THE CAVALIER ATTITUDE OF VIRGINIA'S DEPARTMENT OF TAXATION REGARDING NONRESIDENTS

Posted by KEBSCHULLW on May 28, 2009, 6:08 pm

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For decades Virginia instructions have indicated that nonresidents
cannot file as married filing jointly if one spouse does not have
Virginia income. This requirement has two fatal problems.

Subsection B subdivision 1 of section 58.1-324 of the Virginia Code
provides that a husband and wife may file a joint Virginia income tax
return. There nothing to suggest that this does not apply equally
where BOTH taxpayers are either residents or nonresidents.

Section 58.1.326 of the Virginia Code only applies to a husband and
wife when one is a nonresident. It requires that taxes be determined
on separate Virginia taxable incomes unless both elect to determine
their joint Virginia taxable income as if both were residents.

The provisions of Subsection B subdivision 1 of section 58.1-324
notwithstanding, Virginia instructions require a Married Filiing
Separate return where both husband and wife are nonresidents and both
have income but only one has income from Virginia sources. This
requirement denies one exemption and cuts the standard deduction in
half and if the nonresident taxpayers itemize deductions the
preparation of the Virginia return becomes more complicated and could
result in the payment of higher taxes to Virginia. In addition the
MFS requirement for nonresidents violates the Privileges and
Immunities Clause in the United States Constitution as was discussed
here several years ago when North Carolina had a similar requirement
that was ultimately abandoned in 2006.

When the Virginia Department of Taxation was questioned about the MFS
requirement when both husband and wife were nonresidents and only one
had Virginia source income, the respondent cited section 58.1-326
which is not the applicable section fo the code. In a second letter
the respondent cited subsection B of section 58.1-341 which states "
If the income tax libilities of husband and wife (other than a husband
and wife described in subdivision 2 of of subsection A) are determined
on a joint federal return, or if neither files a federal return:

1. They shall file a joint Virginia income tax retrun, and their tax
liabilities shall be joint and several; or ...

The reason for the parenthetical phrase in subsection B of section
58.1-341 is because subdivision 2 of of subsection A of section
58.1-341 begins with " EVERY (EMPHASIS ADDED) nonresident individual
having Virginia taxable income" . Section 58.1.326 precludes "EVERY
nonresident from filing a joint return with spouse.

I am now waiting for a third response from the state of Virginia.

Here are sections 58.1-324 and 58.1-326 and the instructions that
indicate that nonresidents who filed federal joint returns must file
MFS unless both have Virginia.

Section 58.1-324. Husband and wife.
A. If the federal taxable income of husband or wife is determined on a
separate federal return, their Virginia taxable incomes shall be
separately determined.
B. If the federal taxable income of husband and wife is determined on
a joint federal return, or if neither files a federal return:
1. Their tax shall be determined on their joint Virginia taxable
income; or
2. Separate taxes may be determined on their separate Virginia taxable
incomes if they so elect.

Section 58.1-326. Husband and wife when one nonresident.
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.

Instructions

Line 4 - Married, Filing Separate Returns
(Filing Status 4)

A separate return must be filed if one of the following applies:

- both husband and wife are nonresidents and both have income from
Virginia sources but do not elect to file jointly;

- both husband and wife are nonresidents and both have income but only
one has income from Virginia sources; or

- one is a resident and the other is a nonresident with income from
Virginia sources and they do not elect to file a joint resident
return.

A spouse may claim only those personal exemptions, itemized deductions
and other deductions that could have been claimed had a separate
federal return been completed.

Where deductions and personal exemptions cannot be accounted for
separately, they must be proportionately allocated between each spouse
based on the income attributable to each. For example, if you file a
joint federal return, one of you is a nonresident and you are unable
to account separately for the child and dependent care deduction, that
deduction must be proportionately allocated between each spouse based
on the income attributable to each. One spouse may never claim less
than a whole personal exemption. Even in the case where a husband and
wife have equal income and
one child, only one spouse may claim that child.

