Did a tribal member prove that interest, dividends, and pension income were exempt because he lived on an Indian reservation?

Subject

Taxpayer claims income from activities conducted on an Indian reservation.

Plain-English summary

Virginia upheld the assessments because the taxpayer did not connect the disputed interest, dividends, and pension income to qualifying reservation pursuits. The taxpayer was a tribal member living on an Indian reservation and sought reconsideration of P.D. 10-156 for 2005 through 2007.

The Department said income from activities conducted by an Indian residing on a reservation could be exempt. Its prior determination included intangible income from institutions or providers located on the reservation and pension income from employment pursued on the reservation.

But the taxpayer supplied no evidence that the interest or dividends came from reservation-based pursuits or that the pension arose from employment performed while residing and working there. The 1677 treaty's annual tribal obligation did not satisfy the separate Virginia tax obligations of individual tribal members as residents and citizens.

P.D. 10-156 therefore remained the Department's final determination, and the assessments stood.

What this means for you

• Reservation residence alone did not establish the income subtraction applied here.
• Trace each interest, dividend, pension, or wage item to the activity and location that produced it.
• Preserve provider, institution, and employment records supporting reservation nexus.
• This ruling addressed the taxpayer's evidence and the Department's 2011 treaty interpretation.

Common questions

Did Virginia say reservation-based income could never be exempt?

No. It described categories that could qualify but found the required factual connection missing.

Did the treaty eliminate the taxpayer's individual income-tax duty?

No. The Department distinguished the tribe's annual obligation from individual members' obligations.

Citations and references

• P.D. 00-96 and P.D. 10-156.
• The 1677 treaty argument is described in the ruling.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-38

Original ruling text

March 14, 2011

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter seeking reconsideration of the Department's determination letter, issued as Public Document (P.D.) 10-156 (7/30/2010), to * (the "Taxpayer") for the taxable years ended December 31, 2005 through 2007.

FACTS

During the taxable years at issue, the Taxpayer, an Indian, resided on an Indian reservation. On his Virginia individual income tax return, the Taxpayer claimed a subtraction for wages, interest, dividends and retirement income in computing his Virginia taxable income. As a result of an audit, the Department disallowed the portion of the subtraction for interest, dividends and retirement income and issued assessments. The Taxpayer appealed the assessments, contending the income resulted from activities conducted on an Indian reservation.

In P.D. 10-156, the Department upheld assessments because certain pension, dividend and interest income received by the Taxpayer and subtracted on his income tax returns did not result from pursuits conducted by an Indian residing on a reservation. The Taxpayer requests a redetermination, contending the 1677 treaty between Virginia and the Indians is still in effect and the sites of the income at issue, received by a tribe member living on the reservation, is exempt from taxation by Virginia under the treaty.

DETERMINATION

The Taxpayer reiterates his argument that the treaty between Virginia and the Indians in 1677 exacts an annual tax on the Indians and the Commonwealth can impose no other tax on Indians in Virginia. While the annual tax established by the treaty satisfies the tax obligation of the tribe, it does not satisfy the individual obligations of the members of the tribe as residents and citizens of the Commonwealth of Virginia. See Public Document (P.D.) 00-96 (5/25/2000) and P.D. 10-156.

Further, in P.D. 10-156, the Department determined that income resulting from activities conducted by an Indian residing on an Indian reservation, including income from intangible sources received from institutions or providers located on the reservation and pension income resulting from employment pursued on the reservation, would be income exempt from Virginia income tax.

The Taxpayer have not shown evidence that the dividend or interest income at issue was received from pursuits conducted on the reservation or that the pension income at issue resulted from employment conducted by an Indian residing and working on the reservation. As such, the Department is unable to conclude such income was exempt from taxation.

While I recognize your continuing disagreement with the validity of the assessment, P. D. 10-156 clearly explains the Department's authority for disallowing the Taxpayers' subtraction for the income at issue, and constitutes the Department's final determination on this issue. Accordingly, the assessments for the 2005 through 2007 taxable years are upheld.

The enclosed schedule shows the current outstanding balance. No additional interest will accrue provided the total outstanding balance is paid within 30 days from the date of this letter. Payment should be sent to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23218-7203, Attention: *.

The Code of Virginia sections cited, along with other reference documents, 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 regarding this determination, you may contact * at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4556554606.E