Could a Virginia taxpayer exclude qualified dividends from 2005 federal adjusted gross income after the IRS included them?

Subject

Qualified dividends remained in Virginia income after the IRS correction

Plain-English summary

Virginia upheld the assessment because qualified dividends belonged in federal adjusted gross income and therefore entered the Virginia calculation. The taxpayer had removed the dividends from the 2005 federal return, but the IRS restored them.

Virginia starts individual income tax with federal adjusted gross income. Although federal law applied the capital-gain tax rate to qualified dividends, it still required those dividends to be included in that federal starting amount. Virginia had no separate preferential rate for qualified dividends or capital gains.

The taxpayer also did not file a Virginia amended return reporting the final federal correction within one year. Under the rule cited in the ruling, that failure allowed Virginia to assess the appropriate tax at any time. The assessment was correct and due.

What this means for you

• A preferential federal rate does not mean an item is excluded from federal adjusted gross income.
• Virginia generally begins its individual-income-tax calculation with the federal adjusted amount.
• A final IRS change can trigger a Virginia amended-return obligation.
• Failing to report the federal change can extend Virginia's assessment window under the rule applied here.

Common questions

Were qualified dividends excluded from federal adjusted gross income?

No. They were included even though federal law taxed them at capital-gain rates.

Did Virginia provide the same preferential rate?

No. The ruling states Virginia had no special capital-gain rate or preferential qualified-dividend treatment.

Why could Virginia still assess the 2005 tax?

The taxpayer did not file a Virginia amended return within one year of the final federal correction.

Citations and references

• Va. Code §§ 58.1-301, 58.1-311, and 58.1-312(A)(3).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-31

Original ruling text

March 31, 2010

Re: § 58.1-1821 Appeal: 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 2005 taxable year. I apologize for the delay in the Department's response.

FACTS

In the preparation of his federal Individual income tax return, the Taxpayer eliminated qualified dividends from federal adjusted gross income (FAGI). The Internal Revenue Service (IRS) corrected the Taxpayer's FAGI to include the qualified dividends.

Based on information provided by the IRS, the Department adjusted the Taxpayer's 2005 individual income tax to match federal adjusted gross income (FAGI), and issued an assessment. The Taxpayer contends that the exclusion of qualified dividends from FAGI was correct, and the Department assessment is erroneous.

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 (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 federal adjusted gross income (FAGI).

Although qualified dividends are taxed at the capital gains tax rate for federal income tax purposes, the Internal Revenue Code requires such dividends to be included in FAGI. The IRS adjusted Taxpayer's return accordingly. For Virginia purposes, there is no special tax rate for capital gains or preferential treatment for qualified dividends.

Virginia Code § 58.1-311 requires any individual to report a change or correction in federal taxable income within one year of the final determination of such change or correction by filing an amended return with the Department. If the taxpayer fails to file an amended return, Va. Code § 58.1-312 A 3 permits the Department to assess the appropriate tax at any time.

In this case, the Taxpayer failed to file a Virginia amended income tax return based on the federal changes to FAGI, the starting point for the Virginia income tax calculation. As such, the Department merely adjusted the Taxpayer's return based on the federal changes as provided under Va. Code § 58.1-312 A 3.

Accordingly, the assessment is correct and is now due and payable. Payment of the remaining balance due, as shown on the enclosed schedule, should be remitted to Virginia Department of Taxation, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23261-7203, Attention: *. No additional interest will accrue provided the outstanding balance is paid within 30 days from the date of this

letter.

The Code of Virginia sections and regulations 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 website. If you have any questions concerning this determination, you may contact * at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3145291144.C