Could taxpayers exclude a 2013 retirement distribution by claiming the husband lived elsewhere or that another state had taxed the underlying contributions?

Plain-English summary

A couple argued a 2013 retirement distribution escaped Virginia tax because the husband was not yet resident. Alternatively, they claimed another state had taxed the plan contributions.

Virginia rejected both positions. Their residence evidence placed them in Virginia throughout 2013, and their tax records did not prove previously taxed contributions.

Residency evidence

The couple reported moving to Virginia in July 2012 and filed as full-year residents for 2013. The husband spent 275 nights in Virginia, exceeding the actual-resident threshold, and the couple established a home, licenses, vehicle registrations, and voter registrations.

Virginia viewed domicile as a process beginning before every formal document was obtained. Evidence supported a move to State A only in July 2014, not 2013.

Retirement subtraction

Virginia permits a subtraction only to the extent qualifying federally deductible contributions were taxed by another state. The taxpayers submitted State B returns, not State A substantiation, and those records indicated no State B tax on the contributions.

What this means for you

• Your filing history and day count can establish actual residence.
• Later licenses do not necessarily delay the start of domicile.
• Preserve other-state returns showing contribution-level tax treatment.
• The taxpayer bears the burden for subtraction eligibility.

Common questions

Q: Did the October 2013 license date start Virginia residency?

A: No. Virginia treated the broader domicile process and actual day count as controlling.

Q: Was another state's general law enough to prove the subtraction?

A: No. The taxpayers needed evidence their own contributions were actually taxed.

Citations and references

• Va. Code § 58.1-302 — residency
• Va. Code § 58.1-322.02(11) — retirement subtraction
• Related Virginia rulings cited: P.D. 16-138 and P.D. 17-149

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 19-19

Original ruling text

March 26, 2019

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, 2013. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayers, a husband and wife, filed a Virginia resident individual income tax return for the 2013 taxable year, and claimed a subtraction for retirement income attributable to a distribution on which the contributions were previously taxed by another state. The Department audited the Taxpayers and requested additional information to verify that the contributions met the requirements for the subtraction. When an adequate response was not received, the Department denied the subtraction and issued an assessment. The Taxpayers appealed, contending the distribution was not subject to Virginia income tax because the husband was not a resident of Virginia at the time the distribution was made. In the alternative, the Taxpayers contend that if they were residents of Virginia, they were entitled to a subtraction because the contributions to the retirement plan had been previously taxed by another state.

DETERMINATION

Domicile

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.

The Taxpayers contend the husband was a resident of * (State A) in 2013. No documentation has been provided indicating the husband resided in State A before 2014. The Taxpayers have provided significant evidence to show they established domicile in State A in July 2014. Prior to moving to Virginia in 2012, the Taxpayers lived in *** (State B), where they filed a resident return for 2011 and a part year return for 2012.

The appeal also argues that the husband was not in Virginia for more than 183 days in 2013 and, thus, could not be considered a Virginia resident until he obtained his Virginia driver’s license in October 2013. The Taxpayers claim the distribution was not subject to Virginia income tax because it was received prior to October 2013.

The information submitted during the appeal and the Taxpayers’ filing history with Virginia contradict these assertions. The Taxpayers filed a Virginia part-year resident income tax return for the 2012 taxable year, reporting a move-in date of July 2012, consistent with the start of the husband’s graduate degree program at a Virginia university. On this return, the Taxpayers reported a portion of the husband’s income was received while they were residing in Virginia. The Taxpayers filed as residents for the entire 2013 taxable year, consistent with their status as either actual or domiciliary residents for the entire year. Their filing status is supported by the questionnaire, which indicates the husband spent 275 nights in Virginia in 2013, making them actual residents.

The Taxpayers also took a number of actions consistent with establishing domicile in Virginia. They obtained a permanent place of abode, driver’s licenses, vehicle registrations and voter’s registrations in Virginia. The fact that the husband did not obtain a Virginia driver’s license until October 2013 does not change the result. The Department considers a change of domicile to be part of a process and the change is generally considered to have occurred at the beginning of that process even when official connections such as driver’s licenses, vehicle registrations and voter’s registrations were not obtained until later. See Public Document (P.D.) 16-138 (6/24/2016). In particular, the Department considers obtaining a Virginia driver’s license and registering to vote in Virginia to be very persuasive evidence of domiciliary intent.

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).

With regard to eligibility to vote, Article II, Section 1 of the Constitution of Virginia states in relevant part as follows:

In elections by the people, the qualifications of voters shall be as follows: Each voter shall be a citizen of the United States, shall be eighteen years of age, shall fulfill the residency requirements set forth in this section, and shall be registered to vote pursuant to this article.

The residence requirements shall be that each voter shall be a resident of the Commonwealth and of the precinct in which he votes. Residence, for all purposes of qualification to vote, requires both domicile and a place of abode.

The domicile and place of abode requirement found in the Constitution of Virginia is also reflected in the definition of “residence” or “resident” used in Virginia election statutes. See Virginia Code § 24.2-101.

Retirement Subtraction

In the alternative, the Taxpayers contend that even if the distribution is subject to Virginia income tax, the contributions to the retirement account had been subject to tax in State A but were deductible for federal income tax purposes and thus were eligible for the subtraction under Virginia Code § 58.1-322.02 11.

Virginia Code § 58.1-301 provides, with certain exceptions, 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. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia . 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). Income properly included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Virginia Code § 58.1-322.02. Virginia Code § 58.1-322.02 11 provides a subtraction for:

Any income received during the taxable year derived from a qualified pension, profit-sharing, or stock bonus plan as described by § 401 of the Internal Revenue Code, an individual retirement account or annuity established under § 408 of the Internal Revenue Code, a deferred compensation plan as defined by § 457 of the Internal Revenue Code, or any federal government retirement program, the contributions to which were deductible from the taxpayer’s federal adjusted gross income, but only to the extent the contributions to such plan or program were subject to taxation under the income tax in another state.

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. 82-0849 (10/27/1983).

The Taxpayers point out that under State A law contributions to a retirement plan were not deductible for State A income tax purposes, even if they were deductible for federal income tax purposes. If so, the Taxpayers would be eligible for the subtraction under Virginia Code § 58.1-322.02 11 to the extent they made any such contributions. It is incumbent upon the taxpayer to prove they are entitled to a subtraction reported on a Virginia return. As such, the Department requires evidence that the contributions were taxed in the other state. See P.D. 17-149 (8/14/2017), P.D. 17-134 (7/19/2017), 17-124 (6/29/2017), and P.D. 17-110 (6/21/2017). The information provided, however, does not support that fact the Taxpayers’ contributions were ever subject to tax in State A. When asked for supporting documentation on appeal, the Taxpayers submitted several years’ of returns from State B, not State A. A review of the federal and State B returns provided indicates the contributions were not subject to tax in State B. As such, these contributions were not eligible for the subtraction.

CONCLUSION

Based on the information provided, the Taxpayers’ requested relief cannot be granted, and the assessment is upheld. The Taxpayers will receive an updated bill, which will include accrued interest to date. The Taxpayers should remit payment within 30 days of the bill date 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 contact *, in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

Related Documents

00-151

02-149

16-138

17-110

17-124

17-134

17-149