Could reservation residents subtract the wife's wages, investment income, and pension from Virginia income?

Subject

Indian reservation residence subtracted wages, interest, gains, dividends and retirement income

Plain-English summary

Virginia denied subtractions for a reservation resident's outside investment income and pension, but gave the spouses 30 days to prove that her temporary-agency wages came from work performed on the reservation. Virginia's policy protected a reservation resident's income only when it arose solely from pursuits on that reservation.

The wife held stocks, mutual funds, and bank deposits through entities outside the reservation. Virginia therefore treated the resulting gains, dividends, and interest as off-reservation income. The physical location where she received the money did not control.

Her pension also appeared to arise from off-reservation employment. Virginia treated pension benefits as deferred compensation earned where the underlying job services were performed. The federal bar on taxing nonresident retirement income did not apply because the wife was a Virginia resident.

The wage issue remained fact-dependent. If the wife performed her temporary-agency work on the reservation where she lived, the wages could qualify. Virginia upheld the assessments but allowed 30 days for documentation before collection resumed.

What this means for you

• The location of the income-producing activity matters more than where income is received.
• Wages require records showing where the employee actually performed the work.
• Outside bank and investment income does not become on-reservation income merely because the owner lives there.
• Pension income generally follows the location of the employment that generated it.

Common questions

Were the wife's wages definitively taxable?

Not yet. Virginia gave the spouses 30 days to prove that her work was performed on the reservation.

Why were the investment and pension amounts taxable?

The investments involved outside institutions, and the pension appeared tied to off-reservation employment.

Did the ruling cancel the assessments?

No. It upheld them subject to possible wage documentation submitted within 30 days.

Citations and references

• Va. Code §§ 58.1-301, 58.1-322, and 58.1-1835.
• Treas. Reg. § 1.61-2(a)(1); 4 U.S.C. § 114.
• Virginia Public Document 00-96.
• Eastern Band of Cherokee Indians v. Lynch, 632 F.2d 373 (4th Cir. 1980).
• Mary T. Ryan v. Commonwealth, 169 Va. 414, 193 S.E. 534 (1937).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-157

Original ruling text

July 30, 2010

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter submitted on behalf on your clients, * (the "Taxpayers"), in which you seek correction of the individual income assessments for the taxable years ended December 31, 2005 through 2007. I apologize for the delay in responding to your letter.

FACTS

The Taxpayers, a husband and wife, reside on an Indian reservation located in Virginia. For the taxable years at issue, the Taxpayers subtracted wages, interest, gains, dividends and retirement income in computing their Virginia taxable income. The Department disallowed the subtractions and issued assessments. The Taxpayers appeal the assessments, contending the income resulted from activities conducted on an Indian reservation.

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.

Indian Treaty

The Taxpayers assert that the treaty between Virginia and the Indians in 1677 remains in effect. According to the Taxpayers, the treaty exacts an annual tax on the Indians. The Taxpayers argue that, as wards of the Commonwealth, Virginia can impose no other tax on Indian in Virginia.

Indians are considered residents of the state in which their reservation is located. See Eastern Band of Cherokee Indians v. Mark G. Lynch, Secretary of Revenue for the State of North Carolina , 632 F..2d 373 (4th Cir 1980) ( Cherokee Indians v. Lynch ). An Indian residing on an Indian reservation located in Virginia, therefore, is a resident of Virginia. The Commonwealth's longstanding policy has been to refrain from imposing income tax on the income earned by an Indian residing on a reservation solely from pursuits on that reservation. See 1917 Report of the Virginia Attorney General 160 (1/26/1917) and 1918 Report of the Virginia Attorney General 86 (1/25/1918). This general state tax immunity, however, does not operate outside of the Indian reservation. Indians receiving income from outside the reservation are subject to income taxes in the same manner as other residents of this state.

Situs for Income Tax Purposes

The wife is an Indian who received pension and intangible income. The Taxpayers assert that the wife does not need to leave the reservation to receive her pension, dividends or interest income. Further, they believe that, because intangible property is considered to be sitused at the domicile of the owner for property tax purposes pursuant to 1970 Report of the Attorney General 277 (1/30/1970), these pursuits were conducted on the reservation.

While the Attorney General has opined that bank accounts are intangible property sitused at the domicile of the owner, the opinion cited addressed whether a county or the Commonwealth could impose probate tax on the bank accounts. Because income tax is not based on the situs of property, this opinion would not limit the Department's authority to impose income tax.

In Mary T. Ryan v. Commonwealth of Virginia , 169 Va. 414, 193 S.E. 534 (1937), the Virginia Supreme Court (the "Court") ruled that income tax is not a tax on property, but a tax levied on the individual measured by the net income received by that individual. The Court pointed to its decision in Eppa Hunton, IV v. Commonwealth , 166 Va. 229, 183 S.E. 873 (1936), when it held "the Virginia income tax is an excise tax and not a property tax; that is not a tax on the property from which the income was derived." Thus, situs of the property from which the income is derived does not necessarily determine where the income will be taxed.

Written Advice

The Taxpayers cite a notice of corrected assessment for the 1981 taxable year issued by the Department to one of the wife's relatives who is also an Indian. This notice abates an income tax assessment with the simple explanation that the relative was "not liable for taxes."

