Tax Type
Individual Income Tax
Description
Domiciliary residence, S Corporation
Topic
Accounting Periods and Methods
Collection of Delinquent Tax
Property Subject to Tax
Date Issued
06-26-2002
June 26, 2002
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the Virginia individual income tax assessments issued to ***** (the "Taxpayers") for the 1996, 1997 and 1998 taxable years. I apologize for the delay in responding to your letter.
FACTS
The Taxpayers, a husband and wife, were Virginia residents from 1980 through 1995. In January 1996, the Taxpayers state that they moved to State A, where they rented a fully furnished residence from the husband's brother. In November 1996, the Taxpayers purchased a residence in State B. The Virginia residence of the Taxpayers was placed on the market in 1996; however, it was not sold until March 1998. The Taxpayers registered to vote and obtained driver's licenses in State A in July 1997.
The husband was the president and sole shareholder in a number of S corporations. The S corporations conducted the majority of their activities in Virginia. In 1996, the husband moved the headquarters of one of the S corporations to State A. The products manufactured by this S Corporation in Virginia were sold in Virginia, nationally and internationally. The Taxpayers routinely traveled in Virginia, State A, other states, and overseas while conducting business activities.
Under audit, the department determined that the Taxpayers did not abandon their domiciliary residence in Virginia and establish a domicile in State A at the time they moved in 1996. Consequently, assessments were issued for the 1996 through 1998 taxable years. The Taxpayers contend that they had abandoned Virginia as their domiciliary residence and established their domiciliary residence in State A.
DETERMINATION
Two classes of residents, a domiciliary resident and an actual resident, are set forth in Code of Virginia § 58.1-302. Domiciliary residence means the permanent place of residence of a taxpayer or the place to which he or she intends to return even though they may actually reside elsewhere. For an individual to change domiciliary residency to another state, that individual must intend to abandon their Virginia domicile with no intention of returning to Virginia. Concurrently, that individual must acquire a new domicile where that person is physically present with the intention to remain there permanently or indefinitely. An actual resident of Virginia means an individual who, for an aggregate of more than 183 days of the taxable year, maintained a place of abode within Virginia.
In determining domicile, consideration may be given to an individual's expressed intent, conduct, and all attendant circumstances including, but not limited to, financial independence, profession or employment, income sources, residence of spouse, marital status, sites of real and tangible property, motor vehicle registration and licensing, and such other factors as may be reasonably deemed necessary to determine an individual's domicile. An individual's true intention must be determined with reference to all of the facts and circumstances of the particular case. A simple declaration is not sufficient to establish domicile.
The department concedes that it is difficult to know whether an individual intends to abandon Virginia. The individual has the burden of proving abandonment of his or her Virginia domicile. If the information is inadequate to meet this burden, the department will conclude that he or she is a Virginia domiciliary resident.
The Taxpayers claim that they intended to leave Virginia and become residents of State A in order to be closer to the headquarters of one of the husband's corporations and to be closer to his brother who lived in State A. They moved into a fully furnished residence located in State A owned by the husband's brother. The Taxpayers entered into a verbal rental agreement that allowed them to pay certain expenses instead of remitting monthly rent payments. The brother was responsible for all utility and telephone expenses for the residence. Additionally, when the Taxpayers left State A to travel to Virginia or other locations, the brother was free to rent the house to other tenants. For the 1996, 1997 and 1998 taxable years, the Taxpayer spent 74 days, 41 days and 49 days respectively in State A, respectively. The husband's brother rented this property to other tenants approximately 16 to 18 weeks per year.
The Taxpayers spent 139 days, 114 days and 85 days, respectively, in Virginia during the 1996, 1997 and 1998 taxable years. The Taxpayers indicate that they put their Virginia residence up for sale when they moved to State A. However, the residence was not listed with an agent at that time. The Taxpayers used this Virginia residence when they were staying in Virginia. The Virginia residence was sold in March 1998 after an agent was hired to sell the home. Concurrently, a limited liability company owned by the husband purchased a condominium in Virginia. While this condominium was used to entertain clients, it was also used as the primary housing for the Taxpayers while in Virginia.
The remaining days for the taxable years at issue were spent in State B where the Taxpayers purchased a home. The Taxpayers expressed no intention to make State B their domiciliary residence for the 1996, 1997 and 1998 taxable years. Accordingly, they filed nonresident income tax returns for those years. The Taxpayers also spent time in other states and countries when the husband traveled to conduct business activities.
The Taxpayers assert that their move to State A resulted from the husband transferring to the headquarters of his business. The business referred to by the Taxpayers was a Virginia S Corporation that manufactures tangible personal property at a facility located in Virginia. According to the Taxpayers, the Virginia S Corporation's headquarters moved to State A in early 1996. The Virginia S Corporation was dissolved later that year and the assets were transferred to an S Corporation incorporated in State A. The husband was the sole shareholder and president of the Virginia S Corporation and the State A S Corporation. Clearly, the husband had the authority to control where and when the operations of his manufacturing business occurred. The information provided seems to indicate that it was the business that followed the husband to State A and not the husband moving to the business location.
During the years at issue, substantially all of the operations of the business were conducted in Virginia. In fact, the income tax returns filed by the Virginia S Corporation and the State A S Corporation reported all of its payroll and property in Virginia. In addition, the husband owned a number of other businesses located in Virginia and spent a considerable amount of time in Virginia managing these businesses. This is evidenced by the fact that the Taxpayers spent more time in Virginia than in State A.
Though the Taxpayers contend that their intention was to abandon Virginia as their domiciliary residence, the facts examined collectively do not show that the Taxpayers abandoned Virginia as a domiciliary residence and concurrently acquired a new domicile in State A. Although they registered to vote and obtained driver's licenses in State A, the Taxpayers actually spent more days residing in both Virginia and State B than they did residing in State A. Further, when the Taxpayers were not residing in State A, the brother was free to rent the residence to other tenants. In fact, the brother's house in State A was rented to the other tenants more than it was rented to the Taxpayers. The department typically does not consider such rental arrangements to be a permanent residence. In addition, the husband continued to engage in significant business activities in Virginia that required him to spend a substantial amount of time in Virginia.
When considered collectively, the Taxpayers' activities are not sufficient to show the Taxpayers intended to change their domiciliary residence to State A. The department, therefore, concludes that they were domiciliary residents of Virginia for the 1996 through 1998 taxable years. Accordingly, the assessments for these years are upheld. The attached schedule shows the outstanding tax and updated interest. Payment of the assessments should be remitted to the Department of Taxation, Office of Policy and Administration, Policy Development, Department of Taxation, Post Office Box 1880, Richmond Virginia 23282-1880, Attention: *****. If payment is not received within 30 days from the date of this letter, interest will accrue on the outstanding balance.
The Code of Virginia sections cited and other reference documents are available online in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have any questions regarding this matter, you may contact ***** at *****.
Sincerely,
Kenneth W. Thorson
Tax Commissioner
PD/27735N
Rulings of the Tax Commissioner