April 3, 2018
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you appeal the individual income tax assessment issued to (the “Taxpayer”) for the taxable years ended December 31, 2006 through 2009. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer, a resident of Virginia, was married to a nonresident member of the armed forces. For the taxable year at issue, the couple filed a joint federal income tax return, and the Taxpayer filed a separate Virginia income tax return. The Taxpayer's spouse, a military service member, did not file a Virginia return because he had no income from Virginia sources. On her Virginia return, the Taxpayer claimed a deduction for the full amount of itemized deductions reported on joint federal return and all of the couple's dependent exemptions. Under audit, the Department adjusted the Taxpayer's itemized deductions and exemptions to reflect her portion of the couple's joint income and issued an assessment for additional tax and interest. The Taxpayer filed an appeal, contending the Department's adjustments are contrary to Virginia policy.
DETERMINATION
Virginia Code § 58.1-326 states, “if husband or wife is a resident and the other is a nonresident, separate taxes shall be determined on their separate Virginia taxable incomes on such single or separate forms as may be required by the Department, unless both elect to determine their joint Virginia taxable income as if both were residents.” [Emphasis added.]
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 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).
Dependent Exemptions
The Taxpayer claimed all of the dependent exemptions reported on the joint federal return. When married taxpayers file a joint federal income tax return, but file separately for Virginia, Virginia Code § 58.1-324 C 5 provides:
Personal exemptions properly allowable for federal income tax purposes shall be allocated for Virginia income tax purposes as husband and wife may mutually agree; however, exemptions for taxpayer and spouse together with exemptions for old age and blindness must be allocated respectively to the spouse to whom they relate.
In P.D. 99-82 (4/21/1999), the Department ruled that when a spouse claims dependent exemptions on his/her separate state income tax return, such actions are considered by the Department to be separate accounting and evidence of a mutual agreement between the husband and wife. See also P.D. 10-199 (8/31/2010). In this case, the Taxpayer claimed the dependent exemptions on the Virginia return and it does not appear the husband claimed them on his state return.
Itemized Deductions
Under Virginia Code § 58.1-324, if a couple is unable to separately account for deductions and exemptions, they must be allocated proportionally between each spouse based on income attributable to each. See Title 23 VAC 10-110-190 B. 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. See P. D. 11-180 (11/1/2011).
By reason of their character as legislative grants, statutes relating to deductions and subtractions allowable in computing income and credits allowed against a tax liability 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 Carr, 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.
Consistent with Internal Revenue Service Revenue Ruling (Rev. Rul.) 71-268 (1971-1 CB 58), an itemized deduction is allowable under Title VAC 10-110-190 to the spouse who can account for the payment by demonstrating the payment was made out of his or her funds. However, if records are inadequate to facilitate such an accounting, the regulation requires an allocation of itemized deductions in proportion to income. The Department finds a proportionate determination to be fair, rational and equitable in the absence of separate accounting. See P.D. 95-251.
The Taxpayer has provided canceled checks and bank statements as evidence to show that she was solely responsible for paying for all of the charitable contributions and mortgage interest itemized deductions. 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 show clearly which spouse was entitled to a particular deduction, the deduction has been split between the husband and wife. See also Rev. Rul. 75-347 (1975-2 C.B. 70) and Priv. Ltr. Rul. 82-46-073 (Aug. 17, 1982). The documentation provided indicates that the deductible expenses were paid out of a bank account held jointly with the Taxpayer's husband. Because currency is fungible, the Department does not consider payments made out of a joint bank account to be deductions exclusively from the Taxpayer's funds. See P.D. 11-197 (12/6/2011).
The Taxpayer also claims the Department incorrectly included income in excess of amounts reported as FAGI to compute allocated itemized deductions. The audit letters issued by the Department's auditor include the husband's combat pay in the allocation computation.
In P.D. 11-170 (9/29/2011), the Department ruled that the apportionment computation for a resident taxpayer is based on his or her federal adjusted gross income (FAGI). Pursuant to Virginia Code § 58.1-322, the Commonwealth starts with the FAGI, requires certain additions, and permits certain deductions and subtractions in computing Virginia taxable income. Accordingly, the Department considers it rational to apportion deductions and exemptions between a husband and wife under Virginia Code § 58.1-326 based on FAGI.
Contrary to the audit letters issued by the Department, it does not appear combat pay was actually used in the computation for any of the taxable years. However, after initial assessments were issued, the audits were later revised and the assessments either adjusted or additional assessments issued. A review of the auditor's computations for each of the taxable years indicates there may have been some computational issues.
CONCLUSION
Because the information provided is not sufficient to show that the Taxpayer separately accounted for her itemized deductions, the Department will allocate itemized deductions in accordance with established policy. The Taxpayer, however, was entitled to claim both dependent exemptions on her Virginia income tax return.
Accordingly, the assessments will be returned to the auditor to be adjusted in accordance with this determination. Because payments have been made toward the assessments, overpayments may result. If this is the case, refunds will be issued with applicable interest. For all other taxable years, revised bills will be issued. Payment for should be made within 30 days of the date of the revised bills to avoid the accrual of additional interest.
The Code of Virginia sections, regulations, 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 Department's Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/510.o