Virginia Code § 58.1-1835 authorizes the Tax Commissioner to abate an assessment or a portion of an assessment that is attributable to erroneous advice furnished to taxpayers in writing by an employee of the Department acting in his official capacity. Thus, the Department would be required to abate an assessment or a portion of an assessment that is attributable to such erroneous advice. Such abatement, however, is limited to the taxpayer to whom the advice was given.

In this case, the abatement notice provided does not identify the income at issue or the specific reason for the abatement. While it is possible that the Department abated the relative's assessment because he was an Indian, the notice fails to articulate any particular reason.

Further, even if erroneous written advice were issued, the taxpayer receiving that information, not the Taxpayer, would be entitled to relief pursuant to Va. Code § 58.1­1835.

In addition, the Department's established policy was publicly promulgated in Public Document (P.D.) 00-96 (5/25/2000). P.D. 00-96 directly supersedes any previously written advice, thereby, nullifying any erroneous advice contained therein. P.D. 00-96 was issued well before the taxable years at issue and should have been followed by the Taxpayers.

Federally Recognized Tribes

The Taxpayers argue that the Department erred in relying on Cherokee Indians v. Lynch in P.D. 00-96 because the case involved federal government responsibilities and obligations for federally recognized tribes with a treaty with the federal government. The Indian tribe to which the husband belongs is not a federally recognized tribe and does not have a treaty with the federal government. Instead, the Indian tribe at issue has always related directly to the government of the Commonwealth.

Contrary to the assertion of the Taxpayers, the decision in P.D. 00-96 is not based on the ruling in Cherokee Indians v. Lynch . This case is cited for the sole purpose of pointing out that Indians are considered to be residents of the state in which they reside. Instead, the determination in P.D. 00-96 is based on 1917 Report of the Virginia Attorney General 160, which clearly limits the general state tax immunity for Indians to pursuits, activities, or operations that occur on the Indian reservation.

Income from Wages

The wife earned wages from employment with a temporary placement agency. Such income would be eligible for subtraction if the wife conducted activities for which she was employed on the reservation where she lived. The information provided to date, however, does not indicate where she conducted the activities related to her job. Without documentation to show the wife conducted the pursuit of this income on the reservation where she lived, the Department cannot allow the subtraction.

Income from Intangible Sources

The Taxpayers believe that because the wife did not have to leave the reservation to receive the capital gain, dividend and interest income, she followed these pursuits on the reservation. In P.D. 00-96 (5/25/2000), the Department held that income resulting from activities conducted off an Indian reservation includes intangible source income from institutions or providers located outside the reservation. Under P.D. 00-96, when stock investments are held in corporations located outside the Indian reservation, and accounts are held at banks or other financial institutions located without the reservation, any resulting dividend and interest income is considered to have been earned without the reservation.

In this case, the Taxpayers have provided no evidence that the dividend or interest income resulted from pursuits conducted on the reservation. The wife purchased stock in corporations or mutual funds from financial institutions, and deposited monetary funds in banks that were not located on the reservation. Because the corporations, financial institutions managing the mutual funds, and the banks were not located on the reservation, the income they generated did not result in income from pursuits conducted on the reservation.

Income from Pensions

The Taxpayers also assert that the wife could conduct her pursuits on the reservation and still receive her pension income. They assert that this income cannot be subject to Virginia income tax pursuant to 1917 Report of the Virginia Attorney General 160.

Pensions and employer provided retirement plans are generally considered to be payments made by an employer as a retirement benefit. In Black's Law Dictionary (Eighth Edition, 2004, p. 1170) a "pension plan" is defined as "any plan, fund, or program established or maintained by an employer or an employee organization that provides retirement income to employees or results in a deferral of income by employees extending to the termination of employment or beyond." Under this definition, pension income could be considered to be deferred compensation for providing job services to an employer.

This analysis is supported by Treas. Reg. §1.61-2(a)(1), which includes pensions in a list of the types of income that is considered to be compensation for services. Thus, pension income would be considered to be earned where the individual receiving the income performed their job functions resulting in the retirement income. While 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, this provision does not prohibit Virginia from imposing its income tax on such income received by an Indian residing in the Commonwealth.

If an Indian retired from employment pursued on the reservation, any resulting employer provided retirement income would be income from pursuits conducted on the reservation. If the Indian were employed off the reservation, any resulting pension would be considered to be income from pursuits conducted off the reservation.

In this case, it appears that the wife was employed off the reservation by the employer from whom she receives pension income. Accordingly, the pension income would not be eligible for subtraction for determining Virginia taxable income.

CONCLUSION

Based on the forgoing, the assessments for the taxable years at issue are upheld. I will, however, grant the Taxpayers an opportunity to provide documentation to show that the wages earned by the wife resulted from pursuits engaged on the reservation where she resided. The documentation must be provided within 30 days from the date of this letter. Otherwise, the Taxpayer should remit payment of tax and interest within 30 days in accordance with the enclosed schedule to avoid the accrual of additional interest.

Either the documentation or payment of the balance due should be made 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 23261-7203, Attention: *. If the requested documentation or payment is not received within the time allotted, additional interest will accrue and collection action will resume on the outstanding balance.

The Code of Virginia sections and public document cited 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, please contact * at ***.

Sincerely,

Linda D. Foster

Deputy Tax Commissioner

AR/1-30043885034.E