June 24, 2016
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the individual income tax assessment issued to ***** (the “Taxpayers”), for the taxable year ended December 31, 2012.
FACTS
The Department received information from the Internal Revenue Service (IRS) indicating the Taxpayers, a husband and a wife, may have been required to file a Virginia individual income tax return for the 2012 taxable year. The Department requested additional information to determine whether the Taxpayers' income was taxable in Virginia. Subsequently, the Department issued an assessment. The Taxpayers appealed, contending that the husband's income was exempt from Virginia income taxation under the Servicemembers Civil Relief Act (the “Act”) because he was the spouse of a military service member and they both were domiciliary residents of ***** (State A).
DETERMINATION
Domicile
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. For a person to change domiciliary residency to another state, that person must intend to abandon his Virginia domicile with no intention of returning to Virginia. Concurrently, that person must acquire a new domicile where that person is physically present with the intention to remain therepermanently or indefinitely. 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. A Virginia domiciliary resident, therefore, working in other parts of the country or in another country who has not abandoned his Virginia residency continues to be subject to Virginia taxation. Additionally, a person who is not a domiciliary resident of Virginia, but who stays in Virginia for an aggregate of more than 183 days, is also subject to Virginia taxation.
Residency of a Military Spouse
The Act, codified at 50 U.S.C. § 3901 et seq. (formerly 50 U.S.C. § 511 et seq.) was amended, effective for 2009 taxable year and thereafter, to address the residency of military spouses. Specifically, 50 U.S.C. § 4001(a)(2) (formerly 50 U.S.C. § 571(a)(2)) was enacted to provide that a spouse can neither lose nor acquire domicile or residence in a state when the spouse is present in the state “solely to be with the service member in compliance with the service member's military orders if the residence or domicile, as the case may be, is the same for the service member and the spouse.” The Act does not apply to the spouses of military and naval personnel who have established domiciliary status within Virginia. See Public Document (P.D.) 11-114 (6/21/2011). In Virginia Tax Bulletin (VTB) 10-1 (1/29/2010), the Department explained that the domicile of a military spouse must be the same as the service member in order to be exempt from Virginia's income tax. The determination of a military spouse's domicile requires analysis of the facts and circumstances. The elements that may be examined include:
1. Whether the person claiming exemption is married to a service member who is present in Virginia pursuant to military orders.
2. The service member's domicile.
3. The spouse's domicile and the circumstances in which it was established.
4. The extent to which the spouse has maintained contacts with the domicile.
5. Whether the spouse has taken any action in Virginia that is inconsistent with maintaining a domicile elsewhere.
In determining domicile, the Department will generally consider the 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, situs of real and tangible property, motor vehicle registration and licensing, and such other factors as may be reasonably deemed necessary to determine the person's domicile. A person'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. See United States v. Minnesota, 97 F. Supp. 2d 973 (2000) (Minnesota).
The Department has typically found that when a spouse moves to follow military personnel to a new duty station, they will generally abandon their former real property and move the family. See P.D. 10-32 (4/08/2010). The spouse will establish a new permanent place of abode near the new duty station, enroll children in school, and seek employment of an indeterminate duration. The spouse will generally comply with jurisdictional authorities with regard to driving permits, vehicle registrations, voting registrations, and education requirements. The spouse will also change social, charitable and church associations. Moreover, the military service member and the spouse move with no assurance that they may move back to a former duty station.
In general, the Department will not seek to tax the spouse of a military service member so long as the spouse maintains sufficient connections with the service member's domiciliary state to indicate intent to maintain domicile there. Such connections would include obtaining and retaining a driver's license, registering to vote and voting in local elections, registering an automobile, and exercising other benefits or obligations of a particular state. As long as the spouse of a military service member maintains such connections, he or she would be considered to be a resident of the other state even though they work, live, and establish a place of abode in Virginia.
The Taxpayers contend that the Act eliminates from consideration any domicile factors that relate to his absence from State A and presence in Virginia, including whether he owned or leased a personal residence, was employed, obtained a driver's license, or registered a motor vehicle in Virginia, among other factors. This argument was rejected by the federal court in Minnesota, which involved an interpretation of the predecessor provision, § 514 of the Soldiers’ and Sailors’ Civil Relief Act (the “SSCRA”) (codified at that time at 50 U.S.C. App. § 574). The court observed that if a state could not look to such factors, it would give the SSCRA a power Congress did not intend: “it would render every state [to which a service member is assigned] incapable of ever taxing the incomes of a serviceperson without the serviceperson's consent. Such a result would inherently be unfair.” See Minnesota, F. Supp. 2d at 984.
The court found support for its conclusion in the use of the word “solely” in the SSCRA, noting that the statute only prevents acquisition of domicile if it is solely based on presence in compliance with orders. The Court stated that:
A plain reading of the text of [the SSCRA] thus leads to the conclusion that a state may tax a serviceperson as long as other factors exist, in addition to physical presence in the state, which leads to the conclusion that a serviceperson has affirmatively chosen the state of posting as his home.