VIRGINIA

FILING STATUS
Check the box beside your filing status

Line 1 - Single (Filing Status 1)
Use this filing status if you claimed one of the following federal
filing statuses on your federal return: Single, Head of Household, for
Qualifying Widow(er). If you claimed the Head of Household filing
status on your federal return, check the “Single” filing status box
and the “Head of Household” box on Line 1.

Line 2 - Married, Filing Joint Return
(Filing Status 2)
BOTH spouses must have Virginia source income.
You and your spouse may choose to file a joint return if both have
Virginia Source Income and
• you computed your federal income tax liabilities together on a joint
federal return; or
• neither of you was required to file a federal return.

When using Filing Status 2 or 3 on Form 763, your spouse’s exemption
is included in the “You” column. Do not claim your spouse as a
dependent.

Line 3 - Married, Spouse Has No Income from
Any Source (Filing Status 3)
Husband and wife may elect to file under this status if
• federal income tax liabilities are determined on a joint federal
return; or
• neither files a federal return; or
• one spouse files a separate return and the other spouse has no gross
income and was not a dependent of another taxpayer. (Note that in this
case, the standard deduction is limited to $3,000.) Also enter your
spouse’s name on the line provided.

Line 4 - Married, Filing Separate Returns
(Filing Status 4)
A separate return must be filed if one of the following applies:
• both husband and wife are nonresidents and both have income from
Virginia sources but do not elect to file jointly;
• both husband and wife are nonresidents and both have income but only
one has income from Virginia sources; or
• one is a resident and the other is a nonresident with income from
Virginia sources and they do not elect to file a joint resident
return. A spouse may claim only those personal exemptions, itemized
deductions and other deductions that could have been claimed had
a separate federal return been completed.
Where deductions and personal exemptions cannot be accounted for
separately, they must be proportionately allocated between each spouse
based on the income attributable to each. For example, if you file a
joint federal return, one of you is a nonresident and you are unable
to account separately for the child and dependent care deduction, that
deduction must be proportionately allocated between each spouse based
on the income attributable to each. One spouse may never claim less
than a whole personal exemption. Even in the case where a husband and
wife have equal income and one child, only one spouse may claim that
child.

Cheers,

WDK

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Posted by Katie on May 28, 2009, 8:27 pm

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On May 28, 3:08 pm, KEBSCHU...@aol.com wrote:

> For decades Virginia instructions have indicated that nonresidents

> cannot file as married filing jointly if one spouse does not have

> Virginia income. This requirement has two fatal problems.

> Subsection B subdivision 1 of section 58.1-324 of the Virginia Code

> provides that a husband and wife may file a joint Virginia income tax

> return. There nothing to suggest that this does not apply equally

> where BOTH taxpayers are either residents or nonresidents.

> Section 58.1.326 of the Virginia Code only applies to a husband and

> wife when one is a nonresident. It requires that taxes be determined

> on separate Virginia taxable incomes unless both elect to determine

> their joint Virginia taxable income as if both were residents.

> The provisions of Subsection B subdivision 1 of section 58.1-324

> notwithstanding, Virginia instructions require a Married Filiing

> Separate return where both husband and wife are nonresidents and both

> have income but only one has income from Virginia sources. This

> requirement denies one exemption and cuts the standard deduction in

> half and if the nonresident taxpayers itemize deductions the

> preparation of the Virginia return becomes more complicated and could

> result in the payment of higher taxes to Virginia. In addition the

> MFS requirement for nonresidents violates the Privileges and

> Immunities Clause in the United States Constitution as was discussed

> here several years ago when North Carolina had a similar requirement

> that was ultimately abandoned in 2006.

snipping the detail ...

You know I agree with you, and I do think there is a constitutional
jurisdiction issue when spouses are forced to file jointly when both
are nonresidents and one has no income from sources in the state. The
state is asserting jurisdiction to tax an individual over which it has
no power -- because that person is not a resident and has no source
income.

I also think there is an issue under the Virginia state law, which
certainly seems to require separate returns regardless of the federal
filing unless both spouses elect to be treated as residents. However,
I fear there may be an "out" for the Department.

"Section 58.1-326. Husband and wife when one nonresident.
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."

