Could Virginia tax a 2016 retirement distribution received after the taxpayer moved abroad and abandoned Virginia domicile?

Plain-English summary

Virginia found that the taxpayer had abandoned Virginia domicile and established domicile in Country A before 2016. He had transferred there for work, leased a residence, opened local utility accounts, obtained a resident card and local driver's license, and filed a Country A tax return. Keeping an older Virginia driver's license did not outweigh those actions, particularly because it had been renewed before the move.

As a nonresident, the taxpayer could be taxed only on Virginia-source income. Under 4 U.S.C. § 114, Virginia could not impose income tax on his retirement distribution received while he was no longer a Virginia resident or domiciliary.

The taxpayer's amended return and corrected wage statement were sent to audit staff for verification, after which the assessment would be adjusted and a refund issued as warranted.

Common questions

Did retaining a Virginia driver's license prevent a domicile change? No. It was evidence to consider, but the ruling found the taxpayer's other actions sufficiently established the foreign domicile.

Was Virginia withholding from the retirement distribution correct? No. The ruling says Virginia tax was erroneously withheld because the recipient was no longer a Virginia resident.

Citations and references

• Va. Code §§ 58.1-302 and 58.1-325
• 4 U.S.C. § 114
• Va. Code § 46.2-323.1
• P.D. 00-151, P.D. 02-149, and P.D. 13-95

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-110

Original ruling text

June 6, 2018

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 “Taxpayer”) for the taxable year ended December 31, 2016.

FACTS

The Taxpayer filed a Virginia nonresident individual income tax return for the 2016 taxable year. Under review, the Department requested additional information to determine the Taxpayer's residency situs. Based on the information provided, the Department determined the Taxpayer was taxable as a domiciliary resident of Virginia and issued an assessment. The Taxpayer paid the assessment and filed an appeal, contending he was a resident of * (Country A).

DETERMINATION

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. 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 has 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.

The information provided indicates that the Taxpayer was transferred by his employer from Virginia to Country A in July 2014. He leased a personal residence in Country A and opened accounts with local utility companies. He also obtained a Country A resident card and a Country A driver's license. In addition, he filed a Country A tax return for the 2016 taxable year.

The Taxpayer also maintained some connections with Virginia. Information returns such as W-2s and 1099s were mailed to him at a Virginia address. In June 2014, however, the Taxpayer had already sold the residence to which these returns were addressed. He also retained his Virginia driver's license.

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 Taxpayer had already renewed his Virginia driver's license in April 2013, while he was still a resident of Virginia. Although he retained it while he was living and working in Country A, he also obtained a Country A driver's license as well.

The Department acknowledges that a change of domicile occurs as part of a process in which no single factor is dispositive. After carefully considering all of the evidence presented, I find that the Taxpayer undertook acts to sufficiently abandon his Virginia domicile and acquire domicile in Country A prior to the 2016 taxable year.

Taxability of Qualified and Nonqualified Distributions

Under Virginia Code § 58.1-325, individuals who are neither domiciliary nor actual residents of Virginia and have income from Virginia sources are taxed as nonresidents. Virginia Code § 58.1-302 limits the term “income and deductions from Virginia sources” to the items of income, gain, loss and deductions attributable to the ownership of property in Virginia or the conduct of a business, trade, profession or occupation in Virginia. In addition, Public Law (P.L.) 104-95, codified at Title 4 U.S.C. § 114, prohibits a state from imposing an income tax on any retirement income received by an individual who is not a resident or domiciliary of that state. Under the Department's interpretation, P.L. 104-95 prohibits the retirement income from being included in FAGI until the taxpayers actually receive that income. See P.D. 13-95 (6/11/2013).

The information provided indicates that Virginia income tax was erroneously withheld from a retirement distribution the Taxpayer received in 2016 while he was no longer a Virginia resident. An amended return filed by the Taxpayer accounts for this error and includes a corrected W-2 issued by the Taxpayer's employer for that year. This return will be forwarded to the audit staff to verify that it is otherwise correct. The assessment will then be adjusted accordingly, and a refund will be issued as warranted.

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/1568.A