Could a California domiciliary who was an actual Virginia resident claim a Virginia credit for California tax on income earned outside both states?

Subject

Credit denied for domicile-state tax; other-state credits remained

Plain-English summary

Virginia again denied the taxpayer's credit for California tax because California was her domicile state while Virginia was her actual-residence state. The income at issue came from outside Virginia, and Virginia did not shift the credit obligation to itself merely because California would not grant a credit.

Virginia noted that a state may tax all income of its residents. Its statutory relief generally credited tax paid to a source state, but the Department distinguished this California-domiciliary and Virginia-actual-resident situation from a Virginia domiciliary living elsewhere.

The taxpayer could amend within 30 days to seek Virginia credits for taxes paid as a nonresident to other states—excluding California—on income received while she resided in Virginia.

What this means for you

• Domicile and actual residence can create simultaneous resident taxation by two states.
• Virginia's credit result depended on which state was the domicile state and where the income was sourced.
• Review each other-state return separately; source-state taxes may qualify even when domicile-state tax does not.

Citations and references

• Va. Code § 58.1-332.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-163

Original ruling text

September 8, 2014

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you request reconsideration of the Department's ruling issued as Public Document (P.D.) 13-118 (6/27/2013) regarding your client, * (the "Taxpayer") for the taxable year ended December 31, 2010. I apologize for the delay in responding to your appeal.

FACTS

In P.D. 13-118, the Department denied the Taxpayer's claim of credit for income taxes paid to California. The Taxpayer requests reconsideration, contending that California's statutes prohibit domiciliary residents from claiming a credit on income tax paid to Virginia when such income is derived from sources outside of Virginia. The Taxpayer also argues that the purpose of Va. Code § 58.1-332 was to prevent taxpayers from being taxed by both the state of actual residence and the state of domicile on the same income.

DETERMINATION

It is well established that a state may tax all the income of its residents, even income earned outside the taxing jurisdiction. In New York ex rel Cohn v. Graves, 300 U.S. 308, 57 S.Ct. 466 (1937), the United States Supreme Court explained "[t]hat the receipt of income by a resident of the territory of a taxing sovereignty is a taxable event is universally recognized." Thus, a state may tax all of the income of a resident regardless of whether such income is subject to tax in another state.

As a matter of fairness and equity most states, including Virginia, provide a mechanism to relieve residents from being taxed by both their state of residence and the state in which the income was derived. Virginia's method of limiting taxation of income by more than one state has been to permit a credit for taxes paid to other states pursuant to Va. Code § 58.1-332. By reason of their character as legislative grants, however, statutes relating to deductions and subtractions allowable in computing income and credits allowed against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See Howell's Motor Freight, Inc., et al. v. Virginia Department of Taxation, Circuit Court of the City of Roanoke, Law No. 82-0846 (10/27/1983).

The Taxpayer filed a Virginia part-year resident return for the 2010 taxable year and reported income received from sources outside of Virginia. The income was received while the Taxpayer resided in Virginia. The Taxpayer also reported and paid income tax to California (her state of domicile) on the income and claimed a credit for tax paid to California on her Virginia return.

Because a portion of the Taxpayer's income was not derived from Virginia sources, California's statutes prohibit a tax credit on the California income tax return. In instances where a taxpayer is a domiciliary resident of Virginia and an actual resident of another state, Virginia has permitted a tax credit for income tax paid to the other state under Va. Code § 58.1-332. See P.D. 97-98 (2/24/1997). In this case, the Taxpayer was a domiciliary resident of California and an actual resident of Virginia. See P.D. 87-161 (6/2/1987).

While I recognize your disagreement with the Department's position, based on the above and the reasoning set forth in P.D. 13-118, I find that the Department's adjustment is correct. As indicated in P.D. 13-118, however, the Taxpayer may be eligible for a credit for taxes paid to states where she filed returns as a nonresident. As such, the Taxpayer is advised to amend the Virginia income tax return and claim a tax credit for the income taxes paid to the other states excluding the Taxpayer's domicile state on the income received while residing in Virginia.

The return should be mailed within 30 days from the date of this letter to: Virginia Department of Taxation, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23261-7203, Attention: *. If the requested information is not received within

the allotted time, the assessment will be upheld and collection action will resume.

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 ruling, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-5059574672.D