Could a retiree obtain Virginia's previously taxed contribution subtraction without records supporting the retirement-income claim?

Subject

The Taxpayer failed to provide adequate documentation to substantiate subtraction claimed for certain retirement income.

Plain-English summary

A Virginia resident claimed a 2014 subtraction for retirement income and argued that Virginia should provide relief because taxes had already been paid on that income.

Virginia explained that federal and state income taxes are imposed by separate taxing governments. Federal tax paid on retirement income does not itself require Virginia to exempt the same income. The specific Virginia subtraction applied only to qualifying federally deductible contributions that another state had taxed.

The taxpayer did not respond to the Department's request for records establishing eligibility. Virginia left the assessment in place but granted one final 30-day opportunity to submit the documentation.

What this means for you

• Federal income tax paid does not create a Virginia retirement-income deduction.
• Identify the specific Virginia subtraction that applies.
• Prove the amount and historical state tax treatment of qualifying contributions.
• Respond by the Department's documentation deadline.

Citations and references

• Va. Code §§ 58.1-301, 58.1-322, 58.1-322 C 19, and 58.1-205.
• IRC §§ 401, 408, and 457.
• People of New York ex rel. Cohn v. Graves, 300 U.S. 308 (1937).
• Howell's Motor Freight, Inc. v. Virginia Department of Taxation, Law No. 82-0846 (Roanoke City Cir. Ct. Oct. 27, 1983).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-110

Original ruling text

June 21, 2017

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 assessment issued to * (the “Taxpayer”), for the taxable year ended December 31, 2014.

FACTS

The Taxpayer filed a Virginia resident individual income tax return for the 2014 taxable year, claiming a subtraction for retirement income. Under review, the Department denied the subtraction and issued an assessment. The Taxpayer appealed, contending that Virginia does not properly allow a deduction for taxes already paid on retirement income.

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 (IRC) 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 C 19 provides a subtraction for:

any income received during the taxable year derived from a qualified pension, profit-sharing, or stock bonus plan as described by § 401 of the Internal Revenue Code, an individual retirement account or annuity established under § 408 of the Internal Revenue Code, a deferred compensation plan as defined by § 457 of the Internal Revenue Code, or any federal government retirement program, the contributions to which were deductible from the taxpayer's federal adjusted gross income, but only to the extent the contributions to such plan or program were subject to taxation under the income tax in another state.

By reason of their character as legislative grants, statutes relating to deductions and subtractions allowable in computing income and credits allowed 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 addition, under the provisions of Va. Code § 58.1-205 any proceeding relating to the interpretation of the tax laws of Virginia, an “assessment of a tax by the Department shall be deemed prima facie correct.” As such, the burden of proof is on the Taxpayer to show that the Department's assessment based on the disallowance of the subtraction is erroneous.

The Taxpayer seems to argue that Virginia must allow a subtraction for federal income tax paid on retirement plan income in order to avoid double taxation. In People of State of New York ex rel Cohn v. Graves , 300 U.S. 30, 857 S. Ct. 466 (1937), the United States Supreme Court explained “[t]hat the receipt of income by a resident of the territory of a taxing sovereignty is a taxable event is universally recognized.” As separate and distinct taxing sovereignties, states are not prohibited from imposing an income tax in addition to the income tax imposed by the federal government. Therefore, to the extent the Taxpayer's retirement income was included in FAGI and not eligible for a subtraction under Virginia law, it was properly subject to Virginia income tax.

The Taxpayer subtracted retirement income on his 2014 return, but failed to substantiate the subtraction with adequate documentation. By letter dated November 1, 2016, the Department requested documentation required to determine the extent the Taxpayer may have been eligible for the subtraction. To date, the Taxpayer has failed to respond to the request.

The Taxpayer will be granted one last opportunity to provide the documentation requested to substantiate the subtraction claimed. The documentation should be submitted 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 23161-7203, Attention: *. If the documentation is not received within the allotted time, the assessment will be considered to be correct and collection action will resume.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1020.M