Could a Virginia spouse claim all joint itemized deductions and dependent exemptions when the military spouse was a nonresident?

Plain-English summary

A Virginia resident filed separately from her nonresident military spouse but claimed all itemized deductions and dependent exemptions from their joint federal return. She did not show that she alone paid the deductible expenses, so Virginia upheld proportional allocation of the itemized deductions based on the spouses' income.

Virginia allowed both dependent exemptions, however. Claiming them on her separate Virginia return, when the husband did not claim them on another state return, was treated as evidence of the spouses' mutual allocation agreement.

Citations and references

• Va. Code §§ 58.1-326, 58.1-324, and 58.1-301
• 23 VAC 10-110-190 B
• 50 U.S.C. §§ 3901 et seq. and 4001(e)
• P.D. 95-251, P.D. 99-82, P.D. 10-199, and P.D. 11-180

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-42

Original ruling text

April 3, 2018

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you appeal the individual income tax assessment issued to * (the “Taxpayer”) for the taxable year ended December 31, 2007. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer, a resident of Virginia, was married to a nonresident member of the armed forces. For the 2007 taxable year, the couple filed a joint federal income tax return, and the Taxpayer filed a separate Virginia income tax return. The Taxpayer's spouse, a military service member, did not file a Virginia return because he had no income from Virginia sources. On her Virginia return, the Taxpayer claimed a deduction for the full amount of itemized deductions reported on joint federal return and three personal exemptions. Under audit, the Department adjusted the Taxpayer's itemized deductions and exemptions to reflect her percentage of the couple's joint income and issued an assessment for additional tax and interest. The Taxpayer filed an appeal, contending the Department's apportioning of deductions and exemptions violates the provisions of the Servicemember's Civil Relief Act (SCRA), codified at 50 U.S.C. § 3901 et seq .

DETERMINATION

Virginia Code § 58.1-326 states, “if husband or wife is a resident and the other is a nonresident, separate taxes shall be determined on their separate Virginia taxable incomes on such single or separate forms as may be required by the Department, unless both elect to determine their joint Virginia taxable income as if both were residents.” [Emphasis added.]

In cases where a Virginia resident and nonresident spouse file separate state income tax returns, Virginia Code § 58.1-326 grants the Department authority to modify the allocation of exemptions and deductions claimed for federal income tax purposes under Virginia Code § 58.1-324. Title 23 of the Virginia Administrative Code (VAC) 10­-110-190 B provides that each spouse must account separately for items of income, deductions, and exemptions. However, when such items cannot be accounted for separately, deductions and personal exemptions must be proportionally allocated between each spouse based upon the income attributable to each. See also Public Document (P.D.) 95-251 (9/29/1995).

Dependent Exemptions

The Taxpayer claimed all of the dependent exemptions reported on the joint federal return. When married taxpayers file a joint federal return, but file separately for Virginia, Virginia Code § 58.1-324 C 5 provides:

Personal exemptions properly allowable for federal income tax purposes shall be allocated for Virginia income tax purposes as husband and wife may mutually agree; however, exemptions for the taxpayer and spouse together with exemptions for old age and blindness must be allocated respectively to the spouse to whom they relate.

In P.D. 99-82 (4/21/1999), the Department ruled that when a spouse claims dependent exemptions on his/her separate state income tax return, such actions are considered by the Department to be separate accounting and evidence of a mutual agreement between the husband and wife. See also P.D. 10-199 (8/31/2010). In this case, the Taxpayer claimed the dependent exemptions on the Virginia return and it does not appear the husband claimed them on his state return.

Itemized Deductions

Pursuant to Virginia Code § 58.1-324, if a couple is unable to separately account for deductions and exemptions, they must be allocated proportionally between each spouse based on income attributable to each. See Title 23 VAC 10-110-190 B. Because the Taxpayer has not provided sufficient evidence of separate accounting for the itemized deductions, Title 23 VAC 10-110-190 B requires a proportional allocation of such deductions based on federal adjusted gross income (FAGI). See P. D. 11-180 (11/1/2011).

The Taxpayer has provided no evidence to show that she was solely responsible for paying for all of the itemized deductions claimed on the federal income tax return. Instead, she asserts the Department's allocation policy is prohibited by the SCRA. S pecifically, 50 U.S.C. § 4001(e) prohibits a taxing jurisdiction from using military compensation of a nonresident service member to increase a tax liability imposed on such nonresident service member or their spouse. The Taxpayer argues the Department's policy is tantamount to an increase in the Virginia tax burden on a family based on a nonresident service member's military pay.

By reason of their character as legislative grants, 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). Further, in Lawrence Cam Jr. v. W.H. Forst, Tax Commissioner of the Commonwealth of Virginia , 249 Va. 66, 453 S.E.2d 274 (1995), the Virginia Supreme Court stated that if a statute is clear and unambiguous, a court must accept its plain meaning and not resort to extrinsic evidence or rules of construction.

Consistent with Internal Revenue Service Revenue Ruling (Rev. Rul.) 71-268 (1971-1 C.B. 58), an itemized deduction is allowable under Title VAC 10-110-190 to the spouse who can account for the payment by demonstrating the payment was made out of his or her funds. However, if records are inadequate to facilitate such an accounting, the regulation requires an allocation of itemized deductions in proportion to income. The Department finds a proportionate determination to be fair, rational and equitable in the absence of separate accounting. See P.D. 95-251. Thus, contrary to the Taxpayer's claim that Virginia's regulation increases the Virginia tax liability as a result of using the service member spouse's income to compute allowable itemized deductions, Virginia's method is based squarely on federal law to which it conforms. See Virginia Code § 58.1-301.

Under the IRC, a deduction resulting from a payment of a joint obligation is allowable to whichever of the parties liable for such obligation actually makes the payment out of their own funds. See Al Jolson v. Comm'r , 3 T.C. 1184 (1944) and Mark B. Higgins v. Comm'r , 16 T.C. 140, 143-144 (1951). In P.D. 95-251, the Department expressed Virginia's conformity to the federal statutory regime with regard to itemized deductions. Further, where individuals have not been able to show clearly which spouse was entitled to a particular deduction, the deduction has been split between the husband and wife. See also Rev. Rul. 75-347 (1975-2 C.B. 70) and Priv. Ltr. Rul. 82­-46-073 (Aug. 17, 1982). Instead of increasing the Taxpayer's tax liability based on the nonresident service member's compensation, the Department adjusted the deductions to which the Taxpayer is entitled for Virginia income tax purposes in the same manner it would for any married couple filing on separate returns in Virginia.

Further, the United States Supreme Court (the “Court”) has decided that a state may confine deductions in a manner as Virginia does. See Travis, Comptroller of the State of New York v. Yale & Towne Mfg. Co. , 252 U.S. 60, 40 S. Ct. 228 (1920). In that case, the Court held that there is no unconstitutional discrimination against citizens of other states in confining the deductions of expense to such that are in connection with income arising from the taxing state.

CONCLUSION

Absent evidence of separate accounting, the Department's adjustment to the Taxpayer's itemized deductions is upheld. The Taxpayer, however, was entitled to claim both dependent exemptions on her Virginia income tax return.

Accordingly, the 2007 assessment will be returned to the auditor to be adjusted in accordance with this determination and the enclosed schedule. A revised bill will be issued, and payment should be made within 30 days of the date of the revised bill to avoid the accrual of additional interest.

The Code of Virginia sections, regulations, 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 c ontact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/508.o