March 15, 2022
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 assessment issued to ***** (the “Taxpayers”) for the taxable year ended December 31, 2018.
FACTS
The Taxpayers filed a part-year Virginia resident income tax return for the 2018 taxable year listing a Virginia residency end date of May 11, 2018. Under review, the Department determined that an individual retirement account (IRA) distribution which the Taxpayers had categorized as income attributable to their period of nonresidency was received on May 3, 2018, before they left Virginia. The auditor adjusted their return to include the IRA distribution in income attributable to their period of Virginia residency and issued an assessment. The Taxpayers appeal, asserting that because they demonstrated the intent to change their domicile to ***** (State A) before the distribution, the distribution was properly categorized as income attributable to their period of nonresidency.
DETERMINATION
Domicile
Two classes of residents, a domiciliary resident and an actual resident, are set forth in Virginia Code § 58.1-302. The domiciliary residence of a person means the permanent place of residence of a taxpayer and the place to which he intends to return even though he may reside elsewhere. 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.
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. The issue in this case is not whether the Taxpayers changed their domicile, but when the change of domiciliary residence occurred.
The Taxpayers state that they intended to abandon their Virginia domicile and establish domicile in State A in April 2018 when they signed a contract to purchase a residence in State A. They explain that they received the IRA distribution before leaving Virginia so that they would have the funds needed to purchase their new residence in State A while the sale of their Virginia residence was pending. They also took a number of actions consistent with establishing domicile in State A. They obtained State A driver’s licenses, registered their vehicles in State A, and registered to vote in State A. None of these actions, however, took place prior to the reported end date of their Virginia residency, May 11, 2018, on their Virginia income tax return.
While the Taxpayers may have intended to establish domicile in State A earlier than the end date of their Virginia residency, acquiring domicile in a new location requires both intent and physical presence. The Virginia Supreme Court has observed that neither physical presence alone, nor expressed intent alone, are sufficient to create a legal domicile for taxation purposes. See Coopers Adm’r v Commonwealth, 121 Va. 338, 93 S.E. 680 (1917). See also Public Document (P.D.) 18-179 (10/24/2018). The Taxpayers state they did not leave Virginia until May 9, 2018. Therefore, it appears the Taxpayers were not yet physically present in State A with the intent to remain there as of the date of the IRA distribution, May 3, 2018. As such, a change of domicile had not yet occurred.
Part-Year Residents
Virginia Code § 58.1-303 provides that a taxpayer who becomes a resident of another state during the taxable year is subject to taxation for the period in which he was a Virginia resident. Accordingly, Virginia taxable income is computed by determining income, deductions, subtractions, additions and modifications attributable to the period of residence in Virginia. In addition, part-year residents may claim a portion of their Virginia personal exemptions, but the exemptions will be prorated based upon the number of days that the taxpayer was a Virginia resident. Further, part-year residents may claim a prorated Virginia standard deduction if they claim the standard deduction for federal income tax purposes.
The timing of the receipt of income can be a critical tax planning issue for taxpayers to consider when changing residency. The Department has consistently held that income is attributable to the period of residence in Virginia if the taxpayer is a Virginia resident on the date the income is received. See P.D. 16-130 (6/26/2016), P.D. 17-65 (5/10/2017), P.D. 19-20 (3/26/2019), P.D. 20-30 (3/4/2020), and P.D. 21-15 (2/16/2021). In addition, in answering a question related to the timing of taking IRA distributions, the Department ruled that an IRA distribution must be included in income attributable to the period of Virginia residency where it was received before the Virginia residency end date even though the distribution was to be used to purchase a new home in the taxpayer’s new state of domicile. See P.D. 99-173 (6/30/1999).
CONCLUSION
The evidence indicates the Taxpayers remained domiciliary residents of Virginia until they left Virginia and established physical presence in State A on or after May 11, 2018. As stated above, because the distribution at issue was received on May 3, 2018, before the Taxpayers moved out of Virginia, the income was properly included in income attributable to their period of Virginia residency. The assessment, therefore, is upheld and an updated bill will be issued shortly. The Taxpayers should remit payment of the balance due within 30 days of the bill date to avoid the accrual of additional interest and possible collections actions.
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/3874.X