See id. As a result, the court held that the SSCRA did not preempt the use of any of the twenty-six “A to Z” factors enumerated in Minnesota's administrative rules as a basis for a decision to tax. See id. at 985. Such factors included every factor the Taxpayer in this case specifically argues is irrelevant, namely owning or renting a residence (F); student status (C); employment location (E); obtaining a driver's license (J); location of motor vehicle (M); compliance with motor vehicle registration requirements (M); obtaining a local fishing or hunting licenses (N); location of financial transactions (R); receiving mail (V); amount of time spent in a location (W); dependent's attendance at school (Y); nonprofit organization membership (U); church attendance (S); and statements made to insurance companies regarding residency (Z) (the letters in parentheses refer to the corresponding “A-Z” factor listed in Minn. R. 8.001.0300, subp. 3).
In Waite v. Dep't of Revenue, 2015 Ore. Tax LEXIS 162, 15 (December 15, 2015), the Oregon Tax Court followed Minnesota in holding that the Act did not preempt the state's use of any particular domicile factor. The court, however, stated that factors must be viewed in light of the fact that the military service member was present in the jurisdiction for a specific period of time in compliance with military orders. See id. at 17. The court stated that it would place more weight on the service member's voluntary connections with Oregon and the state he was attempting to claim as his domicile and less weight on his connections that were incidental to being present in Oregon and absent from the other state in compliance with military orders. For example, if a taxpayer merely received mail at his Oregon address or sought medical care from an Oregon provider, those facts would be given less weight because they would be incidental to being present in Oregon in compliance with orders. If the taxpayer, however, voluntarily declared that he was an Oregon resident for purposes of obtaining a hunting license or registered to vote in Oregon, those types of connections may support a finding that he intended to establish an Oregon domicile. See id. at 18-19.
Although Minnesota and Waite involved the domiciliary status of service members, in the Department's opinion, the principles set forth in those cases should apply to spouses as well because in each case the Act applies the same standard: domicile may not be lost or acquired by reason of being absent or present in the taxing jurisdiction solely in compliance with military orders (or, in the case of the spouse, the service member's military orders). See 50 U.S.C. § 4001 (a).
In P.D. 15-186 (9/28/2015), the Department suggested, given the language of the Act, that certain activities conducted by a military spouse, such as the spouse's profession or employment, income sources, permanent place of abode, enrolling children in local schools, and situs of real and tangible property, may no longer be considered to be activities associated with establishing domicile in a state. While such activities may normally be considered to be incidental to a spouse's presence in the state as a result of the service member's military orders, they will be considered when there appears to be an affirmative choice to make their current state of residence their domicile.
In addition, the Department has repeatedly stated that a change of domicile occurs as part of a process in which no single factor is dispositive. See, e.g., P.D. 15244 (12/23/2015), P.D. 14-99 (7/2/2014), and P.D. 14-25 (2/27/2014). Therefore, more weight may be assigned to such factors to the extent any continued after the service person was reassigned elsewhere from a Virginia duty station. The Department would consider the fact that any such connections continued to be evidence that a taxpayer initially intended to establish a Virginia domicile.
By letter dated February 3, 2016, the Department requested additional information from the Taxpayers concerning their Virginia and State A connections. The request covered many of the same domicile factors at issue in Minnesota. When a response was finally received, however, information concerning the Virginia and State A domicile factors was not provided.
According to the Department's records, the husband obtained a Virginia driver's license in August 2012. When determining the domicile of a military spouse, the Department frequently examines the taxpayer's driver's license history. This is because an individual cannot typically obtain a driver's license unless he or she is a resident of the issuing jurisdiction. Va. Code § 46.2-323.1 states, “No driver's license ... shall be issued to any person who is not a Virginia resident.”
In fact, every person applying for a driver's license must execute and furnish to the Commissioner of the Department of Motor Vehicles (DMV) a statement that certifies that the applicant is a Virginia resident. Further, any applicant who knowingly makes a false statement to the DMV is subject to penalties under Va. Code § 46.2-348. The Department has found that an individual may successfully establish a domicile outside Virginia even if he or she retains a Virginia driver's license. See P.D. 00-151 (8/18/2000). However, obtaining or renewing a Virginia driver's license is considered to be a strong indicator of intent to retain domiciliary residency in Virginia. See P.D. 02-149 (12/9/2002).
In addition, Va. Code § 46.2-306 specifically exempts service members on active duty, their spouses, and dependent children residing in Virginia from the requirement to obtain a Virginia driver's license when such individuals have been licensed as drivers under the laws of their home state. Accordingly, when a service member or spouse obtains a Virginia driver's license, the Department considers the action to be an indication of an intent to change one's domicile. In this case, the husband obtained a Virginia driver's license in August 2012.
