February 7, 2018
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you request reconsideration and seek correction of the individual income tax assessments issued to ***** (the “Taxpayer”) for the taxable years ended December 31, 2006 and 2007. I apologize for the delay in responding to your request.
FACTS
The Taxpayer, a resident of Virginia, was married to a nonresident service member of the armed forces. For the taxable years at issue, the couple filed joint federal income tax returns, and the Taxpayer filed a separate Virginia income tax return. The service member did not file a Virginia return because he had no income from Virginia sources. For both taxable years, the Taxpayer claimed the full amount of itemized deductions reported on the joint federal income tax return in computing Virginia taxable income.
Under audit, the Department adjusted the Taxpayer's itemized deductions and exemptions to reflect the Taxpayer's percentage of the couple's joint income and issued an assessment for additional tax and interest. The Department has previously made a determination, issued as Public Document (P.D.) 10-171 (8/10/2010), for the 2006 taxable year.
The Taxpayer requests that the Department reconsider its decision in P.D. 10-171. In addition, the Taxpayer appeals the assessment for the 2007 taxable year. For both taxable years, the Taxpayer asserts that the Department failed to consider whether the Servicemembers Civil Relief Act (the “Act”), codified at 50 U.S.C. § 3901 et. seq., prohibits the apportionment of deductions based on military income of a nonresident.
DETERMINATION
Request for Reconsideration
Virginia Code § 58.1-1821 provides that “[a]ny person assessed with any tax administered by the Department of Taxation may, within ninety days from the date of such assessment, apply for relief to the Tax Commissioner.” Title 23 of the Virginia Administrative Code (VAC) 10-20-165 provides additional requirements regarding the timely filing of administrative appeals. This regulation provides information to taxpayers about the process for appealing tax assessments, including how to file a complete and timely administrative appeal.
Title 23 VAC 10-20-165 F provides that a taxpayer who disagrees with the Tax Commissioner's final determination issued pursuant to Virginia Code § 58.1-1822 may request a reconsideration of the determination. In order for the Tax Commissioner to grant a request for reconsideration, the request must be received by the Department not later than 45 days after the date of the determination letter, and the taxpayer must meet one of four specific requirements set forth in that section.
The Department's determination letter for the 2006 taxable year was issued August 10, 2010. See P.D. 10-171. The Taxpayer's request for reconsideration was not filed until November 3, 2010, well beyond the 45-day limitations period established in Title 23 VAC 10-20-165 F.
Itemized Deductions
As stated in P.D. 10-171, 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 Virginia Code § 58.1-324. Title 23 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 P.D. 95-251 (9/29/1995).
The Taxpayer cites 50 U.S.C. § 4001(e) in support of her contention. The section prohibits a taxing jurisdiction from using military compensation of a nonresident service member to increase a tax liability imposed on such nonresident service member or their spouse. The Taxpayer avers that the ambiguity of the Act should be interpreted in favor of the service member. The Taxpayer also argues that Virginia's Attorney General has acknowledged the supremacy clause with regard to taxation. See 2009 Op. Va. Att'y Gen. (09-077). When federal law conflicts with state law, states are bound to follow federal law pursuant to the “Supremacy Clause” in Article 6 of the United States Constitution. The Department has issued a number of rulings addressing Virginia's compliance with the Supremacy Clause. See P.D. 90-225 (12/19/1990), P.D. 08-166 (8/29/2008), P.D. 13-90 (6/10/2013), and P.D. 15-123 (6/24/2015).
By reason of their character as legislative grants, however, statutes relating to deductions and subtractions allowable in computing income must be strictly construed against the taxpayer and in favor of the taxing authority. See Howell's Motor Freight, Inc., et al. v. Virginia Department of Taxation, Circuit Court of the City of Roanoke, Law No. 82-0846 (10/27/1983). Further, in Lawrence Cam Jr. v. W.H. Forst, Tax Commissioner of the Commonwealth of Virginia, 249 Va. 66, 453 S.E.2d 274 (1995), the Virginia Supreme Court stated that if a statute is clear and unambiguous, a court must accept its plain meaning and not resort to extrinsic evidence or rules of construction.
The United States Supreme Court (the “Court”) has decided that a state may confine deductions in a manner 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 this 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.
Contrary to the Taxpayer's claim that Virginia's regulation increases the Taxpayer's tax liability as a result of using the service member spouse's income to compute allowable itemized deductions, Virginia's method is based squarely on federal law to which it conforms. See Virginia Code § 58.1-301.
Under the IRC, a deduction resulting from a payment of a joint obligation is allowable to whichever of the parties liable for such obligation actually makes the payment out of their own funds. See Al Jolson v. Comm'r, 3 T.C. 1184 (1944) and Mark B. Higgins v. Comm'r, 16 T.C. 140, 143-144 (1951). In P.D. 95-251, the Department expressed Virginia's conformity to the federal statutory regime with regard to itemized deductions. Further, where individuals have not been able to clearly show which spouse was entitled to a particular deduction, the deduction has been split between the husband and wife. See Rev. Rul. 71-268 (1971-1 CB 58), Rev. Rul. 75-347 (1975-2 C.B. 70) and Priv. Ltr. Rul. 82-46-073 (Aug. 17, 1982). Instead of increasing the Taxpayer's tax liability based on the nonresident service member's compensation, the Department adjusted the deductions to which the Taxpayer is entitled for Virginia income tax purposes in the same manner it would for any married couple filing on separate returns in Virginia.
CONCLUSION
Based on the provisions of Title 23 VAC 10-20-165 F, the Taxpayer was required to file a request for reconsideration by September 24, 2010. The Taxpayer failed to timely file its request. Therefore, the Taxpayer's request for reconsideration concerning the Department's adjustment to the itemized deductions claimed for the 2006 taxable year cannot be approved, and the assessment remains due and payable.
With regard to the 2007 assessment, the Department adjusted the Taxpayer's itemized deductions in accordance with established policy. The Department, however, will give the Taxpayer one last opportunity to provide information documenting the deductions for which she can show she separately paid. The documentation should be submitted within 45 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 23261-7203, Attention: *****. Upon receipt, the documentation will be reviewed and the assessment will be adjusted, if appropriate, in accordance with this determination and the documentation provided. If the documentation is not received within the allotted time, updated bills for both taxable years will be issued. Payment of the updated bills should be made within 30 days of the bill date to avoid the accrual of additional interest.
The Code of Virginia sections, regulations and the 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 about this determination, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/507.D