Could a Virginia resident exclude wages by treating the value of personal labor as an offsetting cost?

Subject

The Taxpayer's claim that his income is not subject to Virginia taxation has no basis in fact or Virginia law.

Plain-English summary

Virginia received an IRS audit adjustment showing that a resident had understated federal adjusted gross income on his 2012 return. The taxpayer argued that wages were not taxable because the value of his labor should be treated as an equal cost offset.

The Department rejected that theory. Virginia begins with federal adjusted gross income, subject to specific Virginia modifications, and IRC § 83 did not give a worker fair-market-value basis in personal labor. The ruling cited decisions holding that wages are income and that a worker's cost in his labor is zero for this argument.

The taxpayer received Virginia taxable income above the filing threshold. Virginia upheld the additional 2012 tax and interest based on the federal adjustment.

Citations and references

• Va. Code §§ 58.1-301, 58.1-322, 58.1-302, 58.1-321, and 58.1-341.
• IRC §§ 83 and 6103(d).
• Colonial Pipeline Company v. Commonwealth of Virginia, 206 Va. 517, 145 S.E.2d 227 (1965).
• Talmage v. Commissioner, T.C. Memo 1996-114; Broughton v. United States, 632 F.2d 706 (1980).
• P.D. 14-33.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-67

Original ruling text

May 2, 2016

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, 2012.

FACTS

The Taxpayer filed a 2012 Virginia individual income tax return. The Department received a federal audit adjustment from the Internal Revenue Service (IRS) indicating that the Taxpayer underreported his federal adjusted gross income (FAGI). As a result, the Department issued an assessment for additional tax and interest. The Taxpayer filed an appeal, asserting that he was exempt from filing federal and Virginia income tax returns because wages exchanged for labor is not includable as gross income.

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). 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 Va. Code § 58.1-322.

A resident of Virginia includes any natural person domiciled in Virginia at any time during a taxable year or who, for an aggregate of more than 183 days of the taxable year, maintained his place of abode within Virginia. See Va. Code § 58.1-302. 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 Va. 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 mere fact that Virginia starts with terms defined in 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.

The Taxpayer contends that pursuant to IRC § 83, the value of his labor is a cost to be offset against his wages, which effectively exempts him from income tax. Under IRC § 83, property that is received in exchange for services is taxable to the recipient of the property to the extent of its fair market value minus the amount (if any) paid for the property. A worker's cost for his labor is $0, not fair market value. As such, all of a taxpayer's wages are included in taxable income because the wages would in essence be reduced by $0. See Talmage v. Commissioner , TC Memo 1996-114 (1996). In addition, courts have held that the argument that wages are not income is without merit. See for example, Broughton v. U.S. , 632 F.2d 706 (1980).

The information available shows that the Taxpayer received Virginia taxable income during the 2012 taxable year. Because the amount of such income exceeded the applicable filing threshold under Va. Code § 58.1-321, the Taxpayer was required to file a Virginia return. See also Public Document (P.D.) 14-33 (3/7/2014).

The Taxpayer's claim that his income is not subject to Virginia taxation has no basis in fact or Virginia law. Accordingly, the assessment for the taxable year ended December 31, 2012 is correct and remains due and payable. An updated bill will be issued shortly, which will include accrued interest. Payment of the assessment should be made within 30 days of the bill date in order to avoid the accrual of additional interest.

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 determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-6219670361.B