I lived and worked in Virginia all year but funded my IRA years earlier in a state with no income tax, and I treated half of it as my spouse's community property -- can I subtract any of my Virginia IRA distribution, and can I get interest waived because a Department employee gave my preparer wrong advice over the phone?

Plain-English summary

A taxpayer lived and worked in Virginia for the entire 2018 taxable year but claimed a subtraction on her Virginia return for an IRA distribution, arguing she'd retained "official residence of record" in another state ("State A") where the IRA's rollover contributions had originally been made. When the Department disallowed the subtraction on audit, she raised four separate arguments on appeal -- each one addressed and rejected in this ruling.

First, on residency: it didn't matter whether she was domiciled in State A, because she'd actually lived and worked in Virginia the whole year, making her an "actual resident" subject to Virginia tax on all her income regardless of domicile. Second, on the subtraction itself: Virginia's retirement-income subtraction for IRA distributions applies only to the extent the original contributions were actually taxed by another state. Because State A has no income tax, her contributions were never taxed by any state -- so no subtraction applied, even though she'd also gotten no state tax deduction benefit when she made the contributions (the statute doesn't care about the benefit side, only whether the contributions were previously taxed). Third, on community property: she argued the IRA was community property under State A law, so only half the distribution should be hers. But federal law taxes IRAs as the separate income of the account holder regardless of state community-property rules, so the Department included the entire distribution in her income. Fourth, on interest relief: she said her tax preparer got oral advice from a Department employee (during a phone call, with contemporaneous notes) that the distribution wouldn't be taxable. Virginia's erroneous-advice relief statute requires both a specific WRITTEN request from the taxpayer and WRITTEN advice from the Department -- a phone call doesn't satisfy either half, no matter how well-documented. Finally, she argued Virginia's tax reached beyond what its court "long-arm statute" allows; the Department noted that statute governs civil court jurisdiction over people, not the separate question of tax liability, so it was irrelevant. The assessment was upheld in full.

What this means for you

Anyone who funded a retirement account while living in a no-income-tax state, then took distributions as a Virginia resident

Virginia's subtraction is about whether the CONTRIBUTIONS were previously taxed by another state -- not whether you got a tax benefit for making them. If you contributed in a state with no income tax, the distribution generally won't qualify for this subtraction once you're a Virginia resident, even though you're arguably being taxed on money that was never given a deduction anywhere.

Divorced or separated taxpayers with a community-property retirement account from another state

Don't assume a community-property division under another state's law will split an IRA distribution for federal or Virginia tax purposes. IRC § 408(g) treats an IRA as the account owner's separate income regardless of state community-property rules, so the full distribution can land on one spouse's return.

Anyone relying on advice from a phone call with a tax agency employee

If you want interest or penalty protection based on advice from the Department, get it in writing -- both your request and the Department's response. Detailed notes from a phone call, even taken at the time, won't satisfy Virginia's erroneous-written-advice abatement statute.

Common questions

Q: If I didn't get any state tax deduction for my IRA contributions, can I still claim Virginia's subtraction when I take a distribution?
A: Not under this ruling's reasoning. The subtraction depends on whether the contributions were previously TAXED by another state, not on whether you received a tax benefit when you made them. Contributions made in a state with no income tax don't qualify either way.

Q: Does a community-property agreement or state law split an IRA distribution between spouses for tax purposes?
A: No. Under IRC § 408(g), an IRA is taxed as the separate income of the account holder regardless of community-property rules, so the full distribution can be taxed to just one spouse.

Q: What does it take to get interest waived because of bad advice from the Department?
A: You need a specific WRITTEN request from you (or your representative) and WRITTEN advice back from the Department, based on facts that match your actual situation. Oral advice over the phone -- even with contemporaneous notes -- doesn't qualify under Va. Code § 58.1-1835.

Citations and references

• Va. Code § 58.1-302 (domiciliary resident and actual resident defined)
• Va. Code § 58.1-301 (Virginia conforms to IRC terminology and starts VTI computation with FAGI)
• Va. Code § 58.1-322.02 11 (subtraction for certain IRA distributions, only to the extent contributions were taxed by another state)
• Va. Code § 58.1-1835 (interest/penalty abatement for erroneous WRITTEN advice given in response to a taxpayer's specific WRITTEN request)
• Va. Code § 8.01-328.1 (Virginia's long-arm statute governs court jurisdiction over persons, not tax liability)
• IRC § 408(g) (IRAs are taxed without regard to community property law)
• New York ex rel. Cohn v. Graves, 300 U.S. 308 (1937) (a state may tax all income of its residents, even income earned outside the state)
• Bunney v. Comm'r of Internal Revenue, 114 T.C. 259 (U.S.T.C. 2000) (IRA distributions treated as separate income despite community property law)

Subject

Subtractions : Retirement Income - Contribution must be taxed; Federal Adjusted Gross Income (FAGI) : Community Property - IRA Distribution is Separate Income; Administration : Written Advice - Advice Must Be in Writing

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-12

Original ruling text

January 25, 2022

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, 2018.

FACTS

The Taxpayer filed a Virginia resident income tax return for the 2018 taxable year claiming a subtraction for an individual retirement account (IRA) distribution. Under audit, the Department disallowed the subtraction and issued an assessment. The Taxpayer filed an appeal in which she makes a number of arguments in seeking adjustments to the assessment. She asserts that the distribution was earned in * (State A). Further, she contends that, because State A did not have an income tax and she did not receive a state tax benefit when making contributions, no other state should penalize her for taking out a distribution. In addition, she questions whether Virginia has the ability to tax that half of the distribution she claims was considered the community property of her spouse in State A. In the alternative, she requests an interest waiver on the basis that her tax preparer received erroneous advice regarding the taxation of the distribution from the Department and that had he not received that advice, she would have paid the tax at that time and not incurred additional interest. Finally, she argues that imposition of tax in this case goes beyond the actions allowed by Virginia’s “long-arm statute.”

