March 4, 2020
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will respond to your letter in which you seek correction of the individual income tax assessment issued to ***** (the “Taxpayer”) for the taxable year ended December 31, 2015.
FACTS
The Taxpayer filed a Virginia resident individual income tax return for the 2015 taxable year. The Department was notified by the Internal Revenue Service (IRS) of an adjustment made to the Taxpayer’s federal income tax return for the 2015 taxable year, increasing his federal adjusted gross income (FAGI). When the Taxpayer failed to file an amended Virginia return to reflect his increased FAGI, the Department issued an assessment based on the IRS information. The Taxpayer appeals, contending the additional income was not subject to Virginia taxation pursuant to the Servicemembers Civil Relief Act (the “Act”).
DETERMINATION
Conformity
Virginia Code § 58.1-301 provides that terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required. For individual income tax purposes, Virginia conforms to federal law, in that it starts the computation of Virginia taxable income with FAGI. Income included in the FAGI of a Virginia resident is subject to taxation by Virginia unless it is specifically exempt as a Virginia modification pursuant to Virginia Code §§ 58.1-322.01 through 58.1-322.04.
Virginia Code § 58.1-311 requires any individual to report a change or correction in federal taxable income within one year of the final determination of such change or correction by filing an amended return with the Department. If the taxpayer fails to file an amended return reflecting the federal adjustment, Virginia Code § 58.1-312 A 3 permits the Department to assess the appropriate tax at any time. Where the IRS has audited the federal taxable income of a taxpayer, the Department does not look behind the IRS’s final determination. See Public Document (P.D.) 11-107 (6/14/2001).
In February 2015, the Taxpayer received his final pay from the military, in addition to a severance payment. The Taxpayer had excluded these payments from his FAGI on his federal income tax return. When the IRS changed his FAGI to include such payments, the increase in FAGI resulted in a corresponding increase in the Taxpayer’s Virginia taxable income as a Virginia resident. Because the Taxpayer filed his return as a Virginia resident, the Department correctly adjusted the Taxpayer’s return to reflect the federal change.
Part-Year Residency
The Department further adjusted the Taxpayer’s Virginia return to reflect a period of part-year residency beginning from the date the Taxpayer separated from military service in January 2015 through the end of the year. The Taxpayer contends that the payments should be treated as being received while he was protected under the Act during that part of the year he was in the military. The Taxpayer asserts that he was a domiciliary resident of ***** (State A) who was only present in Virginia on military orders.
The Act, codified at 50 U.S.C. § 3901 et seq., provides that a service member shall neither lose nor acquire a residence or domicile for purposes of taxation by reason of being absent or present in a jurisdiction solely in compliance with military orders. It does not, however, preclude the possibility that they may change their residence or domicile and subject themselves to taxation by a state.
Two classes of residents, a domiciliary resident and an actual resident, are set forth in Virginia 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.
Virginia Code § 58.1-303 provides that a taxpayer who becomes a resident of Virginia during the taxable year is subject to taxation for the period in which they were a Virginia resident. Virginia taxable income is computed by determining income, deductions, subtractions, additions and modifications attributable to the period of residence in Virginia. Part-year residents may claim a portion of their Virginia personal exemptions, but the exemptions will be prorated based upon the number of days that the taxpayer was a Virginia resident. Part-year residents may also claim a prorated Virginia standard deduction if they claim the standard deduction for federal income tax purposes. Pursuant to Virginia 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.].
In P.D. 94-289 (9/23/1994), a taxpayer was discharged from the military in January 1991 and obtained military severance pay in December 1991. The Department reasoned that even if it was not clear whether the Act applied to separation pay received after discharge, the Act did not prevent a state from taxing the income of its residents. Because the Taxpayer had established domiciliary residency in Virginia prior to receiving the severance pay, the Department determined that the pay was subject to Virginia income tax. See P.D. 94-289.
In this case, the Taxpayer was discharged from the military in January 2015 and received the payments at issue in February 2015. Upon his separation from service, the Act no longer protected the Taxpayer from becoming an actual resident of Virginia, if he remained in Virginia long enough to become one. The Taxpayer was stationed in Virginia at the time of his discharge and resided in Virginia until sometime in 2016. As such, he became an actual resident of Virginia from the date of his discharge until he left Virginia in 2016. As the Department reasoned in P.D. 94-289, the controlling factor was the Taxpayer’s residency status when he received the payments. Because he received the payments during his period of actual residency, they were properly subject to Virginia income tax. Accordingly, the assessment is upheld.
The Code of Virginia sections, regulation 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/2137C