Tax Type
Individual Income Tax
Description
Taxation of nonresidents; Husband and wife filing separately
Topic
Taxpayers' Remedies
Date Issued
09-29-1995
September 29, 1995
Re: §58.1-1821 Application: Individual Income Tax
Dear**********************
This will reply to your letter of August 19, 1994, in which you protest the assessment of individual income tax against your clients,******************(the "Taxpayers"), for taxable years 1990 through 1992.
FACTS
The husband is an active duty member of the armed forces, whose domicile is in a state other than Virginia. The wife is a Virginia resident, whose entire income is taxable by this state. The husband had income from Virginia sources for taxable years 1990 through 1992. For these years, separate returns were filed by the Taxpayers, with the husband filing as a nonresident and the wife as a resident.
The department questioned the Taxpayers' allocation of itemized deductions between husband and wife shown on these returns and requested the separate accounting required under Virginia Regulation ("VR") 630-2-326. These itemized deductions were of a personal nature and not related to a trade or business or the production of income. Because the Taxpayers could not account separately for their itemized deductions, the department adjusted the Taxpayers' allocation of deductions proportionally according to income.
You object to the department's allocation of the Taxpayers' itemized deductions. You state VR 630-2-326 goes beyond the legislative intent of the General Assembly, and you therefore request the department to declare this regulation invalid. In addition, you contend VR 630-2-326 discriminates against nonresidents.
DETERMINATION
Code of Virginia § 58.1 -326 provides "[i]f 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.)
When a resident/nonresident married couple do not elect to determine their Virginia taxable income as if both were residents, VR 630-2-326 (b) provides;
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- In the case of a married couple, one of whom is a nonresident of Virginia filing separately, each spouse must account separately for items of income deductions, and exemptions. Where such items cannot be accounted for separately, deductions and personal exemptions must be proportionally allocated between each spouse based upon income attributable to each. (Emphasis added.)
- In the case of a married couple, one of whom is a nonresident of Virginia filing separately, each spouse must account separately for items of income deductions, and exemptions. Where such items cannot be accounted for separately, deductions and personal exemptions must be proportionally allocated between each spouse based upon income attributable to each. (Emphasis added.)
In Travis, the U.S. Supreme Court held that a state cannot deny nonresidents a personal exemption afforded to residents. However, the court also held that "there is no unconstitutional discrimination against citizens of other states in confining the deduction of expenses, losses, etc. in the case of nonresident taxpayers, to such as are connected with income arising from sources within the taxing state..." Travis, at 230. The same rationale applies here where it is clear that military compensation is not Virginia source income.
The separate accounting requirement of VR 630-2-326 follows the federal rules for determining who can claim a deduction when married individuals file federal returns on a separate basis. The Internal Revenue Service summarizes the rules for dividing itemized deductions when a married couple files on a separate basis in its Publication 504.
For instance, Publication 504 summarizes Revenue Ruling 71-268, which addresses with the deduction of mortgage interest paid by married individuals who file their federal returns on a separate basis. Revenue Ruling 71-268 states a deduction in respect to a joint obligation is allowable to the spouse who can account for the payment by demonstrating the payment was made out of his or her funds.
Likewise, a deduction is allowable under VR 630-2-326 to the spouse who can account for the deduction. 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.
The department has consistently interpreted and applied Code of Virginia § 58.1-326, and its predecessor, in the aforementioned manner. Furthermore, the department adopted this interpretation into regulation form on September 19, 1984.
Based on the foregoing, the department finds VR 630-2-326 to be valid. Consequently, the Taxpayers' application for relief cannot be granted. A review of the Taxpayers' account shows their assessments have been paid in full. Should you have additional questions regarding this matter, please contact************at**************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8422L
Rulings of the Tax Commissioner