May 24, 2023
Re: § 58.1-1821 Application: Individual Income Tax
Dear ***** :
This will respond to your letter in which you seek the return of a portion of the tax lien levied against a joint bank account belonging to your clients, ***** (the “Taxpayers”).
FACTS
The Taxpayers, a husband and wife, were married in April 2018. The Taxpayers have been the joint owners of a bank account (the “Account”) since May 2018. The Account was a joint general checking account into which the Taxpayers’ wages were directly deposited and from which their everyday expenses were paid.
In March 2022, a lien was executed on the Account to partially satisfy the balance due on assessments of individual income tax issued to the husband for the 2004, 2006, and 2008 taxable years. Each of the assessments had been issued well before the Taxpayers were married.
The Taxpayers do not dispute the validity of the assessments. The Taxpayers, however, contend that, to the extent funds in the Account are traceable to their joint federal tax refund for the 2021 taxable year, they are entitled to a “poor debtor’s exemption” for the amount of the refund that was attributable to the child tax credit, the additional child tax credit, and the earned income tax credit. They further contend that, because the tax liabilities at issue were assessed before their marriage, they are the sole liability of the husband and thus the wife’s share of the Account cannot be used to satisfy such liabilities.
DETERMINATION
Poor Debtor’s Exemption
The Taxpayers’ joint federal tax refund for the 2021 taxable year was attributable primarily to the child tax credit, the additional child tax credit, and the earned income tax credit. This refund was deposited in the Account in March 2022, shortly before the lien was executed.
The poor debtor’s exemption provided under Virginia Code § 34-26 9 generally exempts federal tax refunds attributable to the child tax credit, additional child tax credit, and the earned income tax credit from creditor process. Virginia Code § 34-3, however, provides that the exemptions listed under Virginia Code § 34-26 do not apply to liens for state taxes. Further, the Virginia Supreme Court has held that exempt funds that were deposited into a general joint account and comingled with other funds, as the Account indicates in this case, lost their exempt status. See Bernardini v. Central National Bank, 223 Va. 519 (1982).
Joint Account
Virginia Code § 6.2-606 A (previously Virginia Code § 6.1-125.3 A) provides that a husband and wife are presumed to own the funds in a joint account “equally.” The Supreme Court of Virginia ruled that this language creates a presumption that each spouse owned one-half of the funds in the account. As such, only one-half of the funds deposited in a joint bank account of a husband and wife were subject to garnishment by a creditor of one of the spouses. See Lewis v. House, 232 Va. 28 (1986).
It has been the Department’s policy not to hold one spouse liable for past tax liabilities of the other spouse accrued in years before a return was jointly filed. See Public Document (P.D.) 08-44 (4/17/2008). In that case, the Department determined that the taxpayer was not liable for her husband’s tax debts he had accrued before their marriage.
CONCLUSION
For the reasons discussed above, the Taxpayers could not claim the poor debtor’s exemption to protect the Account from the Department’s collections attempts. I have determined, however, that one half of the Account is presumed to belong to the wife and may not be levied to satisfy the husband’s state tax debt accrued before marriage. A refund will be issued shortly to reflect this determination.
The Code of Virginia sections and public document cited are available online at www.tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. 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/4372.X