Tax Type
Individual Income Tax
Description
Federal adjusted gross income; Net operating loss carry forward
Topic
Taxable Income
Date Issued
09-30-1997
September 30, 1997
Re: § 58.1-1821 Application: Individual Income Tax
Dear****************
This will reply to your letters concerning the 1980 through 1993 Virginia individual income tax assessments for ********** . As counsel for********* (the "Taxpayer") you have appealed these assessments on her behalf. Her husband is represented by separate counsel. I apologize for the delay in responding to your letters.
FACTS
The Taxpayer is a Virginia resident. Her husband was an airplane pilot who had multiple flight assignments around the country. He considered himself a Tennessee resident though he has not resided in that state since 1974. The Taxpayer and her husband, however, purchased and lived in homes in Virginia, owned rental property in Virginia, held Virginia driver's licenses, and maintained bank accounts in Virginia. The Taxpayer was registered to vote in Virginia. Her husband also had partnership activities in Virginia.
The Taxpayer and her husband filed only joint federal returns. The department considered the Taxpayer and her husband to be domiciliary residents of Virginia and issued joint assessments for not filing Virginia returns for the taxable years 1980 through 1993. These assessments were based on federal income tax returns filed with the Internal Revenue Service.
You contend that the Taxpayer relied on the advice of her husband's CPAs in not filing the Virginia returns. The fraud penalties, therefore, should be abated. You also claim that the Taxpayer was not married to her husband until 1983, therefore, she is not liable for the assessments for the taxable years 1980 through 1982. Additionally, you claim that the statute of limitations expired on assessments issued for taxable years prior to 1988, pursuant to Code of Virginia § 58.1-1812(A). These assessments should also be abated.
After your initial appeal, the department contacted you to give the Taxpayer an alternative of filing separate returns from her husband. As a result, the Taxpayer filed separate Virginia tax returns for the taxable years 1983 through 1993. She filed Virginia returns with a previous spouse for the taxable years 1980 through 1982 and had no liability for those years.
DETERMINATION
You contend that the Taxpayer relied on the advice of her husband's CPAs, and therefore, Virginia tax returns were not filed. You cite court cases Gillis v. Commissioner, T.C. Memo 1986-576 and Cash v. Commissioner, T.C. Memo 1994-166 to justify that, when a taxpayer relies on the advice of an accountant, the penalties for failing to file or fraud cannot be imposed. Both the Gillis and Cash court cases recognized that it is reasonable for a Taxpayer to rely on the advice of an accountant or attorney in matters of law. It must be established, however, that the advice was actually given by the accountant or attorney in order to demonstrate that there was reasonable cause to rely on that advice.
In the instant case, in order to establish the nature of the advice provided by the accountants to the Taxpayer, the department requested that you provide separate, original, and signed affidavits from each of the Taxpayer's accountants. The affidavits were to affirm that, as Virginia CPAs having full knowledge of the Taxpayer's connections with Virginia, these accountants advised the Taxpayer and her husband that they were Tennessee residents and were not required to file Virginia income tax returns. None of the accountants furnished the requested affidavits. The accountants, therefore, have not provided evidence or objective testimony to demonstrate that they actually advised the Taxpayer that she was not required to file Virginia income tax returns.
You contend that assessments issued prior to the taxable year 1988 are barred by the statute of limitations, pursuant to Code of Virginia § 58.1-1812(A). This code section, which applies to some of the taxes administered by the department, generally provides that when a person fails to file a return, the tax shall be assessed within six years from the due date of the return, except as otherwise provided by law. Title 23 of the Virginia Administrative Code (VAC) 10-20-150 B 4 specifies that if the tax is owed for income tax, then Code of Virginia § 58.1-312 would apply. Code of Virginia § 58.1-312 provides that when no income tax return is filed, tax may be assessed at any time. There is, therefore, no statute of limitations when an income tax return is not filed with the department. As the Taxpayer did not file income tax returns for the contested years, the department properly issued the assessments for taxable years prior to 1988.
The Taxpayer has filed with a previous spouse for the taxable years 1980 through 1982, therefore, she is not liable for the assessments with her husband for those years. The Taxpayer filed separate Virginia returns for the taxable years 1983 through 1993. She, therefore, is not liable for the joint assessment issued to her and her husband. Her returns for the taxable years 1983, 1989, and 1990 resulted in Virginia income tax liability, and tax, late penalties, and interest for taxable year 1983 has been paid. The returns for the taxable years 1984 through 1988 and 1991 through 1993 indicated a negative federal adjusted gross income, therefore, there was no Virginia tax liability.
A member of my staff contacted you concerning the net operating loss carryforwards claimed on the Taxpayer's 1989 and 1990 separate Virginia returns. You contend that net operating losses occurred in the years 1984 through 1988 and would have been claimed for federal purposes had separate federal tax returns been filed by the Taxpayer. As a result, the net operating losses for these periods were carried forward to her 1989 and 1990 Virginia returns. There is, however, no provision in the Code of Virginia for a Virginia net operating loss. The starting point of computing Virginia taxable income is federal adjusted gross income. A net operating loss carryforward is allowed on the Virginia return only to the extent it is included in the computation of federal adjusted gross income. The jointly filed 1989 and 1990 federal income tax returns, in fact, did not show net operating loss carryforwards. Consequently, these carryforwards are not allowed on the Taxpayer's separately filed Virginia returns.
Code of Virginia § 58.1-308 provides that if the tax liability is false or fraudulent with the intent to evade tax, the 100% fraud penalty will be assessed. Based on the facts presented, fraud was committed for the taxable years 1983, 1989, and 1990. The Taxpayer was a resident of Virginia, had filed Virginia returns for years prior to 1983, and was aware of the requirement to file Virginia income tax returns. Nevertheless, she intended to evade the Virginia income tax by claiming to be a Tennessee resident, filing joint federal tax returns from a Tennessee address, and failing to file the required Virginia income tax returns for the taxable years 1983, 1989, and 1990.
In conclusion, based on this information, the Taxpayer's name will be removed from joint assessments issued with her husband, and she will not be jointly or severally liable for those assessments. There is, however, no basis to relieve tax and penalties due from the Taxpayer for the taxable years 1983, 1989, and 1990. A schedule to estimate the amount of the liability is enclosed for your reference. Assessments, however, will be forthcoming under another cover and will indicate the correct amounts due.
In addition, within 60 days from the date of this letter, the Taxpayer must file Virginia income tax returns for the taxable years 1994 through 1996. Based on her continued residence in Virginia, these returns must be filed consistent with the Code of Virginia and the Internal Revenue Code. Continued refusal to file any returns referenced in this letter will justify the 100% fraud penalty, pursuant to Code of Virginia § 58.1-308 and other legal actions to collect the proper tax. These returns should be remitted to********** , Office of Tax Policy, Department of Taxation, Post Office Box 1880, Richmond, Virginia 23218-1880.
You may pursue judicial remedies for your client by applying to the circuit court for relief pursuant to Code of Virginia § 58.1-1825. The application, however, should be filed within three years from the date the assessments were made. Additionally, the assessments must be paid or the appropriate bond posted before the court application is deemed filed.
If there are further questions, please contact **********at**************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10010N
Rulings of the Tax Commissioner