Did the 2009 Military Spouses Residency Relief Act exempt a service member's minor child from Virginia tax for 2006?

Subject

2009 military-spouse residency relief did not cover a child or 2006 income

Plain-English summary

Virginia held that the Military Spouses Residency Relief Act did not exempt a service member's minor child from Virginia tax for 2006. The child lived in Virginia with her parents for more than 183 days and had income reported by the IRS.

A minor generally shared the parents' domicile, which was outside Virginia here. But domicile was not the only route to resident taxation. A person maintaining a Virginia abode for more than 183 days could be an actual resident and taxed on all income, including investment income sourced outside Virginia.

The parents argued that the 2009 Act preserved the service member's domicile for dependents. Virginia found two problems: the provision expressly addressed a qualifying spouse, not children, and it applied for 2009 and later rather than retroactively to 2006.

The Department's assessment used available information. Virginia gave the child 30 days to file a full-year resident return and payment so the actual taxable income could be calculated.

What this means for you

• Domiciliary residence and actual residence are separate Virginia tests.
• A dependent can retain another domicile yet become an actual Virginia resident through presence and abode.
• A resident's out-of-state investment income can still be taxed by Virginia.
• Military-family protections depend on who is covered and the law's effective tax year.

Common questions

Did the child share the service member's domicile?

Potentially yes, but that did not prevent actual-resident status.

Why did the 2009 Act not apply?

The ruling said it covered spouses rather than dependents and was effective for 2009 and later.

What filing was required?

A full-year Virginia resident return for 2006 within 30 days.

Citations and references

• Va. Code § 58.1-302.
• 50 U.S.C. § 571(a)(2), as cited in the ruling.
• People of the State of New York ex rel. Cohn v. Graves, 300 U.S. 308 (1937).
• Mary T. Ryan v. Commonwealth of Virginia, 169 Va. 414, 193 S.E. 534 (1937).
• Virginia Public Documents 01-185 and 00-167.
• Virginia Tax Bulletins 09-10 and 10-1.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-55

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 Virginia individual income tax assessment issued to * (the "Taxpayer") for the taxable year ended December 31, 2006.

FACTS

The Taxpayer is a minor child of a military servicemember and his wife (the "Parents") who reside in Virginia. The Department received information from the Internal Revenue Service (IRS) indicating the Taxpayer had income for the taxable year at issue. A letter was sent requesting that the Taxpayer file the proper Virginia individual income tax return or provide an explanation concerning why the income was not taxable.

The Parents responded indicating that, as a military dependent, the Taxpayer retained the domiciliary residences of the military servicemember in accordance with the Military Spouses Residency Relief Act (the "Act") enacted in 2009. The servicemember was domiciled in * (State A). The Department's auditor concluded that the Taxpayer was an actual resident of Virginia and the Act was not effective for the 2006 taxable year. As a result, the Department issued an assessment of tax, penalty, and interest.

The Parents appeal the assessment, contending that a minor child retains the domiciliary residence of her parents. Further, the income resulted from an account with a financial institution located in State A, and the Taxpayer does not have authority to withdraw funds or make payment, from the account.

DETERMINATION

Two classes of residents, a domiciliary resident and an actual resident, are set forth in Va. 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 tie may actually reside elsewhere. An actual resident of Virginia means a person who, for an aggregate of more than 183 days of the taxable year, maintains his place of abode within Virginia.

The Parents argue that a dependent of a military servicemember retains the domiciliary residence of that servicemember. The Department has previously ruled that the domicile of a minor will, generally, be the same as her parents. In addition, such minor's domicile will continue in effect after the age of majority until the parent's domicile is abandoned and a new domicile of choice is established. See Public Document (P.D.) 01-185 (11/2/2001).

However, a taxpayer can tie an actual resident of Virginia without establishing domicile in the Commonwealth. See P.D. 00-167 (9/8/2000). As such, even though the Taxpayer may be a domiciliary resident of State A, she could be taxed as a resident of Virginia because she lived in Virginia for more than 183 days during 2006.

The Parents also assert that the income was derived from investments located outside Virginia, to which the Taxpayer had no authority to access, and, therefore, should not be taxable in Virginia. It is well-established, however, that a state may tax all the income of its residents, even income earned outside the taxing jurisdiction. In People of State of New York ex rel. Cohn v. Graves , 300 U.S. 308 (1937), the United States Supreme Court explained, ". . . the receipt of income by a resident of the territory of a taxing sovereignty is a taxable event is universally recognized." See also Mary T. Ryan v. Commonwealth of Virginia , 169 Va. 414, 193 S.E. 534 (1937). Accordingly, Virginia is well within its authority to impose its income tax on the income of the Taxpayer.

I have also examined the provisions of the Act, signed into law on November 11, 2009. The amendments to the Servicemember Civil Relief Act, specifically 50 U.S.C. § 571(a)(2), provide that a spouse shall neither lose nor acquire domicile or residence in a state when the spouse is present in the state solely to be with the servicemember in compliance with the servicemember's military orders if the residence or domicile is the same for both the servicemember and spouse. This provision specifically grants relief to the spouse of a servicemember and would not apply to dependents. Further, the provision is effective for the taxable year 2009 and thereafter. For more information concerning Virginia's application of the Act, see Virginia Tax Bulletin (VTB) 09-10 (11/12/2009) and VTB 10-1 (1/29/2010).

The assessment for the 2006 taxable year was made based on the best information available to the Department. The Taxpayer may have additional information that more accurately reflects her taxable income. The Taxpayer is, therefore, requested to file an individual income tax return as a full-year resident for the 2006 taxable year.

The return should be filed, along with the appropriate payment, within 30 days from the date of this letter. The return and payment should be submitted to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attention: *. If the requested return is not filed within the allotted time, the assessment as issued will become immediately due and payable, and collection action will resume.

The Code of Virginia sections, regulations, and tax bulletins cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this determination, you may contact * at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

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