Could a Virginia resident claim all joint itemized deductions when her nonresident military spouse's income funded a joint bank account?

Subject

Jointly paid deductions were allocated between resident and military spouse

Plain-English summary

Virginia required the resident wife to allocate jointly paid itemized deductions in proportion to the couple's income rather than claim all of them on her separate state return. The husband was a nonresident member of the armed forces with no Virginia-source income, and the couple filed jointly for federal purposes but not in Virginia.

Virginia allowed separate accounting when a spouse could show an expense was paid from that spouse's own funds. Here, the deductible expenses came from a joint bank account. Without records tracing them to the wife's funds, 23 VAC 10-110-190(B) required proportional allocation between the spouses.

The wife argued that including military pay in the ratio used the nonresident service member's compensation to increase her tax, contrary to federal law. Virginia rejected that argument. The allocation determined ownership of jointly paid deductions; it did not tax the husband's military income.

The assessment was upheld. The ruling also warned that federal military-spouse domicile rules had been amended for tax years beginning in 2009.

What this means for you

• Resident/nonresident spouses filing separately should trace each deduction to the spouse who actually paid it.
• Joint-account payments may force an income-based allocation when separate ownership cannot be shown.
• Using military income in an allocation ratio was not treated as taxing that income here.
• Later military-spouse amendments make the exact tax year important.

Common questions

Why could the wife not claim all deductions?

The expenses were paid from a joint account, not shown to come solely from her funds.

Did Virginia tax the husband's military pay?

No. It used income to allocate deductions and said the pay itself was not taxed.

What happened to the assessment?

It was upheld.

Citations and references

• Va. Code § 58.1-326.
• 23 VAC 10-110-190(B).
• 50 U.S.C. § 571(d), as cited in the ruling.
• IRS Revenue Ruling 71-268.
• Howell's Motor Freight, Inc. v. Virginia Department of Taxation, Roanoke Cir. Ct., Law No. 82-0846 (Oct. 27, 1983).
• Virginia Public Document 95-251 and Virginia Tax Bulletins 9-10 and 10-1.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-54

Original ruling text

May 7, 2010

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, 2006. I apologize for the delay in the Department's response.

FACTS

The Taxpayer, a resident of Virginia, was married to a nonresident member of the armed forces. For the 2006 taxable year, the couple filed a joint federal income tax return and the Taxpayer filed a separate Virginia income tax return. The spouse did not file a Virginia return because he had no income from Virginia sources. The Taxpayer allocated all of itemized deductions claimed on the joint federal return to her Virginia return.

The Department found that payments for the expenses claimed as itemized deductions came from a joint bank account. As a result, the itemized deductions were adjusted based on the Taxpayer's proportion of the joint income and an assessment was issued. The Taxpayer appeals the assessment, contending that the Department's adjustment increases the Taxpayer's Virginia income tax liability in violation of the Service Members Civil Relief Act.

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.) When a resident/nonresident married couple does not elect to determine their Virginia taxable income as if both were residents, Title 23 of the Virginia Administrative Code (VAC) 10-110-190 B provides:

In the case of a married couple, one of whom is a nonresident of Virginia filing separately, each spouse must account separately for items of income deductions, and exemptions. Where such items cannot be accounted for separately, deductions and personal exemptions must be proportionally allocated between each spouse based upon income attributable to each. (Emphasis added.)

The Taxpayer asserts that the Department lacked authority to adjust her itemized deductions because the spouse's military pay was used to proportionally adjust the deductions. Under the Service Members Civil Relief Act (50 U.S.C. § 571), a state may not tax the income of a member of the armed services who maintains his or her domicile in another state. Specifically, 50 U.S.C. § 571(d) states:

A tax jurisdiction may not use the military compensation of a nonresident service member to increase the tax liability imposed on other income earned by the nonresident service member or spouse subject to tax by the jurisdiction.

According to the Taxpayer, Title 23 VAC 10-110-190 B, as applied in this case, is tantamount to an increase in Virginia tax liability based on a nonresident individual's military pay in violation of the Service Members Civil Relief Act.

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).

Consistent with Internal Revenue Service Revenue Ruling (Rev. Rul.) 71-268, 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 Public Document (P.D.) 95-251 (9/29/1995). In fact, the documentation that the Taxpayer provided to the Department indicates that the deductible expenses were paid out of a bank account held jointly with her husband. As such, the payments were not made out of the Taxpayer's funds.

Based on the foregoing, the Department's adjustments to the Taxpayer's 2006 Virginia income tax return are correct, and the Taxpayer's application for relief is denied. Accordingly, the assessment is upheld and is now due and payable. An updated bill notice will be issued shortly to the Taxpayer.

Please note that the Service Members Civil Relief Act was amended, effective for 2009 taxable year and thereafter, to provide that a spouse can neither lose nor acquire domicile or residence in a state when the spouse is present in the state solely to be with the service member in compliance with the service member's military orders if the residence or domicile is the same for both the service member and spouse. See Tax Bulletin (VTB) 9-10 (11/12/2009) and VTB 10-1 (1/29/2010) for more information on this change.

The Code of Virginia sections, regulation and the public document cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department of Taxation's web site. If you have any questions about this determination, please contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3809740220.B