Could Virginia residents subtract foreign-source income from their 2007 Virginia taxable income?

Subject

Virginia residents could not claim the repealed foreign-income subtraction

Plain-English summary

Virginia upheld the assessment because the residents' foreign-source income was included in federal adjusted gross income and no Virginia subtraction applied in 2007. Virginia formerly allowed a subtraction for certain foreign-source income, but the General Assembly repealed it for tax years beginning on or after January 1, 2003.

The foreign tax credit used on the federal return did not create a Virginia deduction. Virginia's federal conformity rule gives federal terms the same meaning when Virginia statutes use them; it does not import federal concepts that Virginia law does not provide.

The ruling also concluded that taxing a resident's foreign-source income was not barred by the Constitution or U.S. tax treaties. The possibility of double taxation did not itself make the assessment unconstitutional.

What this means for you

• Virginia residents started with federal adjusted gross income for this calculation.
• A federal foreign tax credit did not create a separate Virginia subtraction.
• The former Virginia foreign-source-income subtraction was unavailable for 2007.
• A current return should be checked against current Virginia modifications and credits.

Citations and references

• Va. Code §§ 58.1-301 and 58.1-322.
• 2003 Va. Acts ch. 980.
• Guaranty Trust Co. of New York v. Commonwealth of Virginia, 305 U.S. 19 (1938).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-50

Original ruling text

April 27, 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 "Taxpayers") for the 2007 taxable year.

FACTS

The Taxpayer subtracted income earned from * and *** on their 2007 individual income tax return. Upon review, the Department disallowed the subtraction and issued an assessment. The Taxpayers appeal the assessment, contending the subtraction is allowable as a special fixed date conformity adjustment on the individual income tax return and the amount claimed conforms to the foreign dividends amount used to compute the foreign tax credit on their federal return.

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 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.

For many years, Va. Code § 58.1-322 provided individual income taxpayers 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. See Chapter 980, 2003 Acts of Assembly .

The Taxpayers contend that Schedule ADJ of Form 760 allows a reduction of Virginia Adjusted Gross Income (VAGI) for foreign dividends. Line 6 of Schedule ADJ instructs taxpayers to refer to the instructions for other subtractions.

Further, the Taxpayers argue that the foreign dividend deduction conforms with the federal tax credit for foreign source income as required by Virginia law. Virginia's conformity to federal law, as set forth in Va. Code § 58.1-301, provides that the terms used in the Virginia income tax statutes will have the same meanings as used in the Internal Revenue Code. As such, Virginia's conformity to federal law is limited to the actual use of a specific term in a Virginia statute. Conformity does not extend to terms, concepts, or principles not specifically provided in Title 58.1 of the Code of Virginia . Therefore, the Department cannot permit a deduction that is without a corresponding provision in the statutes of the Commonwealth.

The courts have long recognized that the receipt of income by a resident of the territory of a taxing sovereignty is a taxable event. It is also a long established principle that the risk of double taxation does not violate a taxpayer's constitutional rights. In Guaranty Trust Co. of New York v. Commonwealth of Virginia , 305 US 19 (1938), the United States Supreme Court held that the imposition of an income tax under Virginia laws on income received as beneficiary of a trust established in New York did not violate the Due Process Clause of the Constitution, notwithstanding that the trust was also subject to tax in New York. Nor did such treatment deny equal protection under the United States Constitution.

Virginia's authority to tax foreign source income of its residents is not prohibited by the United States Constitution or United States tax treaties. The General Assembly, therefore, was well within its authority when it exercised its right to repeal the foreign source income subtraction in 2003. As such, because the foreign dividends were included in the Taxpayer's FAGI and Virginia's statutes do not permit a subtraction for such income, the Department was correct in disallowing the subtraction on the 2007 income tax return.

Accordingly, the adjustment by the Department is upheld and the assessment for the 2007 taxable year remains due and payable. The Taxpayer will receive an updated bill with accrued interest. The bill should be paid within 30 days of the date shown on the bill to avoid the accrual of additional interest.

The Code of Virginia sections cited, along with other reference documents, are available on-line 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 * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2866759880.E