What does Virginia Ruling of the Tax Commissioner P.D. 09-10 conclude about Taxpayers failed to pay the tax due reported on the return?

Subject

Pension received after moving into Virginia was taxable to the new residents

Plain-English summary

Virginia taxed pension distributions the couple received after becoming Virginia residents. It did not matter that the pension had been earned through earlier employment in another state. Virginia treated retirement distributions received during the resident period as Virginia-attributable income and did not prorate them based on days of residence.

The ruling explained that a state may tax all income of its residents, while federal law prevented the former state from taxing retirement income after the couple ceased being residents there. Virginia began with federal adjusted gross income and found no applicable state modification.

The couple also could not use the cited subtraction for pension contributions previously taxed by another state but not federally. Their former state imposed no individual income tax, so those contributions had not been taxed there.

What this means for you

• Retirement income is generally analyzed when received, not where the underlying employment occurred.
• Separate distributions received before and after a residency change.
• Virginia did not prorate total retirement distributions by the number of resident days in this ruling.
• A prior-contribution subtraction requires proof that another state actually taxed the contributions under the cited rule.

Common questions

Did earning the pension elsewhere exempt it?

No. The couple were Virginia residents when they received the distributions.

Could the old state still tax the retirement income?

The ruling said 4 U.S.C. § 114 prevented that state from taxing it after the couple became Virginia residents.

Why was the prior-contribution subtraction denied?

The former state had no individual income tax and had not taxed those contributions.

Citations and references

• Va. Code §§ 58.1-301 and 58.1-322(C)(19).
• 4 U.S.C. § 114.
• P.D. 99-173.
• New York ex rel. Cohn v. Graves, 300 U.S. 308 (1937).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-10

Original ruling text

February 4, 2009

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, 2007.

FACTS

The Taxpayers moved to Virginia from * (State A) in March 2007. They filed a 2007 Virginia part-year individual income tax return that attributed pension plan distributions to Virginia. The Taxpayers failed to pay the tax due reported on the return. As a result, the Department issued an assessment of tax, penalty, and interest. The Taxpayers filed an appeal, contending that the pension distributions were derived from employment in State A and should not be subject to Virginia tax.

DETERMINATION

The Department's policy with regard to the taxability of retirement income received by part-year residents is articulated in Public Document (P.D.) 99-173 (6/30/1999). Under this ruling, distributions from pensions and IRAs, including withdrawals that exceed the normal distribution, received by an individual while he is a Virginia resident are attributable to Virginia as Virginia source income in the year which such distributions are received. Virginia statutes do not permit proration of total retirement income based on days of Virginia residency.

The Taxpayers were Virginia residents when they began receiving their pension distributions from their former employers located in State A. Because the Taxpayers earned these pensions while residents of State A, they believe that the Department cannot subject the distributions received in Virginia to Virginia income tax.

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 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.

Further, it is well-established that a state may tax all the income of its residents, even income earned outside the taxing jurisdiction. In New York ex rel. Cohn v. Graves , 300 U.S. 308, (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." Thus, Virginia may impose income tax on all the income received by the Taxpayers while they were Virginia residents during 2007.

Further, Title 4 U. S. C. § 114 prohibits states from imposing an income tax on any retirement income of an individual who is neither an actual or domiciliary resident of such state. Under this federal statute, Virginia can only impose income tax on retirement income of individuals that are either actual or domiciliary residents of the Commonwealth. Likewise, State A lost the legal authority to impose tax on the Taxpayers' retirement income once they became residents of Virginia.

Virginia Code § 58.1-322 C 19 does provide a subtraction for income received from certain pension and retirement plans when the contributions to the plans were taxed in prior years by another state, but not by the federal government. Taxpayers eligible for this subtraction are able to avoid taxation by both Virginia and another state on the same retirement savings. Because State A imposes no individual income tax, the prior year contributions were never taxed by State A and the Taxpayers were not eligible for this subtraction.

Based on the foregoing, the Taxpayers' request for the abatement of the Virginia income tax assessment for the 2007 taxable year is denied. A revised bill, with interest accrued to date, will be sent to the Taxpayers. No additional interest will accrue provided the outstanding balance in paid within 30 days from the date of the revised bill.

The Code of Virginia section and public document 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 about this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2586801237.B