Did moving abroad and qualifying for the federal foreign-earned-income exclusion end the taxpayers' Virginia domicile?

Plain-English summary

Virginia treated the couple as domiciliary residents for 2008 despite their residence and employment abroad. They had moved to another country in 2005 for the husband's indefinite job and established a permanent home there, but they kept substantial Virginia connections.

Those connections included an available Virginia home, Virginia-registered vehicles, the husband's Virginia voting activity, and Virginia driver's licenses renewed in 2008. Their children used the Virginia home while attending school, and the couple later filed Virginia resident returns to obtain in-state tuition rates.

The husband argued that foreign-resident treatment exempted him. The Department explained that IRC § 911 may exclude qualifying foreign earned income and that any allowed federal exclusion would already be reflected in federal adjusted gross income. But a foreign tax home did not itself prove abandonment of Virginia domicile.

The Department upheld Virginia domiciliary status and invited the couple to file a 2008 Virginia return within 30 days so the estimated assessments could be adjusted to accurate figures. Without a return, the assessments would remain and collection would resume.

What this means for you

• Living abroad, even indefinitely for work, does not automatically end Virginia domicile.
• Keeping a home, renewing licenses, registering vehicles, voting, and claiming resident benefits can show continued Virginia intent.
• The federal foreign-earned-income exclusion affects taxable income, not domicile by itself.
• A filed Virginia return may still be needed to replace an estimated assessment with the correct liability.

Common questions

Q: Did the Department ignore the couple's foreign home?
A: No. It recognized their foreign residence but found their Virginia connections showed continuing domicile.

Q: Did IRC § 911 exempt them from all Virginia tax?
A: No. Any qualifying federal exclusion reduced federal adjusted gross income, but it did not change their legal domicile.

Q: Could the assessment amount be adjusted?
A: Yes. The Department allowed 30 days to file a 2008 Virginia return for processing and adjustment.

Citations and references

• Va. Code §§ 58.1-302 and 46.2-323.1.
• IRC § 911; Treas. Reg. § 1.911-2(b).
• Mitchell v. United States, 88 U.S. 350 (1874).
• Virginia Public Documents 00-151 and 02-149.

Subject

Taxpayers are taxable as domiciliary residents of Virginia for the 2008 taxable year

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-89

Original ruling text

June 10, 2013

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will respond to your appeal in which you seek correction of the Virginia individual income tax assessments issued to * (the "Taxpayers") for the taxable year ended December 31, 2008. I apologize for the delay in responding to your request.

FACTS

The Department received information from the Internal Revenue Service (IRS) indicating that the Taxpayers, a husband and wife, may be required to file a Virginia income tax return for the 2008 taxable year. A review of the Department's records showed that the Taxpayers had not filed a return, and the Department requested information to verify whether the Taxpayers were subject to Virginia income tax. When a response was not received, an income tax assessment was issued based on available information. Subsequently, the Department issued an additional assessment based on adjustments the IRS made to the Taxpayers' federal adjusted gross income (FAGI). The Taxpayers appeal the assessments, contending that the husband was not subject to Virginia income tax because he was not a Virginia resident and he was exempt as a foreign resident.

DETERMINATION

Residency

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 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.

In order to change from one legal domicile to another legal domicile, there must be (1) actual abandonment of the old domicile, coupled with an intent not to return to it, land (2) an acquisition of a new domicile at another place, which must be formed by personal presence and an intent to remain there permanently or indefinitely. The burden of proving that the domicile has been changed lies with the person alleging the change.

In determining domicile, consideration may be given to the individuals' expressed intent, conduct, and all attendant circumstances including, but not limited to, financial independence, profession or employment, income sources, residence of spouse, marital status, sites of real and tangible property, motor vehicle registration and Iicensing, and such other factors as may be reasonably deemed necessary to determine the person's domicile. A person's true intention must be determined with reference to all the facts and circumstances of the particular case. A simple declaration is not sufficient to establish residency.

