Tax Type
Individual Income Tax
Description
Erroneous assessments
Topic
Assessment
Persons Subject to Tax
Date Issued
06-09-2005
June 9, 2005
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the individual income tax assessments issued to ***** (the "Taxpayers") for the 2001 and 2002 taxable years.
FACTS
The Taxpayers are husband and wife. During the taxable years in question, the husband was on active duty in the United States military. Prior to 2001, the husband was stationed in and a resident of ***** ("State A"). In 2001, the husband was transferred to Virginia pursuant to military orders. He maintained his declaration as a resident of State A for purposes of his military compensation. He maintained a State A driver's license and registered his car in State A. In May 2002, the husband sold his State A residence and purchased a residence in Virginia.
While stationed in Virginia, the husband ran an Internet-based business that used a State A address and generated losses. Upon audit by the Internal Revenue Service ("IRS"), the Internet business was determined to be a hobby, and the losses were allowed to offset the husband's hobby income only. In addition, the husband owned two rental properties located outside Virginia that generated operating losses.
The Taxpayers married in December 2002. Prior to 2002, the wife was a resident of ***** ("State B"). In 2002, the wife continued to maintain a State B driver's license and was employed by a State B based company. Her W-2 form was delivered to a State B address and State B income taxes were withheld.
The Department audited the Taxpayers and issued an assessment for Virginia income tax, penalty and interest. The Taxpayers contend that they are not liable for Virginia income tax because they were not domiciliary residents of Virginia and did not have business income from Virginia sources.
DETERMINATION
Two classes of residents, a domiciliary resident and an actual resident, are set forth in Va. Code § 58.1-302. The domiciliary residence of a person means that the permanent place of residence of a taxpayer is Virginia and the place to which he intends to return is Virginia even though he may actually reside elsewhere. For a person to change domiciliary residency to another state or country, that person must intend to abandon his Virginia domicile with no intention of returning to Virginia. 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 Virginia domiciliary resident, therefore, working in other parts of the country who has not abandoned his Virginia residency continues to be subject to Virginia taxation. Additionally, a person who is not a domiciliary resident of Virginia, but who stays in Virginia for an aggregate of more than 183 days is also 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 domicile.
The Department concedes that it is difficult to know whether a taxpayer intends to return to his or her initial state of domicile, especially when the taxpayer is in military service. The Department determines a taxpayer's intent through the information provided. The taxpayer has the burden of proving that he or she has not abandoned his or her initial domicile. If the information is inadequate to meet his or her burden, the Commissioner must conclude that he or she intended to remain indefinitely in Virginia.
Husband
The Soldiers and Sailors Civil Relief Act of 1940 (50 U.S.C. § 574) provides that military and naval personnel do not abandon their legal domicile solely by complying with military orders that require them to take residence in a different state or country. The Act, however, does not preclude the possibility that military personnel may acquire a new legal domicile in the state where they are stationed, and thus subject themselves to taxation by that state as if they were a domiciliary resident. In order for the change of domicile to occur, there must be an abandonment of the old domicile and the acquisition of a new one. This change must be exhibited by an individual's intent and conduct. In addition, Va. Code § 58.1-321 B provides that members of the armed forces that are stationed in Virginia, who are not domiciled in Virginia, are not subject to income tax on compensation received from their military service.
The husband was stationed in Virginia by the United States military in 2001 and 2002. The evidence presented indicates that the husband took steps to retain his domicile in State A even though he was stationed in Virginia. As such, the husband was a domiciliary resident of State A for the 2001 and 2002 taxable years.
Although the husband was not a resident of Virginia during the taxable years at issue, he would be subject to Virginia income tax as a nonresident if he had income from Virginia sources. The Virginia taxable income of a nonresident is defined under Va. Code § 58.1-325 as "an amount bearing the same proportion to his Virginia taxable income, computed as though he were a resident, as the net amount of his income, gain, loss and deductions from Virginia sources bears to the net amount of his income, gain, loss and deductions from all sources."
Virginia Code § 58.1-302 defines income and deductions from Virginia sources to include:
1. Items of income, gain, loss and deduction attributable to:
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- a. The ownership of any interest in real or tangible personal property in Virginia
b. A business, trade, profession or occupation carried on in Virginia.
- a. The ownership of any interest in real or tangible personal property in Virginia
The husband had dividend and interest income, but the income was not from an intangible asset employed in a trade or business carried on in Virginia. For Virginia income tax purposes, this income would be sourced to State A.
The Taxpayer also engaged in a hobby and had rental property. Although the hobby income could be sourced to Virginia, such income is not derived from a business, trade, profession or occupation. In addition, the hobby produced no net income as the expenses exceeded the gross income. Also, the husband's rental properties were located outside Virginia and would not result in Virginia source income. As such, I find that the husband had no Virginia source income for the 2001 and 2002 taxable years.
Wife
The issue regarding the wife is whether she was a resident of Virginia for the 2002 taxable year. The wife was employed by a State B company that issued her W-2 form to her at a State B address. The wife's employer withheld State B income tax from her wages. She has a State B driver's license and no vehicles registered in Virginia. The Taxpayers were not married until December 2002. The evidence provided by the Taxpayers reveals that the wife resided in State B and spent considerably less than 183 per year days in Virginia during the taxable year at issues. Accordingly, I find that the wife was not a domiciliary or actual resident of Virginia for the 2002 taxable year.
CONCLUSION
Based on the foregoing, the Virginia individual income tax assessments issued to the Taxpayers for the taxable years 2001 and 2002 are erroneous and have been abated. If you have any questions regarding this determination, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/55183B
Rulings of the Tax Commissioner