Tax Type
Individual Income Tax
Description
Fraudulent charitable contributions
Topic
Penalties and Interest
Date Issued
06-19-1985
June 19, 1985
RE: §58.1-1821 Application/Individual Income Tax
Dear ****
This will reply to your letter of March 19, 1985, on behalf of ***** (Taxpayers), requesting relief from a proposed assessment in the above referenced case.
Facts
It is undisputed that Taxpayers have been involved in an organization found to be fraudulent by the Internal Revenue Service. Taxpayer's involvement in the organization encompassed taking a vow of poverty, establishing their own church, and, between 1980 and 1983, deducting all or part of their taxable income as charitable contributions. The department has disallowed such deductions and is preparing to issue assessments accordingly. Taxpayers contest this disallowance and seek relief from the proposed assessments, but offer no facts in support of their contention
Determination
§ 58.1-308 of the Virginia Code states,
"If the amount of tax computed by the Department is greater than the amount theretofore assessed, the excess shall be assessed by the Department,...[and] If the understatement is false or 'fraudulent with intent to evade the tax, a penalty of 100% shall be added together with interest on the tax at a rate determined in accordance with § 58.1-15, from the time the return was required by law to be filed until paid." (Emphasis added)
Furthermore, § 630-2-308(B) of the Virginia Individual Income Tax Regulations states, "The penalty for the filing of a false or fraudulent return with intent to evade the tax will be assessed against a taxpayer whenever the complementary federal fraud penalty is assessed against such taxpayer for the same taxable year or on the basis of the facts in each particular case."
The term "fraud" means actual intentional wrongdoing with a specific intent to evade a tax believed to be owing. L. F. Ratterman, TC Memo Op. Dkt. 11319 (1948) aff'd. 177 F2d 204 (CA 6th, 1949).
In addition, while "Isolated errors or discrepancies in records may be insufficient to establish a fraudulent intent to evade tax, where large amounts of income unquestionably received are consistently and repeatedly omitted from tax returns, and where the explanation for such omissions is patently weak or incredible, then the conclusion is inescapable that the taxpayer intended to understate his true income." James P. Hayes, TC Memo (1960-221); George J. Klevenhagen, TC Memo Op. Dkt. 209296 (1950); Ivan B. Reash, TC Memo Op. Dkt. 35691 (1953). And, "Understatements of income cannot be attributed to mere inadvertence, neglect, or ignorance where the understatements are so large, so regular, and so frequent as to show a deliberate intention to defraud." Ray Shaban, TC Memo, Op. Dkt. 32902 (1952).
In the present case, taxpayer's willingly and intentionally participated in an organization whose sole purpose was to defraud the state and federal government out of income taxes lawfully due and payable. The department's action in disallowing the deductions claimed was justified by the undisputed facts of this case, and the fraud penalty and interest should be assessed accordingly.
We, therefore, find in this case that taxpayer's conduct in deducting most or all of their taxable income as charitable contributions on a regular and consistent basis was fraudulent and in violation of Virginia law. Based on all of the above, I find no basis for the relief requested.
Sincerely,
W. H. Forst
Tax Commissioner
RE: §58.1-1821 Application/Individual Income Tax
Dear ****
This will reply to your letter of March 19, 1985, on behalf of ***** (Taxpayers), requesting relief from a proposed assessment in the above referenced case.
Facts
It is undisputed that Taxpayers have been involved in an organization found to be fraudulent by the Internal Revenue Service. Taxpayer's involvement in the organization encompassed taking a vow of poverty, establishing their own church, and, between 1980 and 1983, deducting all or part of their taxable income as charitable contributions. The department has disallowed such deductions and is preparing to issue assessments accordingly. Taxpayers contest this disallowance and seek relief from the proposed assessments, but offer no facts in support of their contention
Determination
§ 58.1-308 of the Virginia Code states,
"If the amount of tax computed by the Department is greater than the amount theretofore assessed, the excess shall be assessed by the Department,...[and] If the understatement is false or 'fraudulent with intent to evade the tax, a penalty of 100% shall be added together with interest on the tax at a rate determined in accordance with § 58.1-15, from the time the return was required by law to be filed until paid." (Emphasis added)
Furthermore, § 630-2-308(B) of the Virginia Individual Income Tax Regulations states, "The penalty for the filing of a false or fraudulent return with intent to evade the tax will be assessed against a taxpayer whenever the complementary federal fraud penalty is assessed against such taxpayer for the same taxable year or on the basis of the facts in each particular case."
The term "fraud" means actual intentional wrongdoing with a specific intent to evade a tax believed to be owing. L. F. Ratterman, TC Memo Op. Dkt. 11319 (1948) aff'd. 177 F2d 204 (CA 6th, 1949).
In addition, while "Isolated errors or discrepancies in records may be insufficient to establish a fraudulent intent to evade tax, where large amounts of income unquestionably received are consistently and repeatedly omitted from tax returns, and where the explanation for such omissions is patently weak or incredible, then the conclusion is inescapable that the taxpayer intended to understate his true income." James P. Hayes, TC Memo (1960-221); George J. Klevenhagen, TC Memo Op. Dkt. 209296 (1950); Ivan B. Reash, TC Memo Op. Dkt. 35691 (1953). And, "Understatements of income cannot be attributed to mere inadvertence, neglect, or ignorance where the understatements are so large, so regular, and so frequent as to show a deliberate intention to defraud." Ray Shaban, TC Memo, Op. Dkt. 32902 (1952).
In the present case, taxpayer's willingly and intentionally participated in an organization whose sole purpose was to defraud the state and federal government out of income taxes lawfully due and payable. The department's action in disallowing the deductions claimed was justified by the undisputed facts of this case, and the fraud penalty and interest should be assessed accordingly.
We, therefore, find in this case that taxpayer's conduct in deducting most or all of their taxable income as charitable contributions on a regular and consistent basis was fraudulent and in violation of Virginia law. Based on all of the above, I find no basis for the relief requested.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner