CHAPTER 532

An Act to amend and reenact §§ 58-78 and 58-81, as amended, of the
Code of Virginia, relating. respectively, to the definition of gross
income and to deductions allowed taxpayers reporting income.

[H 659]
Approved April 5, 1954
Be it enacted by the General Assembly of Virginia:

1. That §§ 58-78 and 58-81, as amended, of the Code of Virginia be
amended and reenacted as follows:

§ 58-78. (a) General definition—The term “gross income,” as used
herein, includes gains, profits and income derived from salaries, wages
or compensation for personal services of whatever kind and in whatever
form paid or from professions, vocations, trades, businesses, commerce
or sales or dealings in property, whether real or personal, growing out
of the ownership, use or interest in such property; also from rent,
interest, dividends, securities or transactions of any business carried
on for gain or profit or gains or profits and income derived from any
source whatever, including gains or profits and income derived through
estates or trusts by the beneficiaries thereof, whether as distributive or
as distributable shares.

The term includes all interest received within the taxable year on
refunds of State or United States taxes.

The term includes compensation received for personal service as an
officer or employee of the United States, any territory or possession or
political subdivision thereof, the District of Columbia or any agency or
instrumentality of any one or more of the foregoing; and the term
“officer or employee” includes a member of a legislative body, a judge
or officer of a court and a person in the armed forces.

The amount of all such items shall be included in the gross income
for the taxable year in which received by the taxpayer, unless under the
methods of accounting permitted herein such amounts are to be properly
accounted for as of a different period.

(b) Exclusions from gross income.—The following items shall not be
included in gross income and shall be exempt from taxation under this
chapter:

(1) The proceeds of life insurance policies and contracts paid upon
the death of the insured.

(2) The amount received by the insured as a return of premium or
premiums paid him under life insurance, endowment or annuity contracts,
either during the term or at the maturity of the term mentioned in the
contract, or at the surrender of the contract.

(3) The value of property acquired by gift, bequest, devise or
inheritance, but the income received from such gifts, bequests, devises
and inheritances shall be assessed under the provisions of this chapter.

(4) Any amount received through accident or health insurance or
under workmen’s compensation acts or under ordinances in the nature
of workmen’s compensation acts, as compensation for personal injuries
or sickness and the amount of any damages received, whether by suit or
agreement, on account of such injuries or sickness.

(5) Interest upon obligations of the United States or of this State
and interest upon securities issued under the provisions of the Federal
Farm Loan Act

(6) Pensions received from the United States or this State on
account of military or naval service in armed forces, whether such serv-
ice was rendered by the recipient of the pension or by a relative by blood
or marriage.

(7) Amounts received as pensions, annuities, or similar allowances
for personal injury or sickness resulting from active service in the armed
forces of the United States or of this State.

(8) Benefits received under federal and state social security acts.

(c) Alimony, etc., income.—In the case of a wife who is divorced
or legally separated from her husband under a decree of divorce or of
separate maintenance, periodic payments (whether or not made at regular
intervals) received subsequent to such decree in discharge of, or attribu-
table to property transferred (in trust or otherwise) in discharge of, a
legal obligation which, because of the marital or family relationship,
is imposed upon or incurred by such husband under such decree or under
a written instrument incident to such divorce or separation shall be in-
cludible in the gross income of such wife, and such amounts received
as are attributable to property so transferred shall not be includible in
the gross income of such husband. This subsection shall not apply to that
part of any such periodic payment which the terms of the decree or
written instrument fix, in terms of an amount of money or a portion of
the payment, as a sum which is payable for the support of minor chil-
dren of such husband. In case any such periodic payment is less than the
amount specified in the decree or written instrument, for the purpose
of applying the preceding sentence, such payment, to the extent of such
sum payable for such support, shall be considered a payment for such
support. Installment payments discharging a part of an obligation the
principal sum of which is, in terms of money or property, specified in the
decree or instrument shall not be considered periodic payments for the
purposes of this subsection; except that an installment payment shall be
considered a periodic payment for the purposes of this subsection if such
principal sum, by the terms of the decree or instrument, may be or is
to be paid within a period ending more than ten years from the date
of such decree or instrument, but only to the extent that such installment
payment for the taxable year of the wife (or if more than one such
installment for such taxable year is received during such taxable year,
the aggregate of such installment payments) does not exceed ten per
centum of such principal sum. For the purposes of the preceding sentence,
the portion of a payment of the principal sum which is allocable to a
period after the taxable year of the wife in which it is received shall
be considered an installment payment for the taxable year in which it is
received. (In cases where such periodic payments are attributable to
property of an estate or property held in trust, see § 58-121.1)

