Could a Virginia resident avoid income tax by denying a contract to pay, limiting tax to government workers, or charging assessments to a Treasury account?

Plain-English summary

A Virginia resident argued income tax was voluntary or contractual, applied only to government workers, and could be paid from an alleged U.S. Treasury account by stamping assessment notices.

Virginia rejected every theory and continued collection. Resident income is taxable under state law, and the Treasury-account device has no legal effect.

Why the income was taxable

Virginia begins resident taxable income with federal adjusted gross income and applies state modifications. A resident meeting the filing rules owes tax regardless of employment by government.

Virginia's power to tax is inherent except where constitutionally limited. No donation intent or private contract is required.

Why the Treasury device failed

Writing “accepted for value,” “returned for value,” or “exempt from levy” on assessments did not transfer liability to the U.S. Treasury or access an account that would pay the tax. Virginia treated the assertion as baseless.

What this means for you

• State income tax is statutory, not voluntary or contractual.
• Federal conformity does not eliminate Virginia's taxing authority.
• Treasury-account and accepted-for-value devices do not pay assessments.
• Willful nonfiling based on such claims can trigger a 100% fraud penalty.

Common questions

Q: Is Virginia income tax limited to government employees?

A: No. It applies to residents with taxable income under Virginia law.

Q: Can assessment notices be endorsed to make Treasury pay?

A: No. The ruling says that assertion has no basis in fact or law.

Citations and references

• Va. Code §§ 58.1-301, 58.1-302, 58.1-321, 58.1-341 — resident taxation and filing
• Va. Code § 58.1-308 — fraud penalty
• Colonial Pipeline Co. v. Commonwealth, 206 Va. 517, 145 S.E.2d 227 (1965)
• Rev. Rul. 2005-21 — federal warning cited by Virginia

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 19-21

Original ruling text

March 26, 2019

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 years ended December 31, 2010, 2013 and 2014.

FACTS

The Department received information from the Internal Revenue Service (IRS) indicating that the Taxpayer may have been required to file Virginia individual income tax returns for the taxable years at issue. The Department requested information to verify whether the Taxpayer was subject to Virginia income tax. When an adequate response was not received, the Department issued assessments for each taxable year at issue. The Taxpayer filed an appeal, contending that the assessments should be abated because she had no intention to gift tax to the Department or had a contract to pay income tax to Virginia. In addition, she asserts that only government employees and government contractors are subject to income tax. Alternatively, she asserts that the assessments are the responsibility of the United States Treasury.

DETERMINATION

Taxability of Income

Virginia Code § 58.1-301 provides, with certain exceptions, that the 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 (VTI) with 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 § 58.1-322.01 through § 58.1-322.04.

Virginia Code § 58.1-341 provides that a Virginia resident who is required to file a federal income tax return is also required to file a Virginia income tax return, unless the resident is exempt from filing under Virginia Code § 58.1-321. Additionally, even if a resident is not required to file a federal return but has Virginia adjusted gross income that exceeds the filing threshold, the resident is required to file a Virginia individual income tax return. When a resident does not file a proper Virginia return, IRC § 6103(d) authorizes the Department to obtain information from the IRS that will enable the Department to determine the resident’s tax liability.

In addition, the Virginia Supreme Court has held “the power of the State of Virginia to levy taxes is not derived from the Constitution of the United States as interpreted by the Supreme Court. On the contrary, the State has the inherent and unlimited power of taxation unless restrained by its Constitution or the Constitution of the United States.” See Colonial Pipeline Company v. Commonwealth of Virginia , 206 Va. 517, 145 S.E.2d 227 (1965). Thus, the fact that Virginia starts with the IRC to determine Virginia taxable income does not in any way inhibit the Commonwealth's authority to impose an income tax on its citizens.

In New York ex rel. Cohn , 300 U.S. at 312, 57 S.Ct. at 467, 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.” Thus, any resident who has Virginia taxable income as determined under Virginia's statutes is subject to Virginia income tax.

The Taxpayer resided in Virginia and would be considered to be a natural person that meets the definition of a resident of Virginia pursuant to Virginia Code § 58.1-302. Accordingly, the Taxpayer’s arguments that she did not donate tax to the Department, had no contractual obligation to pay tax, and income tax liability is limited to government employees and contractors are without merit. See Public Document (P.D.) 14-84 (6/4/2014) and P.D. 14-113 (7/18/2014).

Payment by Treasury

The Taxpayer has returned the assessments to the Department with the statements “accepted for value”, “returned for value”, and “exempt from levy” printed on them. It appears that she has instructed the Department to satisfy her tax liability through an alleged account held by the United States Treasury. The Department has determined that such an assertion is invalid and provides no basis to abate assessments. See P.D. 01-164 (10/24/2001). In addition, individuals who have sought the abatement of federal income tax assessments using such schemes are subject to substantial civil and criminal penalties. See Rev. Ruling 2005-21 (3/14/2005).

CONCLUSION

The Taxpayer has provided no evidence that the IRS information legally obtained by the Department is fraudulent. Accordingly, the individual income tax assessments issued for the 2010, 2013 and 2014 taxable years are upheld and remain due and payable. Collection action as permissible by law will continue.

As stated above, the Taxpayer’s claim that she had no liability to pay income tax or that the Department’s assessments can be satisfied through an account administered by the Treasury Department using an “accepted for value” stamp has no basis in fact or Virginia law. An individual who fails to file income tax returns based solely on such a claim has intentionally understated his or her income tax liability with the intent to evade tax and is subject to a 100% fraud penalty pursuant to Virginia Code § 58.1-308.

The Code of Virginia sections and public document 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 response, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

Related Documents

95-83

95-180

01-164

14-33

14-84

14-113

15-169