Tax Type
Individual Income Tax
Description
Domicile and retirement income
Topic
Basis of Tax
Residency
Date Issued
09-03-2002
September 3, 2002
RE: Ruling Request: Individual Income Taxation
Dear *****:
This will reply to your letter in which you request a ruling as to whether you and your wife (the "Taxpayers") are required to file a Virginia resident income tax return for the 2000 taxable year and whether certain retirement income is subject to taxation for that year.
FACTS
In April 1991, the Taxpayers, a husband and wife, moved from their state of domicile ("State A") to a foreign country ("Country A"). While in Country A, the Taxpayers indicate that they maintained their domicile in State A. In 1992, the Taxpayers purchased a vacation residence in Virginia. This home was used occasionally by the Taxpayers to visit family in the United States and it was also leased to unrelated third parties. When the husband retired from his employment in Country A in August of 1999, the Taxpayers and their child moved to the Virginia vacation home. After learning that his professional license would not transfer from State A, the husband passed Virginia's licensing examination in October 2001 and was licensed.
The husband rolled over the amounts due from his employer's qualified retirement plan into an Individual Retirement Account. In addition, retirement income was due from a supplemental retirement plan. Amounts due from the qualified and supplemental plans were set at the time of the husband's actual retirement, but were not received until January of 2000.
The Taxpayers filed a resident individual income tax return for the 2000 taxable year. However, you assert that the Taxpayers did not intend to become domiciliary residents of Virginia until August 2000. The Taxpayers, therefore, believe that they should have filed a part-year resident return for the 2000 taxable year. In addition, the Taxpayers assert that the amounts of income received from the retirement plans should be recognized at the time of the retirement rather than when the amounts were received and should not be subject to Virginia income tax.
DETERMINATION
Filing Status
Code of Virginia § 58.1-303 provides that a person who becomes a resident of Virginia is subject to taxation during the period of Virginia residency. Title 23 of the Virginia Administrative Code ("VAC") 10-110-40 provides that individuals who become residents of Virginia during the taxable year are only taxed as residents for that portion of the year that they reside in Virginia. The pertinent issue is when the Taxpayers become residents of Virginia.
Two classes of residents, a domiciliary resident and an actual resident, are set forth in Code of Virginia § 58.1-302. The domiciliary residence of a person means that the permanent place of residence of a taxpayer and the place to which he intends to return even though he may actually reside elsewhere. For a person to change domiciliary residency to another state, that person must intend to abandon his original domicile with no intention of returning to the original state. Concurrently, that person must acquire a new domicile where that person is physically present with the intention to remain there permanently or indefinitely. 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. A domiciliary resident of another state, therefore, working in other parts of the country who has not abandoned his original domicile continues to be subject to taxation in the state of his original domicile. Conversely, a person who is not a domiciliary resident of Virginia, but who resides in Virginia for an aggregate of more than 183 days is subject to Virginia taxation.
In order to change from one legal domicile to another legal domicile, there must be (1) actual abandonment of the old domicile, coupled with an intent not to return to it, and (2) an acquisition of a new domicile at another place, which must be formed by personal presence and an intent to remain there permanently or indefinitely. The burden of proving that the domicile has been changed lies with the person alleging the change.
In determining domicile, consideration may be given to the individual's expressed intent, conduct, and all attendant circumstances including, but not limited to, financial independence, profession or employment, income sources, residence of spouse, marital status, sites of real and tangible property, motor vehicle registration and licensing, and such other factors as may be reasonably deemed necessary to determine the person's domicile. A person's true intention must be determined with reference to all of the facts and circumstances of the particular case. A simple declaration is not sufficient to establish residency.
The Taxpayers have stated that they intended to remain in Virginia in August of 2000. However, they moved to Virginia in August 1999 and resided in the Commonwealth in all of 2000. Based on the information provided, the Taxpayers were part-year residents of Virginia in 1999 and actual residents in 2000. Accordingly, the Taxpayers correctly filed a resident individual income tax return for 2000. In addition, the Taxpayers are required to file a part-year resident individual income tax return for 1999.
Retirement Income
Code of Virginia § 58.1-301 provides that terminology and references used in Title 58.1 of the Code of Virginia will have the same meanings as provided in the Internal Revenue Code ("IRC") unless a different meaning is clearly required. Virginia "conforms" to federal law because it starts the computation of Virginia taxable income with federal adjusted gross income ("FAGI").
The Taxpayers cite the "all events" test to determine whether the retirement income is subject to Virginia taxation. Under the "all events" test, the fixed right to receive income is controlling and not whether the income has been actually received. In other words, a taxpayer's right to receive income is fixed upon the earliest of the taxpayer's receipt of payment, the contractual due date, or the taxpayer's performance.
According to the Taxpayers, the "all events" test provides that, if prior to a taxpayer becoming a resident of a state all of the events have occurred that entitle the taxpayer to income, the income is not subject to tax in that state. The Taxpayers contend that the amounts due from the qualified and supplemental plans were set at the time of the husband's actual retirement, prior to the Taxpayers becoming residents of Virginia and should, therefore, be exempt from Virginia income tax.
In general, the "all events" test applies to compensatory payments received by nonresidents. As stated above, the Taxpayers were residents of Virginia in January 2000 when they actually received the retirement payments. As such, the "all events" test would not apply to the Taxpayers' situation.
Moreover, Public Law ("P.L.") 104-95, as codified at Title 4 U.S.C.A § 114, supersedes the "all events" test by prohibiting a state from imposing an income tax on any retirement income received by an individual who is not a resident or domiciliary of that state. Because the Taxpayers were residents of Virginia in 2000, the retirement income received in 2000 could not be taxed by State A, even if the retirement income was derived from employment in State A and the taxpayer remained a domiciliary resident of State A. To the extent it is included in FAGI, the retirement income would be included in the computation of Virginia taxable income.
Code of Virginia § 58.1-322 (C)(19) provides a subtraction from FAGI for income received from certain pension and retirement plans when the contributions to the plans were taxed in prior years by another state, but not by the federal government. Taxpayers eligible for this subtraction are able to avoid taxation by both Virginia and another state on the same retirement savings.
In addition, Code of Virginia § 58.1-332.1 provides a credit for income tax paid on any personal or retirement income to a foreign country to the extent that such income is included in federal adjusted gross income, derived from past employment in the foreign country and subject to Virginia income tax.
In the case at hand, the Taxpayers received distributions from retirement plans after becoming Virginia residents. These distributions would be included in FAGI and reported on the 2000 Virginia return to the extent included in FAGI on the 2000 federal income tax return. Based on the information available, the department cannot determine if the Taxpayers could claim the subtraction provided by Code of Virginia § 58.1-322(C)(19) or the credit pursuant to Code of Virginia § 58.1-332.1. Should the Taxpayers qualify for the subtraction or the credit, they may file an amended return to claim a refund for any taxes overpaid.
As with any ruling provided by the department, my analysis is limited to the years and the facts and circumstances identified in your letter. Any material changes in the facts could alter the results.
Copies of the Code of Virginia sections and public document cited are attached for reference purposes. These and other documents are also available online in the Tax Policy library section of the Department of Taxation's web site located at www.tax.state.va.us. I hope that the foregoing answers your questions. If you have any further questions, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Kenneth W. Thorson
Tax Commissioner
AR/38318B
Rulings of the Tax Commissioner