May 11, 2015
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This is will reply to your letter in which you seek correction of the individual income tax assessments issued to ***** (the "Taxpayers") for the Taxable years ending December 31, 2010 and 2011. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayers, a husband and wife, changed their domicile from Virginia to ***** (State A) in 2005. The Taxpayers maintain rental property and receive income from ***** (VSC), a Virginia Subchapter S corporation located in Virginia. For the taxable years at issue, the Taxpayers filed Virginia nonresident returns.
Under audit, the Department discovered that the Taxpayers spent more than 183 days in Virginia during the 2010 and 2011 taxable years. As a result, the Department treated the Taxpayers as part-year residents and issued assessments. The Taxpayers appeal the assessments, contending the Department attributed too much income to Virginia.
DETERMINATION
Residency
Two classes of residents, a domiciliary resident and an actual resident, are set forth in Va. Code § 58.1-302. The domiciliary residence of a person means the permanent place of residence of a taxpayer and the place to which he intends to return even though he may actually reside elsewhere. An actual resident of Virginia means a person who, for an aggregate of more than 183 days of the taxable year, maintained his place of abode within Virginia.
Based on information provided to the Department, the Taxpayers spent 282 days in Virginia in 2010. According to the Taxpayers, they spent significant time overseeing renovations to a Virginia property at which VSC is located. During 2010, the evidence indicates the Taxpayers travelled between Virginia and ***** five times.
In 2011, the Taxpayers were in Virginia 270 days. While the renovations were continuing, the husband also experienced health issues that made travel back to State A difficult. The Taxpayers where still able to travel between Virginia and ***** six times during the year, but spent both January 1 and December 31 in Virginia.
Under Va. Code § 58.1-303, a person who becomes a resident of Virginia is subject to taxation during the period in which he or she is a Virginia resident and is taxed as a resident only for the portion of the year that he or a she resides in Virginia. When a Taxpayer maintains a place of abode in Virginia for more than 183 days, but less than the full year, he may file as a part-year resident of Virginia. See P.D. 89-160 (5/22/1989).
In P.D. 89-160, a taxpayer moved into Virginia with intention of moving back out of Virginia within one year. The Department held that in the year the taxpayer moved into Virginia, only the portion of income received while residing in Virginia would be subject to Virginia's income tax. However, if the Taxpayer remained in Virginia in the following year, the Taxpayer would be subject to Virginia's income tax as an actual resident.
Similarly, in P.D. 11-177 (10/24/2011), the Department ruled that a couple who lived in Virginia for more than 183 days during each of the 2008 and 2009 taxable years were part-year residents. In that case, the individuals were considered to have moved into Virginia as a result of one spouse's medical condition and moved out when the spouse was able to travel.
In this case, however, the Taxpayers traveled back and forth to State A throughout the taxable years at issue. Under Va. Code § 58.1-303, a person is considered to have become a resident of Virginia "by moving to the Commonwealth" from outside Virginia during the taxable year. When individuals travel into and out of Virginia multiple times during a taxable year, it is difficult for the Department to determine whether they moved into or out of Virginia. Instead, such activities suggest they were residents of Virginia who visited another state or other states, including domiciliary states, for short periods of time. Accordingly, domiciliary residents of another state who spend more than 183 days in Virginia during a taxable year will be considered to be actual residents from the date they first enter Virginia to the last date they spend in Virginia.
Under this reasoning, the Taxpayers would be considered part-year residents for 2010 from the first day they entered Virginia, February 4, through end of the year because they where residing in Virginia on December 31. For 2011, they would be considered to be actual residents for the entire year because they were residing in Virginia on January 1 and December 31.
Resident Income
The Taxpayers contend the Department apportioned too much of their income to Virginia. The husband earned a substantial portion of his income from insurance sales compensation primarily from renewal and residual commissions. By 2010, the husband was spending very little time attempting to generate new business. He claims he spent all of the 72 days in 2010 and the 70 days in 2011 working on his insurance business outside Virginia.
