March 13, 2024
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will respond to your letter in which you seek correction of the individual income tax assessments issued to ***** (the “Taxpayer”) for the taxable years ended December 31, 2020 and 2021.
FACTS
The Taxpayer filed Virginia resident income tax returns for the 2020 and 2021 taxable years, claiming medical expenses, mortgage interest, charitable contributions, and gambling losses as itemized deductions reportable on federal Schedule A. Under audit, the Department requested documentation to support the deductions. When the Taxpayer indicated that she could not substantiate the deductions, the Department disallowed the itemized deductions. As a result, the Department applied the standard deduction and issued assessments for both taxable years. The Taxpayer appeals the assessments, contending that the documentation provided with the appeal substantiates her gambling losses and mortgage interest.
DETERMINATION
Conformity
Virginia Code § 58.1-301 provides, with certain exceptions, that 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. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia. 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 properly 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 Chapter 3 of Title 58.1 of the Code of Virginia.
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.
Itemized Deductions
Virginia Code § 58.1-322.03 1 allows an individual to deduct from their Virginia adjusted gross income certain amounts allowed for itemized deductions for federal income tax purposes. A taxpayer may claim the Virginia standard deduction only if they have not elected to itemize deductions on her federal income tax return. These deductions include those for real estate taxes, home mortgage interest, personal property taxes, medical expenses, charitable contributions and gambling losses, provided they are claimed in accordance with the IRC and its related regulations.
Gambling Income and Losses
Pursuant to IRC § 61(a), gross income includes all income from whatever source derived, including gambling winnings. For a taxpayer that does not engage in gambling as a trade or business, losses from wagering transactions are allowable as an itemized deduction, but only to the extent of gambling winnings. See IRC § 165(d).
The Taxpayer played slot machines at several casinos during the 2020 and 2021 taxable years. Casinos are required to issue federal Form W-2G to report slot machine winnings of $1,200.00 or more. See Treas. Reg. § 1.6041-10(b)(1). Casinos, however, are not required to keep track of gambling losses or smaller winnings. See John M. Coleman v. Commissioner, TC memo 2020-146. Form W-2Gs were issued to the Taxpayer for both taxable years at issue. The Taxpayer reported these winnings as income on her federal and Virginia returns. She also reported gambling losses as an itemized deduction on Schedule A.
Substantiation
Taxpayers must maintain records sufficient to allow the Internal Revenue Service (IRS) to determine their correct tax liability. See Treas. Reg. § 1.6001-1(a). Similarly, Virginia Code § 58.1-310 provides:
Whenever in the opinion of the Department it is necessary to examine the federal income returns or any copy thereof of any individual, estate, trust, partnership or corporation in order properly to audit such returns, the Department or the commissioner of the revenue shall have the right to require such taxpayer to provide such return or a copy thereof and all statements, inventories, and schedules in support thereof.
Taxpayers have been able to substantiate gambling losses with such evidence as “casino ATM receipts, canceled checks made payable to casinos . . . and credit card statements stating that cash was advanced at the casinos.” See Coleman at 14, citing Johnson v. Commissioner, T.C. Memo 2007-373. In this case, it appears that the financial statements provided by the Taxpayer include some ATM withdrawals made at casinos and some payments made directly to casinos. The Department will allow a deduction for such withdrawals and payments. The statements provided, however, also include ATM withdrawals made at banks and other locations that are not clearly connected to a casino based on the descriptions given in the documents. Without more specific identifying information, the Department cannot allow a deduction for such withdrawals.
Mortgage Interest
IRC § 163(a) allows taxpayers to deduct mortgage interest paid on a principal residence. The Taxpayer submitted a Form 1098 for both the 2020 and 2021 taxable years. The Department finds that this form is sufficient proof to substantiate payment of deductible mortgage interest.
CONCLUSION
This case will be returned to the auditor to adjust the amount of allowable deductions consistent with this determination. The attached schedule shows the type of transactions with casinos that are acceptable proof of gambling losses. The Taxpayers will then receive revised assessments for the 2020 and 2021 taxable years.
The Code of Virginia sections 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/4625.B