Could a Virginia military resident claim the full basic-pay subtraction and also subtract combat pay already excluded from federal income?

Plain-English summary

Virginia upheld the 2008 assessment because the military-pay adjustments were correct and the taxpayer did not prove he had abandoned Virginia domicile. He received one final 30-day opportunity to provide residency evidence.

The taxpayer filed a Virginia resident return and claimed subtractions for basic military pay, combat pay, and active-duty allowances. He later argued that he did not live in Virginia during 2008 but provided no objective evidence after the Department requested it.

Under Va. Code § 58.1-302, a domicile change required both abandonment of Virginia without intent to return and acquisition of a new domicile through presence and intent to remain. The military domicile protection cited in the ruling meant military orders alone did not change domicile, though a service member could establish a new domicile through intent and conduct.

Extended active-duty basic pay

Va. Code § 58.1-322(C)(23) then allowed up to a $15,000 subtraction for basic military pay during extended active duty over 90 days. The subtraction decreased as basic pay exceeded $15,000 and was fully phased out at $30,000. Because the taxpayer's basic pay exceeded $15,000, the auditor's reduction was correct.

Combat and hazardous-duty pay

Va. Code § 58.1-322(C)(21) allowed subtraction of qualifying combat-zone or hazardous-duty pay only to the extent it was included in federal adjusted gross income. The taxpayer's combat-zone income was not included federally, so Virginia denied a second subtraction.

What this means for you

• Check the historical phaseout before claiming the full basic-pay subtraction.
• A Virginia subtraction cannot remove combat pay that federal adjusted gross income already excludes.
• Military stationing outside Virginia does not by itself change domicile.
• Keep objective domicile records when filing as a nonresident or changing residency status.

Common questions

Q: Was the $15,000 basic-pay subtraction automatic?
A: No. It phased down when basic pay exceeded $15,000.

Q: Why was combat pay not subtracted?
A: It was already absent from federal adjusted gross income.

Q: Did service outside Virginia prove nonresidency?
A: No. The taxpayer supplied no objective proof of a domicile change.

Citations and references

• Va. Code §§ 58.1-302 and 58.1-322(C)(21) and (C)(23).
• 50 U.S.C. § 574, as cited in the 2012 ruling.

Subject

Combat pay/ allowances for active duty while serving in a combat zone or a qualified hazardous duty area.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-210

Original ruling text

December 13, 2012

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter appealing the Virginia individual income tax assessment issued to * (the "Taxpayer") for the taxable year ended December 31, 2008. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer filed a Virginia resident income tax return for the 2008 taxable year. In determining his Virginia taxable income, the Taxpayer claimed subtractions for basic military pay, Operation Joint Endeavor combat pay, and the allowances for active duty while serving in a combat zone or a qualified hazardous duty area. Under audit, the Department reduced the basic military pay subtraction and denied the other subtractions. The Department issued an assessment to the Taxpayer for 2008 taxable year. The Taxpayer appeals the assessment, contending he did not reside in Virginia during the 2008 taxable year.

DETERMINATION

Domicile

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 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 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.

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 determines a taxpayer's intent through the information provided. The Taxpayer has the burden of proving that he or she has abandoned his or her Virginia domicile. If the information is inadequate to meet his or her burden, the Tax Commissioner must conclude that he or she intended to remain indefinitely in Virginia.

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 armed forces 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.

The Taxpayer filed a 2008 Virginia income tax return as a resident and reported all of his income as Virginia source income. By letter dated August 27, 2012, the Department requested additional information to ascertain the Taxpayer's domiciliary status for the taxable year at issue. As of the date of this letter, the Taxpayer has provided no objective evidence to substantiate his claim that he was not a resident of Virginia for the 2008 taxable year.

Extended Active Duty

To the extent included in FAGI, Va. Code § 58.1-322 C 23 provides military service personnel with a subtraction for up to $15,000 of military basic 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. This subtraction is available whether the individual is stationed inside or outside of Virginia.

The Taxpayer claimed a military pay subtraction in the amount of $15,000. A review of his wage information shows that the Taxpayer's military pay exceeded $15,000. The Department's auditor reduced the Taxpayer's subtraction by the amount that the military pay exceeded $15,000. Accordingly, the adjustment to the Taxpayer's military pay subtraction is correct.

Combat Duty Pay

To the extent included in FAGI, Va. Code § 58.1-322 C 21 allows military service personnel to subtract all military pay and allowances attributable to service in a combat zone or a qualified hazardous duty area designated by order of the President of the United States with the consent of Congress. This subtraction exempts the portion of the officer's combat duty or a qualified hazardous duty pay included in the FAGI.

Information provided to the Department, indicates that the Taxpayer's income received while serving in a combat zone was not included in the Taxpayer's FAGI. As such, the adjustments to the subtractions for service in a combat zone or a qualified hazardous duty area are in accordance with Va. Code § 58.1-322 C 23 and are correct.

CONCLUSION

Based on the information available, the assessment for the 2008 taxable year is upheld. I will, however, grant the Taxpayer one final opportunity to provide sufficient evidence regarding his domicile for the 2008 taxable year. Such evidence should be provided within 30 days from the date of this letter to: Virginia Department of Taxation, Appeals and Rulings, Attention: *, Post Office Box 27203, Richmond, Virginia 23261-7203. If the requested information is not provided within the allotted time, the 2008 assessment will become due and payable.

The Code of Virginia and regulation sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department of Taxation's web site. If you have any questions about this determination, please contact * at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4994638796.D