Document Number
11-196
Tax Type
Individual Income Tax
Description
Combat pay excluded from FAGI and computation when proportionally allocating itemized deductions
Topic
Servicemembers Civil Relief Act
Date Issued
12-06-2011

December 6, 2011




Re: § 58.1-1821 Application: Individual Income Tax

Dear *****:

This will reply to your letter in which you contest the individual income tax assessment issued to ***** (the Taxpayer") for the taxable year ended December 31, 2007. I apologize for the delay in responding to your appeal.


FACTS


The Taxpayer, a resident of Virginia, is married to a nonresident member of the armed forces. For the 2007 taxable year, the couple filed a joint federal income tax return, and the Taxpayer filed a separate Virginia income tax return. The Taxpayer's spouse did not file Virginia returns because he had no income from Virginia sources. Under audit, the Department adjusted the Taxpayer's itemized deductions and exemptions to reflect her percentage of the couple's joint income and issued an assessment for additional tax and interest.

The Taxpayer appeals the assessment, contending the Department violates the Servicemembers Civil Relief Act (SCRA) by using the servicemember's income in the proportional allocation basis. The Taxpayer further argues that the Department's allocation basis, erroneously exceeds their joint federal adjusted gross income (FAGI).

DETERMINATION


In cases where a Virginia resident and nonresident spouse file separate state income tax returns, Virginia Code § 58.1-326 grants the Department authority to modify the allocation of exemptions and deductions claimed for federal income tax purposes under Va. Code § 58.1-324. Title 23 of the Virginia Administrative Code (VAC) 10-110-190 B provides that each spouse must account separately for items of income, deductions, and exemptions. However, when such items cannot be accounted for separately, deductions and personal exemptions must be proportionally allocated between each spouse based upon the income attributable to each. See also Public Document (P.D.) 95-251 (9/29/1995).

The Taxpayer avers that the ambiguity of the SCRA should be interpreted in favor of the service member as indicated in prior federal court decisions. However, the United States Supreme Court (the "Court") has decided that a state may confine deductions in a mariner, as Virginia does. See Travis, Comptroller of the State of New York v. Yale & Towne Mfg. Co., 252 U.S. 60, 40 S. Ct. 228 (1920). In that case, the Court held that there is no unconstitutional discrimination against citizens of other states in confining the deductions of expense to such that are in connection with income arising from the taxing state. As such, the Department finds a proportionate allocation of deductions from income to be fair, rational and equitable in the absence of separate accounting.

The Taxpayer contends the Department's citation of Revenue Ruling 71-268 in P.D. 10-23 (3/26/2010) is unrelated to the provisions of the SCRA, and that the issues at hand are not in regard to federal taxation. For Virginia income tax purposes, the separate accounting methodology follows federal regulations for married individuals who file a separate return. Because the Taxpayer has not provided sufficient evidence of separate accounting for the itemized deductions, Title 23 VAC 10-110-190 B requires a proportional allocation of such deductions based on the Taxpayer's FAGI. See P.D. 11-180 (11/01/2011).

In his appeal, the Taxpayer raises a question regarding the inclusion of nontaxable income in the basis of the proportional allocation. The Taxpayer contends that the basis used to calculate the ratio exceeds the FAGI. In P.D. 11-170 (9/29/2011), the Tax Commissioner ruled that the proportional allocation, for a resident taxpayer is based on his/her FAGI. Because the Department included the spouse's combat pay in the proportional allocation, the assessment will be returned to the auditor to be adjusted.

The Code of Virginia sections, regulation and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
              • Sincerely,
                • Craig M. Burns
                  Tax Commissioner



    AR/1-4736949538.D


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