Did a temporary State Department assignment abroad make a Virginia couple nonresidents and allow them to exclude the husband's overseas income?

Subject

The Department determined that the Taxpayers were domiciliary residents of Virginia.

Plain-English summary

A retired State Department couple filed as part-year Virginia residents for 2012 and excluded income earned while the husband served at a foreign post from August through December.

Foreign Service assignments are often temporary, so domicile depends on the full facts. Here, the couple owned and treated a Virginia home as permanent, registered and voted in Virginia, registered two vehicles here, held Virginia driver's licenses, and continued accepting temporary overseas assignments while otherwise retired.

Those connections showed that they remained Virginia domiciliaries throughout 2012. Virginia domiciliary residents are taxable on all income regardless of where it is earned, so the overseas income was included and the tax assessment upheld.

Virginia agreed to waive the estimated-tax underpayment penalty under the circumstances. It could not waive interest, which the statute imposed as compensation for the use of money due the Commonwealth rather than as a penalty.

Common questions

Does every Foreign Service posting change domicile? No. Temporary assignments often leave the original domicile intact.

Why was the penalty waived but not interest? Virginia had reasonable-cause authority over the penalty, while interest was mandatory unless the underlying tax changed.

Citations and references

• Va. Code §§ 46.2-323.1, 58.1-105, 58.1-302, 58.1-492, and 58.1-1812.
• P.D. 00-151, P.D. 02-149, and P.D. 91-70.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-248

Original ruling text

December 23, 2015

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, 2012.

FACTS

The Taxpayers, a husband and a wife, filed a Virginia part-year resident individual income tax return for the 2012 taxable year. The husband was employed by the United States Department of State and was assigned to a post in * (Country A) from August to December 2012. In computing Virginia adjusted gross income (VAGI), the Taxpayers excluded the income attributable to the time the husband spent on assignment in Country A.

Under audit, the Department determined that the Taxpayers were domiciliary residents of Virginia. Accordingly, the Department adjusted the return to include such income and issued an assessment. The Taxpayers appealed, contending they were advised that they would be considered nonresidents for Virginia income tax purposes during periods of overseas employment. Alternatively, the Taxpayers request a waiver of any associated penalties and interest if the Department upholds the assessment.

DETERMINATION

Residency

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 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 Department must conclude that he or she intended to remain indefinitely in Virginia.

In Public Document (P.D.) 91-70 (4/15/1991), the Department ruled that Foreign Service employees may retain their original state of domicile even while assigned to a temporary post. The Department acknowledges that most assignments from the Department of State are generally temporary in nature and the determination of one's domicile can only be made after considering all of the facts and circumstances.

The Taxpayers indicate that they owned a personal residence in Virginia in 2012, and it was their permanent residence. The Taxpayers were also registered to vote in Virginia and voted in the November 2012 election. In addition, the Taxpayers owned two vehicles that were registered in Virginia that year, and they held Virginia driver's licenses.

Virginia Code § 46.2-323.1 states, "No driver's license . . . shall be issued to any person who is not a Virginia resident." In fact, this section states that every person applying for a driver's license must execute and furnish to the Commissioner of the Department of Motor Vehicles (DMV) a statement that certifies that the applicant is a Virginia resident. The Department has found that an individual may successfully establish a domicile outside Virginia even if he retains a Virginia driver's license. See P.D. 00-151 (8/18/2000). However, obtaining or renewing a Virginia driver's license is considered to be a strong indicator of intent to retain domiciliary residency in Virginia. See P.D. 02-149 (12/9/2002).

The Taxpayers indicate that by 2012, they were both retired from full-time employment with the Department of State but still accepted assignments overseas as needed. They claim to have been advised that they would be considered nonresidents of Virginia during these assignments. The connections the Taxpayers had with Virginia, however, clearly indicate that they were, and intended to remain, domiciliary residents of Virginia while serving overseas. Domiciliary residents of Virginia remain taxable on all income, regardless of where it was earned. Accordingly, the assessment for the 2012 taxable year is upheld.

Penalties and Interest

In the event the Department upholds the assessment, the Taxpayers request a waiver of any associated penalties and interest. Virginia Code § 58.1-105 grants the Department the authority to waive penalty in cases where reasonable cause is demonstrated.

Virginia Code § 58.1-492 provides for an "addition to tax" (commonly called the estimated tax underpayment penalty") in the event of an underpayment of estimated tax. Under current law, taxpayers are required to make timely income tax payments throughout the year by having tax withheld from wages or making estimated payments. Taxpayers who do not have enough tax withheld from their income must make four estimated tax payments throughout the taxable year. Under the circumstances presented, the Department agrees to waive the estimated tax underpayment penalty.

The application of interest to tax underpayments, however, is mandatory under Va. Code § 58.1-1812, and it cannot be waived unless the associated tax is adjusted. Interest is not assessed as a penalty, but represents a fee for the use of money that was properly due the Commonwealth. As such, the Department finds no basis for abating any portion of the assessed interest.

CONCLUSION

Because the Taxpayers remained taxable as domiciliary residents of Virginia for the entire 2012 taxable year, the assessment of additional tax by the Department is upheld. In addition, the Department agrees to waive the estimated tax underpayment penalty, but the assessment of interest is mandatory under Virginia law and cannot be waived.

If the 2012 assessment creates a financial hardship, the Taxpayers may pursue an offer in compromise based on doubtful collectibility. If the Taxpayers decide to request an offer in compromise, they should complete an Offer in Compromise ­Individual Request for Settlement, and Financial Information Statement (enclosed).

The completed forms should be mailed to Virginia Department of Taxation Attn: CICT, P.O. Box 2475, Richmond, Virginia 23218-2475. If you have any questions about making an offer, you may contact a member of the Collections Team at (804) 367-8045. Upon completion of that review, a response will be issued to the Taxpayers. Alternatively, the Taxpayers may contact that number and arrange for a payment plan.

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/1-6157662778.M