The worrisome clause here is "as may be required by the Department."
I suppose the Department would argue that this phrase gives it the
power to determine by regulation or form instruction how such a couple
must file. Of course that doesn't address the constitutional
jurisdiction issue -- but the Department probably wouldn't have the
power to determine that anyway.

It sounds like Virginia is going to be stubborn about this. You'll
probably have to find somebody who has enough money at stake to be
willing to litigate, unless you can get some interest from members of
the state legislature. Good luck!

Katie in San Diego

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Posted by KEBSCHULLW on May 29, 2009, 12:55 am

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> On May 28, 3:08ï¿½pm, KEBSCHU...@aol.com wrote:

> You know I agree with you, and I do think there is a constitutional

> jurisdiction issue when spouses are forced to file jointly when both

> are nonresidents and one has no income from sources in the state. ï¿½The

> state is asserting jurisdiction to tax an individual over which it has

> no power -- because that person is not a resident and has no source

> income.

Katie:

Noooo! Under section 58.1-324 of the Virginia Code nonresident
taxpayers where only one has Virginia source income and who filed a
joint federal income tax return have the OPTION of filing a MFJ
Virginia return or the one with Virginia source income can file MFS.
That satisfies me and the United States Constitution, i.e., the
Priviliges and Immunities Clause in Article IV and the Due Process
Clause in the Fourteenth Amendment. Virginia Law is fine. The
problem is the Department of Taxation's REQUIREMENT that a nonresident
file MFS if his/her spouse does not have Virginia source income

> I also think there is an issue under the Virginia state law, which

> certainly seems to require separate returns regardless of the federal

> filing unless both spouses elect to be treated as residents. ï¿½However,

> I fear there may be an "out" for the Department.

That requirement only applies if one spouse is a Virginia resident and
the other is a nonresident. Where one is a resident and the other is
a nonresident there could be a tax credit problem for the return of
the Virginia nonresident in his state of residency if he filed as if a
Virginia resident. Tennessee does not have the traditional income tax
so the joint return may not be a problem for some of those taxpayers.

> "Section 58.1-326. Husband and wife when one nonresident.

> 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."

> The worrisome clause here is "as may be required by the Department."

> I suppose the Department would argue that this phrase gives it the

> power to determine by regulation or form instruction how such a couple

> must file. ï¿½Of course that doesn't address the constitutional

> jurisdiction issue -- but the Department probably wouldn't have the

> power to determine that anyway.

At this time I have no problem with section 56.1-326 or it
interpretation by the Department of Taxation.

> It sounds like Virginia is going to be stubborn about this. ï¿½You'll

> probably have to find somebody who has enough money at stake to be

> willing to litigate, unless you can get some interest from members of

> the state legislature. ï¿½Good luck!

Thanks, but I think that you have overlooked a couple of things. The
Virginia Governor, Tim Kaine, is Chairman of the Democratic National
Committee and Virginia's unconstitutional scheme causes a loss of
income to the states where the nonresidents live. Not a good
situation. Maryland is desperate for all the tax revenue they can
come up with. Maryland's estimate of the revenues that would come
from slot parlors appears to me to overly optimistic by a bunch and
the rollout of the slots parlors is not going well. In addition I
believe that Delaware is going for sports gambling. It just crazy!

Oh, BTW, I ran into one of you old buddies, Debra Peterson, at the
"Closing the Tax Gap" symposium at Stanford on November 8, 2008. That
is the only day in my life that I was ever in a law school building.
Nothing like jumping into the deep end of the pool. I was given the
opportunity to do my "billion dollar annual tax gap rant" related to
IRS's interpretation of section 56(b)(1)(D).

> Katie in San Diego

Cheers,

WDK

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Posted by Bill Brown on May 28, 2009, 10:21 pm

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> THE CAVALIER ATTITUDE OF VIRGINIA'S DEPARTMENT OF TAXATION

Well, a large percentage of them did go to UVA.

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Posted by KEBSCHULLW on May 31, 2009, 2:24 pm

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> > THE CAVALIER ATTITUDE OF VIRGINIA'S DEPARTMENT OF TAXATION

> Well, a large percentage of them did go to UVA.

That is what I suspected. One would expect better from graduates of
the university founded by Thomas Jefferson.

Cheers,

WDK

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<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
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