December 29, 2014
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 your clients, ***** (the "Taxpayers"), for the taxable years ended December 31, 2010 and 2011. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayers, a husband and wife, were residents of Virginia prior to the taxable years at issue. The wife was the sole member of ***** (VALLC), a limited liability company located in Virginia. The husband was employed by VALLC. In 2010, the Taxpayers established domicile in ***** (State A). The Taxpayers, however, maintained their Virginia residence and continued to spend time in Virginia.
The Taxpayers filed nonresident Virginia individual income tax returns for the 2010 and 2011 taxable years. Under audit, the Department found the husband received compensation from VALLC. The Taxpayers, however, had not reported any portion of the compensation as Virginia source income. Reasoning that the compensation was severance pay attributable to the conduct of an occupation in Virginia, the auditor determined that it was Virginia source income and adjusted the Taxpayers' returns accordingly. The Taxpayers paid the resulting assessments and appealed, contending that the compensation was not Virginia source income because it was for services the husband rendered to VALLC as an employee and all the services were performed in State A.
DETERMINATION
Individuals who are neither domiciliary nor actual residents of Virginia and have income from Virginia sources are taxed as nonresidents. 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."
In Public Document (P.D.) 99-108 (5/12/1999), the taxpayer received a final paycheck, vacation pay and negotiated settlement upon termination of his employment in Virginia. The taxpayer, however, did not receive the payments until after he had left Virginia and established domicile in another state. Nevertheless, the Department ruled that the payments were Virginia source income because they were attributable to the conduct of an occupation within Virginia.
In this case, the auditor concluded that the compensation the husband received from VALLC in 2010 and 2011 was severance pay attributable to the husband's employment in Virginia. As such, the auditor determined that it was Virginia source income in accordance with the principle set forth in P.D. 99-108. Information provided with the appeal, however, indicates that the husband was paid wages as an employee of VALLC in exchange for services as needed. In addition, the husband spent nearly half of each year in Virginia. Therefore, the question becomes what portion of his wages, if any, was Virginia source income.
Typically, the factor that most equitably determines the apportionment of salaries and wages is the ratio of the number of days services were performed in Virginia to the number of days services were performed elsewhere. See P.D. 94-219 (7/13/1994). The Department has previously ruled that a nonresident who works in Virginia may apportion his or her salary to Virginia using a ratio of (1) the number of days or portion thereof spent in Virginia performing duties for his or her employer, divided by (2) the number of days or portion thereof spent anywhere performing duties for his or her employer. See P.D. 85-134 (6/18/1985).
As a general rule, the Department uses 260 days in the denominator of the ratio for determining wages attributable to Virginia for full-time employees. Taxpayers who claim to have worked more than 260 days during a given taxable year must document that claim. Likewise, taxpayers who worked less than 260 days are limited to using days actually worked in the denominator of the ratio. For part-time employees, semiretired individuals and consultants, a ratio of hours worked in Virginia divided by hours worked anywhere may be a better indicator of income from Virginia sources.
In this case, the Taxpayers contend that the husband performed services for VALLC only while he was in State A. The Taxpayers have provided representative examples of the types of services the husband performed, which included reviewing technical documents and proposals and quality reports. The Taxpayers state that the husband worked approximately 400 hours in 2010 and 2011, whereas he had never worked less than 1400 hours any previous year. The Taxpayers also state that all of the work was done by phone or email from their home office in State A.
The Department questions the Taxpayers' assertion that the husband only performed services for VALLC while he resided in State A. The information provided indicates that the husband was employed by VALLC on a full-time or nearly full-time basis from 2005 through 2009. During that time, he was the only engineer employed by VALLC, and he continued as the only engineer in 2010 and 2011. In addition, the Taxpayers claim VALLC agreed to pay the husband a weekly salary, but the salaries he received in 2010 and 2011 were more than he had earned in any previous year working full-time for VALLC. Employees who move to part-time status do not typically receive higher annual salaries than they received while employed full-time in the same capacity. Also, part-time employees working only as needed typically are paid by the hour and do not receive a weekly salary. This arrangement, therefore, strongly suggests that the husband was available and continued to perform services throughout the year and not just during those periods he was in State A. Couple these facts with the husband's presence in Virginia for more than 160 days in each taxable year at issue raises doubts that the husband performed no work for VALLC in Virginia.
Based on the available information, the Department finds the husband received compensation from VALLC while in Virginia in 2010 and 2011. Accordingly, it will attribute 123 and 115 days as the number of days out of 260 the Taxpayer worked for VALLC in Virginia during 2010 and 2011, respectively. The case will be returned to the audit staff to adjust the assessments accordingly and issue the appropriate refunds.
The Code of Virginia sections 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/1-5577704608.M