Could a Virginia nonresident subtract foreign-source income before applying the nonresident apportionment formula?

Plain-English summary

The taxpayer was a Country A resident with Virginia rental income. On her 2015 nonresident return, she subtracted foreign-source income before calculating Virginia tax.

Virginia denied the subtraction because the individual foreign-source-income subtraction had been repealed for tax years beginning in 2003. The nonresident formula instead includes all-source income in the denominator and Virginia-source income in the numerator, proportionally limiting tax to Virginia income. Allowing an additional subtraction would duplicate that relief, so the paid assessment remained upheld.

Citations and references

• Va. Code §§ 58.1-301 and 58.1-322
• Va. Code §§ 58.1-325 and 58.1-302
• P.D. 03-54, P.D. 07-1, P.D. 08-103, P.D. 09-50, and P.D. 15-52

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-19

Original ruling text

March 9, 2018

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will respond 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, 2015. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer filed a 2015 Virginia nonresident individual income tax return and claimed a subtraction for foreign source income. The Department denied the subtraction and issued an assessment, which has been paid. The Taxpayer appealed, contending her foreign source income was not subject to Virginia income taxation.

DETERMINATION

Virginia Code § 58.1-301 provides, with certain exceptions, 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. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia . 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 properly 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 Virginia Code § 58.1-322.

Under Virginia Code § 58.1-325, individuals who are neither domiciliary nor actual residents of Virginia and have income from Virginia sources are taxed as nonresidents. Virginia Code § 58.1-302 limits the term income and deductions from Virginia sources to the items of income, gain, loss and deductions attributable to the ownership of property in Virginia or the conduct of a business, trade, profession or occupation in Virginia.

When a taxpayer files a Virginia nonresident individual income tax return, the computation of nonresident taxable income first requires that Virginia taxable income (VTI) be computed as if the taxpayer was a Virginia resident. When computing her income as a Virginia resident, the Taxpayer subtracted the amount of foreign source income that had not already been excluded from her FAGI. The Taxpayer contends that the foreign source income subtraction should have been allowed because she was a resident of the * (Country A) and none of her earned income was sourced to Virginia. The Taxpayer explains that her Virginia taxable income consisted primarily of rental income from a Virginia property.

At one time, Virginia Code § 58.1-322 did provide a subtraction from FAGI for certain foreign source income. However, the General Assembly specifically repealed the subtraction effective for taxable years beginning on and after January 1, 2003. Since then, Virginia's policy denying the foreign source income subtraction for individuals has been consistently articulated in Public Document (P.D.) 03-54 (5/3/2003), P.D. 07-1 (2/22/2007), P.D. 08-103 (6/18/2008), P.D. 09-50 (4/27/2009), and P.D. 15-52 (4/2/2015). Because the computation of VTI for a Virginia resident generally requires the taxpayer to include income from all sources and a subtraction for foreign source income is not permitted to Virginia residents, it was improper to subtract foreign source income at this step of the computation.

Once the amount of income tax is computed based on VTI as a Virginia resident, a nonresident taxpayer must then apply the nonresident apportionment factor to determine the nonresident income tax. This percentage is computed by dividing the amount of income from Virginia sources by the amount of income from all sources. Any income that is not derived from Virginia sources, including any foreign source income, would only be included in the denominator of the formula with income from all sources. Applying the nonresident apportionment factor proportionally reduces a taxpayer's total tax to that imposed on income from Virginia sources. In other words, the formula essentially removes the tax on income from other than Virginia sources.

In this case, the Taxpayer's foreign source income was included in the denominator of the nonresident apportionment factor. According to the return filed by the Taxpayer, the difference between the amount of income from Virginia sources * and the amount of income reported from all sources was the same as the foreign source income subtraction claimed **. Allowing a subtraction for foreign source income when the income was also included in the nonresident apportionment factor would effectively grant the Taxpayer to have a double benefit.

Because the subtraction for foreign source income was not permitted by Virginia statutes, the Department was correct to deny the subtraction. Accordingly, the assessment is upheld. Because the assessment has been paid, no further action is required.

The Code of Virginia sections and public documents 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/1361.M