Could a commissioned officer count all of July and taxable hazardous-duty pay in Virginia's 2013 combat-zone subtraction?

Plain-English summary

The husband, a commissioned officer, served in a combat zone from part of July through December 2013. Virginia initially omitted July when calculating the couple's combat-pay subtraction because the relevant pay indicators first appeared on the August earnings statement.

The August statement's official notes confirmed July service, and federal law treated any part of a day in a combat zone as qualifying the entire month. Under the 2013 rules, the subtraction also included taxable hazardous-duty pay and the portion of basic pay above the federal maximum-enlisted exclusion. Virginia accepted the taxpayers' calculation and directed that a refund be issued as warranted.

Citations and references

• Va. Code § 58.1-322.02 13 (formerly Va. Code § 58.1-322 C 21)
• IRC § 112(b) and § 112(c)(5)
• 37 U.S.C. §§ 310 and 351

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-28

Original ruling text

March 15, 2018

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek a refund of individual income tax paid by * (the “Taxpayers”) for the taxable year ended December 31, 2013.

FACTS

The Taxpayers, a husband and wife, filed a Virginia resident income tax return for the 2013 taxable year and claimed a combat pay subtraction. Under review, the Department adjusted the subtraction, resulting in additional tax due. Before the Department issued an assessment, the Taxpayers made a payment in excess of the proposed assessment amount, and the Department issued a refund for the difference. The Taxpayers appealed to claim a refund of the additional tax paid, contending that the Department miscalculated the subtraction.

DETEMINATION

To the extent included in federal adjusted gross income (FAGI), Virginia Code § 58.1-322.02 13 (formerly Virginia 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. Under Internal Revenue Code (IRC) § 112, the amount eligible for exclusion depends upon rank. Personnel below the rank of commissioned officer may exclude all compensation for service in a combat zone or a qualified hazardous duty area. Commissioned officers may exclude up to the “maximum enlisted amount” for any month under the same circumstances.

For the 2013 taxable year, IRC § 112 (c)(5) defined the “maximum enlisted amount” as the sum of:

(A)the highest rate of basic pay payable for that month to any enlisted member of the Armed Forces of the United States at the highest pay grade applicable to enlisted members, and

(B) in the case of an officer entitled to special pay under section 310, for such month, the amount of such special pay payable to such officer for such month.

The subtraction provided by Virginia Code § 58.1-322.02 13 exempts the portion of the officer's combat duty or a qualified hazardous duty pay included in the FAGI. The husband was a commissioned officer whose rate of basic pay exceeded the highest rate of basic pay payable to enlisted members. Thus, the amount of basic pay earned in the combat zone and included in FAGI was equivalent to the difference in the pay rates multiplied by the number of months in the combat zone. The husband contends he served in the combat zone from July to December 2013. The Department's computation, however, excluded the basic pay the husband earned in July. The husband states that he did not begin serving in the combat zone until towards the end of July and the delay in payroll reporting caused certain indicators of combat duty such as hostile fire/imminent duty pay and hazardous duty pay to appear on his August 2013 leave and earning statement (LES) for the first time. A careful review of the official notes on his August 2013 LES confirms that the husband began serving in the combat zone in July. Any service in a combat zone for a part of one or more days entitles the servicemember to a combat pay exclusion for the entire month. See IRC § 112(b).

In addition, the husband earned the hostile fire/imminent danger pay described in Title 37 U.S.C. § 310. Such income was excluded from FAGI as a part of the maximum enlisted amount. The husband also earned hazardous duty pay described in Title 37 U.S.C. § 351. Although such amounts are currently included in the IRC § 112 definition of the maximum enlisted amount pursuant to P.L. 114-328 (12/23/2016), they were not included under the version of IRC § 112 in effect for the 2013 taxable year. Thus, the amount the husband earned for hazardous duty pay while serving in the combat zone was included in FAGI.

Accordingly, the allowable subtraction was equivalent to the sum of the cumulative difference in the monthly pay rates described above computed over the time the husband served in the combat zone, July through December, plus the total amount of taxable hazardous duty pay earned over that time.

The Taxpayers' computation provided with the appeal indicates the correct amount of the allowable subtraction. The case will be returned to the audit staff to make the appropriate adjustment to the return and issue a refund as warranted.

The Code of Virginia sections 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/1404.M