Could a Virginia resident exclude short-term National Guard pay as extended active-duty pay or under the Servicemembers Civil Relief Act?

Subject

National Guard pay did not qualify for active-duty subtraction

Plain-English summary

Virginia denied the subtraction for the husband's National Guard pay because the taxpayers did not prove that he served on extended active duty for more than 90 days. The Department also found him taxable as a Virginia resident and unprotected by the Servicemembers Civil Relief Act on the evidence submitted.

The husband earned about $5,000 from another state's National Guard while receiving more than $100,000 from a Virginia civilian employer. He filed joint Virginia resident returns, maintained a Virginia home and vehicles, and held a Virginia driver's license. Virginia found no evidence of covered active military service and concluded he was a Virginia domiciliary resident; even if domiciled elsewhere, he likely met Virginia's more-than-183-day actual-resident test.

National Guard duty is distinct from active duty under the federal provision cited, and the record did not show service exceeding 90 days. The pay therefore remained in Virginia taxable income. Because the other state also taxed it, the couple could submit an amended Virginia return and the other state's return to seek the limited credit for tax paid to another state.

What this means for you

• National Guard membership alone did not establish qualifying extended active duty.
• Military orders and service-duration records are essential when claiming the subtraction or federal domicile protection.
• Virginia residency can arise from domicile or from maintaining a Virginia abode for more than 183 days.
• Tax paid to another state may support a credit even when Virginia also taxes the income.

Citations and references

• Va. Code §§ 58.1-1821, 58.1-1824, 58.1-302, 58.1-322 C 23, and 58.1-332 A.
• 50 U.S.C. § 571 et seq.; 32 U.S.C. § 101.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-206

Original ruling text

October 27, 2015

Re: § 58.1-1824 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of an individual income tax assessment issued to * (the "Taxpayers"), for the 2011 taxable year. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayers, a husband and a wife, filed a 2011 Virginia resident income tax return and reported a subtraction for basic military pay. The income was earned by the husband while serving in the * (State A) National Guard. Under review, the subtraction was disallowed and an assessment for additional tax and interest was issued. The assessment was collected through a refund match from a succeeding taxable year.

The Taxpayers have filed a claim for refund, contending the National Guard pay must be excluded from Virginia's income tax under the Servicemembers Civil Relief Act (the "Act"). The Taxpayers argue the husband never changed his home of record from State A while he was on active duty and the National Guard pay was reported and taxed in State A.

DETERMINATION

Protective Claim

Virginia Code § 58.1-1824 permits any person who has paid an assessment of taxes administered by the Department to file a protective claim for refund within three years of the date of an assessment. Pursuant to the authority granted the Department under Va. Code § 58.1-1824, a protective claim for refund can be held pending the outcome of another case before the courts or the claim may be decided based upon its merits pursuant to Va. Code § 58.1-1821. As permitted by statute, the Taxpayers' request has been treated as an appeal under Va. Code § 58.1-1821.

Servicemembers Civil Relief Act

The Act , codified at 50 U.S.C. § 571 et seq. , provides that military service members 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 service members 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. See United States of America vs. Minnesota Department of Revenue , 97 F. Supp. 2d 973 (2000).

The Taxpayers have provided no evidence that the husband was an active military service member during 2011. The evidence available, in fact, contradicts the Taxpayers' claim. The husband served in State A's National Guard earning $5,000, while receiving compensation in excess of $100,000 from his Virginia employer. Generally, short-term National Guard service would not be considered to be active duty military service. Further, based on the husband's income, it appears he spent almost the entire year working for his civilian employer. Thus, the Department finds it doubtful that the husband was a service member covered by the Act.

Residency

Virginia Code § 58.1-302 sets forth two classes of residents, a domiciliary resident and an actual resident. 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. 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. A Virginia domiciliary resident, therefore, working in other parts of the country or in another country who has not abandoned his Virginia residency continues to be subject to Virginia taxation. Additionally, a person who is not a domiciliary resident of Virginia, but who stays in Virginia for an aggregate of more than 183 days is also subject to Virginia taxation.

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.

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, situs of real or 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 the facts and circumstances of the particular case. A simple declaration is not sufficient to establish residency.

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

The Taxpayers assert the husband never relinquished his domiciliary residency in State A and will return to State A when they retire. The only connection the Taxpayers maintained with State A was a rental home.

The husband, however, filed joint Virginia resident income tax returns with his wife for the 2008 through 2013 taxable years. In 2011, the husband was employed and maintained a permanent place of abode within Virginia. Virginia Department of Motor Vehicle (DMV) records show the Taxpayers maintain registered motor vehicles in Virginia and the husband obtained a Virginia driver's license in September 2008.

Based on the preponderance of evidence, the Department finds the husband to be a domiciliary resident of Virginia. Further, even if the husband could be considered to be a domiciliary resident of State A, he was likely in Virginia for more than 183 days and would be subject to Virginia income tax as an actual resident.

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 federal adjusted gross income (FAGI). See Va. Code § 58.1-322 A. Thus, the National Guard income was appropriately included in the Taxpayers' FAGI reported on their 2011 Virginia income tax return.

Extended Active Duty Pay Subtraction

Virginia 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.

By reason of their character as legislative grants, statutes relating to deductions and subtractions allowable in computing income and credits 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 Taxpayers assert the National Guard pay should receive the same income tax treatment as active duty income. Under 32 U.S.C. § 101, National Guard duty is defined separately from active duty service. Thus, while members of the National Guard may be called to active duty, generally they are not considered to be on active duty while fulfilling their annual National Guard obligations. Even if the husband were considered to be on active duty, the Taxpayers have provided no evidence to show his active duty extended for a period in excess of 90 days.

Out-of-State Tax Credit

Virginia Cod e § 58.1-332 A allows Virginia residents a credit on their Virginia return for income taxes paid to another state, provided the income is either earned or business income or any gain on the sale of a capital asset. The credit is limited to the lesser of the amount of tax actually paid to the other state or the amount of Virginia income tax actually imposed on the taxpayer on the income earned or derived in the other state. See Public Document (P.D.) 97-301 (7/7/1997). Because State A statutes imposes an income tax on National Guard pay, the Taxpayers may be eligible for a tax credit for the income tax paid to another state.

CONCLUSION

Based on the evidence provided, the Department concludes the husband was a resident of Virginia for the 2011 taxable year. Furthermore, the National Guard pay did not qualify for the extended active duty pay subtraction. However, the Taxpayers may be entitled to an out-of-state tax credit for income tax paid to State A.

In order to claim the credit, the Taxpayers should file an amended 2011 Virginia income tax return. The amended return, including a full copy of the State A income tax return, should be mailed to: Virginia Department of Taxation, Appeals and Rulings, Attn: *, Post Office Box 27203, Richmond, Virginia 23261-7203. The requested documents should be received within 45 days from the date of this letter. If the Taxpayers fail to respond within the time allowed, the assessment will be considered to be correct. Because the assessment was satisfied prior to the appeal, no further actions would be required.

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/1-5897434714.D