(d) Definition of ‘‘adjusted gross income”’.—As used in this chapter
the term “adjusted gross income” means the gross income minus:

(1) Trade and business deductions—The deductions allowed by
§ 58-81 which are attributable to a trade or business carried on by the
taxpayer, if such trade or business does not consist of the performance
of services by the taxpayer as an employee;

(2) Expenses of travel and lodging in connection with employment.
—The deductions allowed by § 58-81 which consist of expenses of travel,
meals, and lodging while away from home, paid or incurred by the tax-
payer in connection with the performance by him of services as an
employee;

(3) Reimbursed expenses in connection with employment.—The de-
ductions allowed by § 58-81 (other than expenses of travel, meals, and
lodging while away from home) which consists of expenses paid or
incurred by the taxpayer, in connection with the performance by him of
services as an employee, under a reimbursement or other expense allow-
ance arrangement with his employer;

(4) Deductions attributable to rents and royalties.—The deductions
(other than those provided in paragraphs (1), (5), or (6)) allowed by
§ 58-81 which are attributable to property held for the production of
rents or royalties;

(5) Certain deductions of life tenants and income beneficiaries of
property.—The deductions (other than those provided in paragraph (1) )
for depreciation and depletion, allowed by § 58-81 (i) and (j) to a life
tenant of property or to an income beneficiary of property held in trust;

(6) Losses from sales or exchange of property.—The deductions
(other than those provided in paragraph (1)) allowed by § 58-81 as
losses from the sale or exchange of property; and

; - Dividend deductions.—The deductions allowed by § 58-81 (k)
an .

§ 58-81. Taxpayers, reporting income as prescribed by this chapter
shall be allowed the following deductions:

(a) Expenses.—(1) Trade or Business Expenses.—(A) In General.
—All the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business, including a reasonable
allowance for salaries or other compensation for personal services actu-
ally rendered; traveling expenses (including the entire amount expended
for meals and lodging) while away from home in the pursuit of a trade
or business; and rentals or other payments required to be made as a
condition to the continued use or possession, for the purposes of the
trade or business, of property to which the taxpayer has not taken or
is not taking title or in which he has no equity.

(B) Corporate charitable contributions.—No deduction shall be allow-
able under subparagraph (A) to a corporation for any contribution or
gift which would be allowable as a deduction under subsection (n) were
it not for the five per centum limitation therein contained and for the
requirement therein that payment be made within a specified time.

_. (2) Nontrade or nonbusiness expenses.—In the case of an indi-
vidual, all the ordinary and necessary expenses paid or incurred during
the taxable year for the production or collection of income, or for the
Management, conservation, or maintenance of property held for the pro-
duction of income.

(b) Interest.—All interest paid or accrued within the taxable year
on existing indebtedness, except on indebtedness incurred or continued to
purchase or carry obligations or securities, the interest from which is not
or would not be taxable under this chapter. All interest actually paid
within the taxable year on tax liabilities due to the State or the United
States shall be deductible as interest.

(c) Taxes.—Taxes paid or accrued within the taxable year, except
income taxes, inheritance taxes, and taxes assessed for local benefits of
a kind tending to increase the value of the property assessed.

(d) Losses in trade or business.—Losses sustained during the tax-
able year and not compensated for by insurance or otherwise, if incurred
at made or business, the income from which is subject to taxation in this

tate.

(e) Losses in other transactions entered into for profit.—Losses
sustained during the taxable year and not compensated for by insurance
or otherwise, if incurred in any transaction entered into for profit, though
not connected with the trade or business; but in the case of a taxpayer
other than a resident of the State only such losses shall be deductible as
relate to transactions in real property or in tangible personal property
having an actual situs in this State.

(f) Losses from casualty or theft.—Losses sustained during the tax-
able year of property not connected with the trade or business (but in
the case of a taxpayer other than a resident only of real property or
tangible personal property having an actual situs in this State), if aris-
ing from fire, storms, shipwrecks or other casualty or from theft and not
compensated for by insurance or otherwise.

(zg) Bad debts.—Debts due the taxpayer and actually ascertained to
be worthless and actually charged off within the taxable year.

(h) Repairs.—The actual amount paid or incurred during the tax-
able year for repairs to and maintenance of buildings and machinery;
provided that no deductions shall be made for any repair which is charge-
able to residence property occupied by its owner, or for depreciation
thereof, and the annual value of the estimated rental thereof shall not
be included in the income subject to taxation.

(i) Depreciation.—A reasonable allowance for the exhaustion, wear
and tear (including a reasonable allowance for obsolescence) :

(1) of property used in the trade or business, or

(2) of property held for the production of income. In the case of
property held by one person for life with remainder to another person
the deduction shall be computed as if the life tenant were the absolute
owner of the property and shall be allowed the life tenant. In the case
of property held in trust the allowable deduction shall be apportioned
between the income beneficiaries and the trustee in accordance with the
pertinent provisions of the instrument creating the trust, or, in the
absence of such provisions, on the basis of the trust income allocable
to each. .

