providers located outside the reservation. Under P.D. 00-96, when stock investments are held in corporations located outside the Indian reservation, and accounts are held at banks or other financial institutions located without the reservation, any resulting dividend and interest income is considered to have been earned without the reservation.

In this case, the Taxpayers have provided no evidence that the dividend or interest income resulted from pursuits conducted on the reservation. The husband purchased stock in corporations, mutual funds from financial institutions, and monetary funds deposited in banks that were not located on the reservation. Because the corporations, financial institutions managing the mutual funds, and the banks were not located on the reservation, the income they generated did not result in income from pursuits conducted on the reservation.

Income from Pensions

The Taxpayers also assert that the husband could conduct his pursuits on the reservation and still receive his pension income. They assert that this income cannot be subject to Virginia income tax pursuant to 1917 Report of the Virginia Attorney General 160.

Pensions and employer provided retirement plans are generally considered to be payments made by an employer as a retirement benefit. In Black's Law Dictionary (Eighth Edition, 2004, p. 1170) a "pension plan" is defined as "any plan, fund, or program established or maintained by an employer or an employee organization that provides retirement income to employees or results in a deferral of income by employees extending to the termination of employment or beyond." Under this definition, pension income could be considered to be deferred compensation for providing job services to an employer.

This analysis is supported by Treas. Reg. §1.61-2(a)(1), which includes pensions in a list of the types of income that is considered to be compensation for services. Thus, pension income would be considered to be earned where the individual performed their job functions resulting in the retirement income.

If an Indian retired from employment pursued on the reservation, any resulting employer-provided retirement income would be income from pursuits conducted on the reservation. If the Indian were employed off the reservation, any resulting pension would be considered to be income from pursuits conducted off the reservation.

In this case, it appears that the husband was employed off the reservation by the employer from whom he receives pension income. Accordingly, the pension income would not be eligible for subtraction for determining Virginia taxable income.

CONCLUSION

Based on the forgoing, the assessments for the 2005 through 2007 taxable years are upheld. Payment of the balance due, as shown on the enclosed schedule should be made 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 23261-7203, Attention: *. If payment is not received within the allotted time, additional interest will accrue and collection action will resume on the outstanding balance.

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

Sincerely,

Linda D. Foster

Deputy Tax Commissioner

AR/1-3161761474.E