The Department determines a taxpayer's intent through the information provided. A taxpayer has the burden of proving that he or she has abandoned his or her Virginia domicile. If the information is inadequate to meet this burden, the Tax Commissioner must conclude that he or she intended to remain indefinitely in Virginia.

The Taxpayers have provided evidence indicating their intent to establish domicile in Country A in 2005. The Taxpayers moved to Country A so that the husband could pursue an employment opportunity. The employer has verified that the husband has been employed for an indefinite period of time. The Taxpayers also established a permanent place of abode in Country A.

The Taxpayers also maintained significant connections with Virginia. They continued to own the home in which they resided while they were in Virginia. The husband was registered to vote in Virginia and voted in federal elections. The husband also owned motor vehicles registered in Virginia. In addition, the Taxpayers held Virginia driver's licenses, which were renewed in 2008.

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). In this case, the Taxpayers renewed their driver's licenses in 2008.

In addition, the Taxpayers continued to own a residence in Virginia while they lived in Country A. No evidence has been provided to indicate that the Taxpayers attempted to sell the real estate or convert it into a rental property. As such, the property was available to the Taxpayers if and when they chose to return to Virginia. In addition, it appears the home was available for the children to reside in when they attended school in Virginia. Further, after not filing for a number of years and with no other significant changes to their residency status, the Taxpayers filed Virginia income tax returns as residents for the 2010 and 2011 taxable years. The Taxpayers claim that they decided to file Virginia income tax returns in 2010 and 2011 so that they could get in-state tuition rates for their children. Representing oneself to be a Virginia resident in order to obtain in-state tuition rates for one's child has been considered evidence of a clear indication of intent to be considered a domiciliary resident of Virginia. The Department considers a taxpayer's continued connections to Virginia for the purposes of taking advantage of favorable Virginia laws in order to gain the benefits of lower costs ( i.e. , driver's licenses and in-state tuition) available to Virginia residents to be strong intent of a taxpayer's desire to be a domiciliary resident of Virginia. See P.D. 02-149 .

Exempt Foreign Resident

The husband asserts that he was exempt from federal income tax as a foreign resident. Internal Revenue Code (IRC) § 911 allows an exclusion from federal income tax for certain amounts of foreign income earned by qualifying individuals. Because Virginia "conforms" to the IRC for purposes of this exclusion, any income so excluded from federal income tax would also be excluded from Virginia income tax. Even if the exclusion applies, however, it does not exempt taxpayers from their general liability to pay federal and state income taxes because it only applies to certain types of income and is subject to a cap. More importantly, this exclusion does not operate to change an individual's legal domicile.

Under IRC § 911, a taxpayer must have a "tax home" in a foreign country to qualify for the foreign earned income exclusion. Tax home for the purposes of IRC § 911 means a taxpayer's regular or principal place of business or, if he has no regular or principal place of business because of the nature of the business, his regular place of abode. See Treas. Reg. §1.911-2(b).

The concept of domicile, however, requires both the establishment of a new residency in fact, which may be enough to be a tax home, and an intent to abandon the old domicile and remain in the new. See Mitchell v. United States , 88 U.S. 350, 1874 WL 17410 (1874). The mere absence from a previous domicile, however long, is insufficient to prove intent. Even though the Taxpayers may have a tax home in Country A and reside there, the Taxpayers must prove they intended to change their domicile permanently.

CONCLUSION

Based on the evidence in this case, I find that the Taxpayers are taxable as domiciliary residents of Virginia for the 2008 taxable year. The Department based its assessments on the Taxpayers' FAGI as adjusted, which would have taken into account any foreign income exclusion the Taxpayers claimed on their federal return and the IRS allowed, and other information available. The Taxpayers, however, may have additional information that more accurately reflects their Virginia taxable income. Therefore, it may be advisable for the Taxpayers to file a 2008 Virginia individual income tax return in order to more accurately reflect their tax liability.

The return should be submitted within 30 days from the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attention: *. Upon receipt, the return will be reviewed and processed, and the assessments for the taxable year in question will be adjusted as warranted. If the return is not received within the time provided, the assessments will be upheld and collection action will resume.

The Code of Virginia sections 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

AR/1-5215749649.M