DETERMINATION

Taxation of Virginia Residents

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. 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.

The Taxpayer asserts she retained State A as her official residence of record and the IRA was composed primarily of rollover contributions from an employer plan funded while she was a State A resident. By “official residence of record,” the Department assumes the Taxpayer meant that she considered State A to be her state of domicile. The Taxpayer, however, lived and worked in Virginia for the entire 2018 taxable year. She was therefore taxable as an actual Virginia resident regardless of whether she retained a State A domicile. It is well-established that a state may tax all the income of its residents, even income earned outside the taxing jurisdiction. In New York ex rel. Cohn v. Graves , 300 U.S. 308, (1937), the United States Supreme Court explained “[t]hat the receipt of income by a resident of the territory of a taxing sovereignty is a taxable event is universally recognized.”

Retirement Subtraction

Virginia Code § 58.1-301 provides 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. 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 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 Chapter 3 of Title 58.1 of the Code of Virginia .

Virginia Code § 58.1-322.02 11 provides a subtraction for certain distributions received from “an individual retirement account or annuity established under IRC § 408 . . . 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.”

The Taxpayer asserts that she should be eligible to subtract her IRA distribution as she did not obtain a state tax benefit when funds were contributed to the IRA because she lived in State A which did not have a state income tax. Regardless of whether the Taxpayer received a state tax benefit, the contributions were not subject to a state income tax as required by the clear language of the statute. The distribution was, therefore, not eligible for the subtraction.

Community Property

The Taxpayer also claims that because the IRA was community property under State A law, only one-half of the distribution should be taxable to her and the remaining one-half to her spouse. Because the Taxpayer’s spouse was not subject to Virginia income tax in the 2018 taxable year, this would mean only one-half of the distribution would be taxable in Virginia. Under IRC § 408(g), IRAs are taxed without regard to community property laws. This means that the Taxpayer’s IRA distribution was treated as her separate income for purposes of determining her separate FAGI. See also Bunney v. Comm’r of Internal Revenue , 114 T.C.259, 114 T.C. 17 (U.S.T.C. 2000). Because the computation of Virginia taxable income begins with FAGI, the entire distribution was taxable by Virginia.

Written Advice

The Taxpayer stated that her preparer relied on advice received during a telephone call with a Department agent during which the agent allegedly told the preparer that the IRA distribution would not be taxable in Virginia. The Taxpayer submitted a copy of contemporaneous notes taken by her preparer during this conversation. Virginia Code § 58.1-1835 provides that the Tax Commissioner shall abate any portion of tax, interest and penalty attributable to erroneous written advice by the Department under the following conditions:

The written advice was reasonably relied upon by the taxpayer and was in response to a specific written request by the taxpayer;

The portion of the penalty or tax did not result from a failure by the taxpayer to provide adequate or accurate information; and

The facts of the case described in the written advice and the request thereof are the same, and the taxpayer’s business or personal operations have not changed since the advice was rendered.

Based on the above statutory provision, the erroneous advice must be reasonably relied upon by the taxpayer, and such advice must be in writing. In addition, such written advice must be provided based on a specific written request by a taxpayer who has provided sufficient and accurate facts so that the Department may issue a correct decision. In this case, the Taxpayer’s preparer did not make a written request as to whether she could claim the subtraction. Further, no written advice was provided by a Department tax official. The Taxpayer, accordingly, is not entitled to abatement of the assessment or accrued interest based on the reliance on erroneous advice.

Long-Arm Statute

The Taxpayer argues that Virginia’s taxation of her IRA distribution goes beyond the actions permitted under Virginia’s “long-arm statute.” Virginia’s long-arm statute, codified at Virginia Code § 8.01-328.1, governs the circumstances under which a Virginia court can exercise jurisdiction over a person. This statute has no bearing on whether a person is subject to taxation under Title 58.1 of the Code of Virginia . Even if the long-arm statute were relevant to the case at hand, the Virginia courts would have jurisdiction over the Taxpayer for causes of action relating to her incurring a liability for tax in Virginia. See Virginia Code § 8.01-328.1 A 10.

CONCLUSION

Because the Taxpayer was an actual resident of Virginia for the 2018 taxable year, she was subject to tax on her Virginia taxable income. The Taxpayer’s IRA distribution was properly included in her Virginia taxable income and was not eligible for any subtraction. State A’s community property laws also did not affect the taxation of the distribution under Virginia law. Further, the Department is unable to abate the assessment based on the Taxpayer’s alleged reliance on erroneous advice or the application of Virginia’s long-arm statute.

Based on the foregoing, the Taxpayer’s request for relief cannot be granted and the assessment is upheld. An updated bill will be issued shortly. The Taxpayer should remit payment of the balance due within 30 days of the bill date to avoid the accrual of additional interest and possible collections actions.

Last, the Taxpayer requests information concerning further remedies beyond this appeal. The Taxpayer is referred to Title 23 of the Virginia Administrative Code 10-20-165 F for information regarding a request for reconsideration of this decision and to Virginia Code § 58.1-1825 for information regarding an application for relief that may be filed with a Virginia circuit court.

The Code of Virginia sections and regulations 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/3936.X