The husband also maintained some connections with State A. The husband was himself a member of the armed forces prior to 2005, and he entered the service listing State A as his home of record. One of his immediate family members also still resided in State A.
A service member's “home of record” refers to the state from which a service member entered the military. Its primary purpose is determining military benefits such as travel entitlements upon separation from service. Depending on the circumstances, a service member's state of legal domicile and home of record might be the same. That is not true, however, for all service members. A change of domicile results from the establishment of a new residency in fact, coupled with an intent to abandon the old domicile and remain in the new, regardless of what state is listed as the home of record. Based on the information provided, I find that the husband has failed to prove that: (1) he intended to retain his State A domicile; and (2) he did not establish a Virginia domicile in 2012.
Residency of Military Service Member
The Act provides that military and naval personnel do not abandon their legal domicile solely by complying with military orders that station them in a different state or country whether permanently or temporarily. See 50 U.S.C. § 4001 (formerly 50 U.S.C. § 571). The Department has ruled that the residency status of a taxpayer requires analysis separate from their military spouse. See Public Document (P.D.) 05-92 (6/9/2005) and P.D. 05-150 (9/8/2005).
In this case, the assessment was issued to the Taxpayers jointly. The Taxpayers contend that State A was also the wife's domicile. The only contact the Taxpayers have indicated the wife had with State A was that it was her home of record. As stated above, home of record is a term specific to the military, and its primary purpose is to determine benefits such as travel entitlements. The mere submission of a form indicating a home of record is insufficient, by itself, to prove that a military service person retained domiciliary residency in that jurisdiction. In addition, it is also possible that a military service member may have never even established domicile in the home of record jurisdiction.
The husband was a military service member from 1977 to 2005, with a State A home of record. The Taxpayers married in 1984, and the wife entered the service in 1989. In the husband's case, it appears that he was likely a domiciliary resident of State A at least at some point in the past, because he claims to have lived in State A for ten years prior to entering the service. In the wife's case, however, it is unclear whether she was ever a domiciliary resident of State A because she listed the husband's family member's address as her home of record. There is no indication that she ever resided at this State A address. In Coopers Adm'r v. Commonwealth, 121 Va. 338, 93 S. E. 680 (1917), the Virginia Supreme Court ruled that acquiring domicile in another state requires both intent and personal presence. Without establishing a physical presence in State A, the wife could not have established his domicile there.
Again, part of the Department's information request concerned the wife's past and present State A connections, but this information was not provided. Among other questions, the Department specifically asked whether the spouse had ever lived in State A and if so, at what address.
Even if the husband remained a domiciliary of State A, he would not have been exempt under the Act if he did not share the same domicile as his spouse. If the Act did not apply, the husband would have been taxable as an actual resident of Virginia for any taxable year he was present in Virginia for more than 183 days, regardless of where he was domiciled. See Va. Code § 58.1-302.
Part-Year Residency
Virginia Code § 58.1-303 provides that 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 she resides in Virginia.
In this case, the Taxpayers moved into Virginia during the 2012 taxable year. The Taxpayers, therefore, would only be taxable on income attributable to that part of the year they were Virginia residents.
CONCLUSION
Virginia Code § 58.1-205 provides that in any proceeding relating to the interpretation of the tax laws of Virginia, an “assessment of a tax by the Department shall be deemed prima facie correct.” As such, the burden of proof is on the Taxpayers to show they were not subject to income tax in Virginia. In this case, the Taxpayers have not proven that (1) they intended to remain domiciliary residents of State A; or (2) they did not become domiciliary residents of Virginia.
In addition, even if the husband were a domiciliary resident of State A, the Taxpayers have not proven that the wife shared the husband's State A domicile. Pursuant to the Act, the spouses must have shared the same domicile for the husband's income to be exempt. If the Act did not apply, he would have been taxable as an actual resident of Virginia for any taxable year he was present in Virginia for more than 183 days.
Furthermore, Va. Code § 58.1-1826 precludes a court from granting relief to taxpayers seeking correction of erroneous state tax assessments in cases in which the erroneous assessment is attributable to the taxpayer's willful failure or refusal to provide the Department with necessary information as required by law. In this case, the Department has been unable to conduct a complete examination of the Taxpayers' circumstances because the Taxpayers failed to comply fully with the Department's information request.
The assessment at issue was made based on the best information available to the Department pursuant to Va. Code § 58.1-111. The Taxpayers may have information that better represents their Virginia income tax liability for the year at issue. Therefore, the Taxpayers will be granted one last opportunity to provide complete documentation with regard to their domiciliary status or file a 2012 Virginia part-year resident income tax return. The documentation or return should be submitted within 30 days from the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23161-7203, Attention: *****. Upon receipt, the documentation or return will be reviewed and the assessment will be adjusted, as appropriate. If the documentation or return is not received within the allotted time, the assessment will be considered to be correct as issued and collection actions may result.
The Code of Virginia sections, tax bulletins and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-6245213061.M