(j) Depletion.—In the case of mines, oil and gas wells, other natural
deposits, and timber, a reasonable allowance for depletion and for depre-
ciation of improvements, according to the peculiar conditions in each
case; such reasonable allowance in all cases to be made under rules and
regulations to be prescribed by the Department of Taxation. In any case
in which it is ascertained as a result of operations or of development
work that the recoverable units are greater or less than the prior estimate
thereof, then such prior estimate (but not the basis for depletion) shall
be revised and the allowance under this subsection for subsequent tax-
able years shall be based upon such revised estimate. In the case of
leases the deductions shall be equitably apportioned between the lessor
and lessee. In the case of property held by one person for life with
remainder to another person, the deduction shall be computed as if the
life tenant were the absolute owner of the property and shall be allowed
to the life tenant. In the case of property held in trust the allowable
deduction shall be apportioned between the income beneficiaries and the
trustee in accordance with the pertinent provisions of the instrument
creating the trust, or, in the absence of such provisions, on the basis of
the trust income allocable to each.

(k) Dividends on bank stocks.—Dividends received during the tax-
able year upon stock of national banks and dividends received during the
taxable year upon stock of banks and trust companies organized under
the laws of this State.

(1) Other dividends or portions thereof.—Dividends received during
the taxable year from stock in any corporation, the income of which was
assessable for the preceding year under the provisions of the income tax
laws of this State; provided that when only a part of the income of any
such corporation was so assessable, only a corresponding part of the
dividends received therefrom shall be deductible.

‘((m) Charitable and other contributions.—In the case of an indi-
vidual, contributions or gifts, payment of which is made within the tax-
able year to or for the use of:

(1) The United States, any state, territory, or any political sub-
division thereof or the District of Columbia, or any possession of the
United States for exclusively public purposes;

(2) A corporation, trust, or community chest, fund, or foundation,
created or organized in the United States or in any possession thereof
or under the law of the United States or of any state or territory or of any
possession of the United States, organized and operated exclusively for
religious, charitable, scientific, literary, or educational purposes, or for
the prevention of'cruelty to children or animals, no part of the net earn-
ings of which inures to the benefit of any private shareholder or indi-
vidual, and no substantial part of the activities of which is carrying on
propaganda, or otherwise attempting, to influence legislation ;
(8) The special fund for vocational rehabilitation authorized by § 12
wriy World War Veterans’ Act, 1942, 43 Stat. 611 (U.S. C., Title 38.

(4) Posts or organizations of war veterans, or auxiliary units or
societies of any such posts or organizations, if such posts, organizations,
units, or societies are organized in the United States or any of its posses-
sions, and if no part of their net earning inures to the benefit of any
private shareholder or individual; or

(5) A domestic fraternal society, order or association, operating
under the lodge system, but only if such contributions or gifts are to be
used exclusively for religious, charitable, scientific, literary, or educa-
tional purposes, or for the prevention of cruelty to children or animals;

To an amount which in all the above cases combined does not exceed
fifteen per centum of the taxpayer’s adjusted gross income. Such con-
tributions or gifts shall be allowable as deductions only if verified under
rules and regulations prescribed by the Department of Taxation.

(n) Charitable and other contributions by corporations and co-
operative associations.—In the case of a corporation, or a cooperative
association or cooperative farm produce marketing association organized
under the provisions of Chapters 14 and 15, Title 13 of the Code of
Virginia, contributions or gifts payment of which is made within the tax-
able year to or for the use of:

_(1) The United States, any state, territory, or any political sub-
division thereof or the District of Columbia, or any possession of the
United States, for exclusively public purposes;

(2) A corporation, trust, or community chest, fund, or foundation,
created or organized in the United States or in any possession thereof
or under the law of the United States, or of any state or territory, or of
the District of Columbia, or of any possession of the United States, organ-
ized and operated exclusively for religious, charitable, scientific, veteran
rehabilitation service, literary, or educational purposes or for the preven-
tion of cruelty to children (but only if such contributions or gifts are to
be used within the United States or any of its possessions exclusively
for such purposes), no part of the net earnings of which inures to the
benefit of any private shareholder or individual, and no substantial part
of the activities of which is carrying on propaganda, or otherwise
attempting, to influence legislation; or

(3) Posts or organizations of war veterans, or auxiliary units of,
or trusts or foundations for, any such post or organizations, if such
posts, organizations, units, trusts, or foundations are organized in the
United States or any of its possessions, and if no part of their net earn-
ings inure to the benefit of any private shareholder or individual;

To an amount which, in the case of a corporation, does not exceed
five per centum of the taxpayer’s net income as computed without the
benefits of this section; to an amount which, in the case of a cooperative
association or cooperative farm produce marketing association, does not
exceed five per centum of the savings or earnings of such association
available for distribution to its members and patrons. Such contribu-
tions or gifts shall be allowable as deductions only if verified under rules
and regulations prescribed by the Department of Taxation.

