March 4, 2020
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek a refund of individual income tax paid by ***** (the “Taxpayers”) for the taxable year ended December 31, 2017.
FACTS
The Department adjusted the Taxpayers’ itemized deductions reported on their 2017 Virginia income tax return resulting in an assessment of Virginia income tax. The Taxpayers paid the assessment and appeal the adjustments to the personal property tax and charitable gifts, contending they provided adequate documentation to claim the deductions.
DETERMINATION
Virginia Code § 58.1-301 provides that the 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 Virginia Code §§ 58.1-322.01 through 58.1-322.04.
As a general rule, the Department relies on the accuracy of information and computations reflected on the federal income tax return when reviewing Virginia individual income tax returns. If the information provided on the federal return looks reasonable, there is generally no reason to look behind those computations. The Department, however, retains the authority to adjust FAGI where there is clear evidence that the amounts reported on the federal or Virginia income tax return are not consistent with the IRC. See Virginia Code § 58.1-219. Virginia Code § 58.1-322.03 1 a allows a taxpayer to deduct from its Virginia adjusted gross income the amount allowed for itemized deductions for federal income tax purposes.
Personal Property Taxes
In addition to state and local income taxes, IRC § 164 provides a deduction for certain state and local real estate and personal property taxes paid for business and non-business purposes. The Taxpayers appeal the Department’s adjustment to disallow amounts reported as personal property taxes included in their federal itemized deductions.
The Department requested that the Taxpayers provide documentation concerning all deductions claimed on their 2017 Schedule A in its letters dated January 15, 2019 and May 24, 2019. Substantiating payment of property taxes through items such as a receipt or cancelled check is required to claim the deduction. See Public Document (P.D.) 14-155 (8/28/2014). The Taxpayers sent copies of property tax bills, but have provided no proof of payment.
Gifts to Charity
Under IRC § 170(a), taxpayers may deduct charitable contributions of cash, tangible and intangible personal property, and services made during the taxable year. Because of Virginia’s conformity to the IRC, taxpayers must meet the substantiation requirements established by federal regulation.
Cash Gifts
The Taxpayers have provided a list of cash contributions and receipts. As such, the charitable contributions of cash will be adjusted to reflect this documentation.
Non-Cash Gifts
The Taxpayers donated books and furniture which they valued based on what they believe the items would sell for on-line. The Department adjusted the value of the donations based on a donation guide provided by an international charity.
Under IRS regulations, substantiation requirements for gifts of property other than money vary depending on the amount of the deduction claimed. The regulations set up three tiers of deductions, for amounts up to and including $500, greater than $500 but less than $5,000, and greater than $5,000, and require greater substantiation for each tier. See Treas. Reg. § 1.170A-13. For purposes of meeting the $5,000 amount claimed for items of “similar property,” such property is aggregated whether or not it is donated to the same charity. See Treas. Reg. § 1.170A-13(c)(1)(i). Pursuant to Reg. § 1.170A-13(c)(1), a taxpayer must obtain a qualified appraisal to substantiate the donation of similar items that have an aggregated value of greater than $5,000.
The donated property was comprised of furniture and books. Certain items of furniture were valued below $500. One item of furniture and the books were each valued between $500 and $5,000. Under Treas. Reg. § 1.170A-13(b)(1), for items valued below $500, a taxpayer need only have a receipt from the donee containing the name and address of the donee, the date and place of the contribution, and a description of the property on the receipt. The receipt for the donation of the furniture valued at less than $500 meets the criteria. As such, the Taxpayers were entitled to itemize and deduct the value of the furniture valued at less than $500 for the amounts reported on their federal Schedule A.
Treas. Reg. § 1.170A-13(b)(3) provides that in addition to the receipt required by Treas. Reg. § 1.170A-13(b)(1), the donation of non-cash property with a value between $500 and $5,000 necessitates a written record of the manner and approximate date of acquisition and the cost basis. The date of acquisition and cost basis for the donation of books was listed on the federal Form 8283, however, the amounts reported do not reflect the provided receipts. No other documentation was provided for substantiating the value of the books. In addition, the Taxpayers did not supply any information regarding the date and manner of acquisition, or the cost basis for the furnishings that fall within this category.
CONCLUSION
Based on the information, the Taxpayers must provide proof of payment before they will be allowed to claim a deduction for personal property tax. The documentation 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 23161-7203, Attention: *****. Upon receipt, the documentation will be reviewed and the deduction for personal property tax may be adjusted, as appropriate.
The Taxpayers will, however, be able to claim a charitable deduction for donated cash. For non-cash donations less than $500, they will be permitted a charitable deduction for those items for which appropriate documentation has been provided.
Although the value of books and furniture that was valued by the Taxpayers between $500 and $5,000 cannot be substantiated, the Department acknowledges that the property was donated for a charitable cause. As such, the auditor’s valuation of this property, made in accordance with the recommendations by an international charity’s guide, will be upheld.
If the requested proof of payment is not received within the 30 day timeframe, the Taxpayers’ assessment for the taxable year ended December 31, 2017 will be adjusted in accordance with the enclosed schedule and a refund issued as warranted.
The Code of Virginia sections and public document 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/2188.B