Title: Virginia Dept. of Taxation v. Davenport

State: virginia

Issuer: Virginia Supreme Court

Document:

Present:  Carrico, C.J., Compton, Lacy, Hassell, Keenan, and 
Koontz, JJ., and Whiting, Senior Justice 
 
COMMONWEALTH OF VIRGINIA,  
DEPARTMENT OF TAXATION 
 
OPINION BY JUSTICE LEROY R. HASSELL, SR. 
v.   Record No. 961270 
February 28, 1997 
 
BRADFUTE W. DAVENPORT, JR., ET AL. 
 
 
FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND 
 
Randall G. Johnson, Judge 
 
 
In this appeal, we consider whether Code § 58.1-322 
requires taxpayers, who included the unearned income of 
their minor children in the taxpayers' federal adjusted 
gross income, to include the children's unearned income in 
the taxpayers' Virginia adjusted gross income. 
 
Bradfute W. Davenport, Jr., and Suzanne S. Davenport 
(the taxpayers) have five minor children who periodically 
have received cash gifts from their grandparents.  The 
grandparents made the gifts to Bradfute W. Davenport, Jr., 
as custodian for each child as permitted by the Virginia 
Uniform Transfers to Minors Act, Code §§ 31-37, et seq.  The 
taxpayers have no ownership interest in, or use of, the 
gifts or any investment income thereon. 
 
The taxpayers filed joint income tax returns with the 
federal government and the Commonwealth of Virginia for the 
years 1992 through 1994.  In each of these taxable years, 
the taxpayers' children had income subject to federal 
taxation.  As permitted by 26 U.S.C. § 1(g)(7), the 
taxpayers elected to include their minor children's unearned 
income in the taxpayers' federal adjusted gross income for 
 
 
 
 
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federal income tax purposes rather than file a separate tax 
return for each child.  When the taxpayers submitted their 
Virginia income tax returns for the years 1992 and 1993, the 
taxpayers subtracted the unearned income of their minor 
children from their federal adjusted gross income to 
determine the quantum of the taxpayers' Virginia adjusted 
gross income. 
 
The Commonwealth of Virginia Department of Taxation 
issued a notice of assessment to the taxpayers for their 
1992 Virginia income tax return.  The Department asserted 
that the taxpayers should not have subtracted the children's 
unearned income from the taxpayers' federal adjusted gross 
income, and the Department assessed tax and interest on the 
income which was not reported.   
 
The taxpayers paid the additional tax assessment under 
protest and filed an application for correction of erroneous 
or improper assessments of state income taxes in the circuit 
court, seeking a determination that they were entitled to 
subtract their children's unearned income from the 
taxpayers' federal adjusted gross income.  The trial court 
agreed with the taxpayers, and we awarded the Department an 
appeal.   
 
Code § 58.1-301 provides that "[a]ny term used in this 
chapter [which governs Virginia's income tax] shall have the 
same meaning as when used in a comparable context in the 
 
 
 
 
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laws of the United States relating to federal income taxes, 
unless a different meaning is clearly required."  Code 
§ 58.1-322 states in relevant part:  "A.  The Virginia 
taxable income of a resident individual means his federal 
adjusted gross income for the taxable year . . . with the 
modifications specified in this section."   
 
The taxpayers argue that they are entitled to deduct 
their children's unearned income from the taxpayers' federal 
adjusted gross income because, they say, the word "his" 
found in Code § 58.1-322(A) refers to the taxpayers' income 
and does not include their children's unearned income, which 
was less than $5,000 and would otherwise not be subject to 
state income taxation.  The Department argues that in 
determining a taxpayers' Virginia income tax liability, Code 
§ 58.1-322(A) requires that the taxpayers include all income 
included in the taxpayers' federal adjusted gross income 
subject only to those modifications contained in § 58.1-322. 
 
We agree with the Department.  The plain language in 
Code §§ 58.1-301 and -322 clearly and unambiguously requires 
the taxpayers to report their federal adjusted gross income 
as taxable income on their Virginia tax returns.  Code 
§ 58.1-322, which also prescribes numerous modifications to 
a resident individual's federal adjusted gross income, 
contains no provision which authorizes the taxpayers to 
subtract their children's unearned income.  The taxpayers 
 
 
 
 
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elected to include their children's unearned income in the 
taxpayers' federal adjusted gross income for federal 
taxation purposes, and, having made such election, the 
taxpayers may not change that election in computing their 
state income tax.  Moreover, we are of opinion that the 
phrase "his federal adjusted gross income" contained in Code 
§ 58.1-322 does not refer to only one taxpayer's income, but 
refers to the amount of federal adjusted gross income that 
the taxpayers specified on their federal income tax return, 
subject to any modification authorized by Virginia statutes. 
 
Accordingly, we will reverse the judgment of the trial 
court and enter final judgment here in favor of the 
Commonwealth. 
 
Reversed and final judgment.