In the case of a corporation reporting its net income on the accrual
basis, at the election of the taxpayer any contribution or gift payment of
which is made after the close of the taxable year and on or before the
fifteenth day of the third month following the close of such year shall,
for the purpose of this section, be considered as paid during such taxable
year if, during such year, the board of directors authorized such contribu-
tion or gift. Such election shall be made only at the time of the filing
of the return for the taxable year, and shall be signified in such manner
as the Department of Taxation shall by rules and regulations prescribe.

(o) Alimony, etc., payments.—In the case of a husband described
in § 58-78 (c), amounts includible under § 58-78 (c) in the gross income
of his wife, payment of which is made within the husband’s taxable year.
If the amount of any such payment is, under § 58-78 (c) or § 58-121.1,
stated to be not includible in such husband’s gross income, no deduction
shall be allowed with respect to such payment under this subsection.

(p) Medical, dental, etc., expenses.—Expenses paid during the tax-
able year, not compensated for by insurance or otherwise, for medical
care of the taxpayer, his spouse, or a dependent specified in § 58-98 (c):

(1) If neither the taxpayer nor his spouse has attained the age of
sixty-five before the close of the taxable year, to the extent that such
expenses exceed five per centum of the adjusted gross income, or

(2) If either the taxpayer or his spouse has attained the age of
sixty-five before the close of the taxable year, (A) the amount of such
expenses for the care of the taxpayer and his spouse, and (B) the
amount by which such expenses for the care of such dependents exceed
five per centum of the adjusted gross income. The deduction under this
subsection shall not be in excess of one thousand two hundred and fifty
dollars multiplied by the number of exemptions allowed under § 58-98 for
the taxable year (exclusive of exemptions allowed under § 58-98 (a) (2)
or (3), with a maximum deduction of two thousand five hundred
dollars, except that the maximum deduction shall be five thousand dollars
in the case of a joint return of husband and wife under § 58-105 (b). The
term “medical care,” as used in this subsection shall include amounts
paid for the diagnosis, cure, mitigation, treatment, or prevention of
disease, or for the purpose of affecting any structure or function of the
body (including amounts paid for accident or health insurance). The
determination of whether an individual is married at any time during
the taxable year shall be made in accordance ~7ith the provisions of
§ 58-105 (b) (5).

(q) Optional standard deduction for individuals.—

(1) Allowance.—In the case of an individual, at his election a stand-
ard deduction as follows:

(A) Adjusted gross income five thousand dollars or more.—If his
adjusted gross income is five thousand dollars or more, the standard
deduction shall be five hundred dollars or an amount equal to five per
centum of the adjusted gross income, which ever is the lesser, except that
in the case of a separate return by a married individual, the standard
deduction shall be two hundred fifty dollars.

(B) Adjusted gross income less than five thousand dollars.—If his
adjusted gross income is less than five thousand dollars the standard deduc-
tion shall be an amount equal to five per centum of the adjusted gross
income.

(2) In lieu of certain deductions and credits.—The standard deduc-
tion shall be in lieu of: (A) all deductions other than those which under
§ 58-78 (d) are to be substracted from gross income in computing ad-
justed gross income, and (B) all credits with respect to taxes of other
states.

(3) Method and effect of election.—

(A) The standard deduction shall be allowed only if the taxpayer
so elects in his return, and the Department of Taxation shall by rules and
regulations prescribe the manner of signifying such election in the
return.

(B) If the taxpayer does not signify, in the manner provided by
subparagraph (A), his election to take the standard deduction, it shall
not be allowed. If he does so signify, such election shall be irrevocable.
(4) Husband and wife.—In the case of husband and wife, the stand-
ard deduction shall not be allowed to either if the net income of one of
the spouses is determined without regard to the standard deduction.

(5) Short period.—In the case of a taxable year of less than twelve
months on account of a change in the accounting period, the standard
deduction shall not be allowed.

(6) Determination of status.—For the purposes of this subsection:

(A) The determination of whether an individual is married shall
be made as of the close of his taxable year, unless his spouse dies during
his taxable year, in which case such determination shall be made as of the
time of such death; and

(B) An individual legally separated from his spouse under a decree
of divorce or of separate maintenance shall not be considered as married.