June 24, 2015
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This is in response to your letter in which you seek correction of the individual income tax assessment issued to ***** (the "Taxpayers") for the taxable year ended December 31, 2011. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayers, husband and wife, claimed a subtraction from federal adjusted gross income (FAGI) for basic military pay on their 2011 Virginia individual income tax return. Under review, the Department disallowed the subtraction on the basis that, although the husband served on active duty from November 2011 to June 2012, he had not served for more than 90 days in the 2011 taxable year. The Taxpayers appealed, contending that Virginia law does not specify that the active duty period must exceed 90 days within the same taxable year.
DETERMINATION
Virginia Code § 58.1-301 provides that terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required. For individual income tax purposes, Virginia "conforms" to federal law, in that it starts the computation of Virginia taxable income with FAGI. Income included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Va. Code § 58.1-322.
Title 58.1 of the Code of Virginia currently provides three subtractions for military compensation. Military servicemembers may be eligible for a subtraction for (1) military pay and allowances earned while serving in a combat zone or qualified hazardous duty area (Va. Code § 58.1-322 C 21); (2) military basic pay for personnel on extended active duty for periods in excess of 90 days (Va. Code § 58.1-322 C 23); and (3) wages or salaries received for active and inactive service in the National Guard of the Commonwealth (Va. Code § 58.1-322 C 11). Servicemembers may be eligible for more than one subtraction, but the same income may not be included in more than one subtraction.
Further, all of the subtractions under Va. Code § 58.1-322 C are prefaced by the words "To the extent included in federal adjusted gross income." As such, no military compensation excluded from FAGI can be used to claim a military subtraction in computing Virginia taxable income. See also Public Document (P.D.) 11-133 (7/25/2011).
Virginia Code § 58.1-322 C 23 provides military service personnel with a subtraction for up to $15,000 of basic military pay received during a taxable year, provided they are on extended active duty for a period in excess of 90 days. The subtraction is reduced when the amount of military basic pay received by the taxpayer exceeds $15,000 and is fully phased out when basic military pay reaches $30,000. The subtraction is available whether the individual is stationed inside or outside Virginia.
The Department denied the subtraction the Taxpayers claimed for extended active duty pay on the basis that the husband had not been on extended active duty for more than 90 consecutive days in 2011. The statute does not, however, expressly require the period to occur within the same taxable year. Thus the Department will consider any extended active duty period of more than 90 consecutive days to satisfy the requirement of Va. Code § 58.1-322 C 23, even if the period occurs over two taxable years such that the military servicemember served less than 90 days in one or each of the taxable years.
The documentation provided indicates that the husband was on extended active duty from November 2011 to June 2012. Although he had not been on active duty for more than 90 days by the end of the 2011 taxable year, the basic pay the husband received during 2011 was earned during a period in which he was assigned to extended active duty for more than 90 days.
The available information, however, raises further questions concerning the Taxpayers' eligibility for the subtraction. The husband appears to have had non-taxable combat pay that was not includable in FAGI and would, therefore, not be eligible for the basic pay subtraction. It is also unclear how much of the husband's military income reported on his W-2 was attributable to basic pay earned while on extended active duty and not already classified as non-taxable combat pay. The Department has found that a servicemember is not entitled to a basic pay subtraction when their compensation is excluded from FAGI because they were serving in a combat zone. See P.D. 13-222 (12/13/2013) and P.D. 14-75 (5/29/2014).
In order to verify how much of the husband's basic military pay was eligible for the subtraction, it will be necessary to review his leave and earnings statements for the 2011 taxable year together with his military W-2 and active duty orders. See id. Please send the leave and earnings statements within 30 days from the date of this letter to the Department's Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attn: *****. If the information is not received within the allotted time, the Department's assessment will be considered to be correct and collection actions may resume.
Once the documentation is received, the case will be returned to the audit staff with the instruction to reconsider the Taxpayers' eligibility for the subtraction consistent with the policies set forth in this determination and adjust the assessment if warranted. If the Taxpayers are not satisfied with the result of that review, they may appeal to the Tax Commissioner pursuant to Va. Code § 58.1-1821.
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/1-5845761625.M