It has been well-established that a state may tax all the income of its residents, even income earned outside the taxing jurisdiction. In New York ex rel. Cohn v. Graves, 300 U.S. 308, 312, 57 S.Ct. 466, 467 (1937), the United States Supreme Court explained "[t]hat the receipt of income by a resident of the territory of a taxing sovereignty is a taxable event is universally recognized." See also Lawrence et al. v. State Tax Commission of State of Mississippi, 286 U.S. 276, 52 S.Ct. 556 (1932) and Shaffer v. Carter, State Auditor, et al., 252 U.S. 37, 40 S.Ct. 221 (1920). Further, in Ryan v. Commonwealth of Virginia, 169 Va. 414, 423, 193 S.E. 534, 538 (1937), the Virginia Supreme Court determined that the Virginia income tax "is a tax levied upon Mrs. Ryan measured by the net income-received and enjoyed" in the Commonwealth. The Court upheld the assessment of income tax. Thus, Virginia has the authority to impose its income tax on all of the Taxpayers' income for the 2011 taxable year regardless of where it was earned.
Pursuant to Va. Code § 58.1-303, part-year residents are subject to tax only on their income that is attributable to Virginia. Title 23 of the Virginia Administrative Code (VAC) 10-110-40 B specifically defines income attributable to Virginia as "that which is received during the portion of the year in which the individual is a Virginia resident; . . ." [Emphasis added.] For 2010, any income received from the insurance business from February 4 through the end of the year would be considered to be Virginia source income.
Out-of-State Tax Credit
Virginia Code § 58.1-332 A allows Virginia residents a credit on their Virginia return for income taxes paid to another state, provided the income is either earned or business income or any gain on the sale of a capital asset. The credit is limited to the lesser of the amount of tax actually paid to the other state or the amount of Virginia income tax actually imposed on the taxpayer on the income earned or derived in the other state. See P.D. 97-301 (7/7/1997). State A does not impose an income tax. However, the Taxpayers indicate the husband may have conducted business in ***** (State B). If the Taxpayers were subject to tax in State B and filed a State B return, they could claim an out-of-state tax credit for State B tax paid on income subject to Virginia tax.
Notwithstanding the provisions of Va. Code § 58.1-332, Va. Code § 58.1-303 prohibits part-year residents from claiming any credit against their Virginia tax liability for tax paid to any other state or jurisdiction of residence or domicile for that portion of the taxable year during which they were a resident of such other state or jurisdiction. Under this statute, the Taxpayers would not eligible for a credit for taxes paid to State A for 2010, but may be eligible for an credit for tax paid to State B.
Nonresident Income
Pursuant to Va. Code § 58.1-303 C, a part-year resident who, as a nonresident of Virginia for any portion of the taxable year, derived income from any property owned or from any business, trade, profession or occupation carried on in Virginia is subject to Virginia income tax as a nonresident as provided under Va. Code § 58.1-325. Because the Taxpayers derived income from Virginia rental properties before moving into Virginia in 2010, they may have income from Virginia sources subject to tax for the period they were nonresidents.
CONCLUSION
After considering all the facts presented, it is my determination that the Taxpayers were actual residents of Virginia from February 4 through December 31, 2010, and for the entire 2011 taxable year. Further, the Taxpayers may have a Virginia income tax liability for the period they were not residents of Virginia during 2010. In addition, the Taxpayers may be eligible for out-of-state tax credits as enumerated above.
Based on the foregoing, the audit will be returned to the audit staff to adjust the assessments in accordance with this determination. The auditor may request additional information (e.g., State B tax returns, rental income break down by month) in order to make the necessary adjustments. After the auditor makes the appropriate adjustments, the Taxpayer will receive a revised bill if there are any outstanding liabilities. The Taxpayers should remit payment for the outstanding balance on the revised bill within 30 days from the date of the bill to avoid the accrual of additional interest.
The Code of Virginia sections, regulation, and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions regarding this determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5674316117.D