Tax Type
Individual Income Tax
Description
Penalties; Fraud
Topic
Collection of Tax
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 his behalf. His wife is represented by separate counsel. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer, an airline pilot, has not filed Virginia individual income tax returns for the taxable years 1980 through 1993. He claimed to be a resident of Tennessee, a state which does not impose an individual income tax. He, however, has not resided in Tennessee since 1974. From 1980 through 1993, the Taxpayer purchased and lived in homes in Virginia, owned rental property in Virginia, held a Virginia driver's license, maintained banking accounts in Virginia, and engaged in partnership activities in Virginia. He was not registered to vote in Virginia or any other state.
At one time, Taxpayer claimed North Carolina to be his home. He purchased a lot in North Carolina in 1986. He docked his boat at that lot in 1989 and has periodically lived on the boat. He maintains bank accounts in North Carolina and became employed with a North Carolina Airline in 1993. No evidence has been provided to indicate that the Taxpayer has filed North Carolina income tax returns for the periods indicated. From 1980 through 1991, the Taxpayer continued to use a Tennessee address when mailing his federal income tax returns.
Beginning in 1992, the Taxpayer's federal income tax returns showed a Florida address. Florida is a state which does not impose an individual income tax. The Taxpayer had expressed interest in moving to Florida in the future but had only obtained a Florida post office box when filing the 1992 federal return. The Taxpayer has provided no documentation to demonstrate any other connections with Florida.
The department considered the Taxpayer and his wife to be domiciliary residents of Virginia. Joint assessments were issued by the department to the Taxpayer and his wife because Virginia returns were not filed for the taxable years 1980 through 1993. The assessments were based on joint federal income tax returns filed with the Internal Revenue Service.
You contend that the Taxpayer's certified public accountant (CPA) advised him that he was a Tennessee resident and was not required to file Virginia income tax returns. He was, therefore, required to file only federal income tax returns. As a result, the fraud penalties should be abated. You also claim that returns were filed with the department for the years 1980 and 1981. Those years were, therefore, barred by the statute of limitations, and the assessments should be abated. 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.
DETERMINATION
Two classes of residents, a domiciliary resident and an actual resident, are set forth in Code of Virginia § 58.1-302. A domiciliary resident does not break residency status merely because his job duties require him to work in other parts of the country. For a person to change domiciliary residency to another state, that person must intend to abandon his Virginia domicile with no intention of returning to Virginia. Concurrently, that person must acquire a new domicile where that person is physically present with the intention to remain there permanently or indefinitely. A Virginia domiciliary resident, therefore, working in other parts of the country who has not abandoned his Virginia residency continues to be subject to Virginia taxation.
Although the Taxpayer traveled to various cities around the country as an airline pilot, he has not provided sufficient evidence to demonstrate that he abandoned Virginia as his domiciliary residence and concurrently established his domiciliary residence in Tennessee or any other state. The Taxpayer continued, therefore, to be a domiciliary resident of Virginia for the taxable years 1980 through 1993.
The Taxpayer states that 1980 and 1981 Virginia income tax returns were filed with the department and has provided copies of these returns. The department has no record of these returns being filed. The 1980 return, however, included a Wage and Tax Statement (W-2 form) which showed Virginia withholding tax that exceeded the tax liability. This assessment will be abated.
The 1981 Virginia income tax return indicated that the Taxpayer was a part-year resident moving out of Virginia. As indicated above, the Taxpayer has not provided sufficient evidence to demonstrate that he abandoned Virginia as his domiciliary residence. A Virginia resident return, therefore, should have been filed. The W-2 form provided by the Taxpayer showed no Virginia withholding tax. The department, therefore, issued the proper assessment.
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 statute, 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 prior to taxable year 1988.
You contend that the Taxpayer relied on the advice of accountants on the filing requirements. You cite court cases U.S. v. Boyle, 469 U.S. 241, 83 L.Ed.2d 622 (1985), Davis v. Commissioner, 184 F.2d 86 (10th Cir. 1950), and other cases to justify that, when a taxpayer relies on the advice of an accountant, the penalties for failing to file or fraud cannot be imposed. In both the Boyle and Davis cases, the courts 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 that he was a Tennessee resident and was 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 he was not required to file Virginia income tax returns.
The assessments of the Taxpayer were issued jointly with his wife. The wife has filed separate Virginia returns showing income and losses for the taxable years 1984 through 1993. As a result, the Taxpayer's Virginia taxable income will be increased by the negative federal adjusted gross income claimed on the wife's separate Virginia return. The Taxpayer's Virginia taxable income will be decreased by the positive federal adjusted gross income claimed in the wife's separate Virginia return. The wife's name will be removed from the assessments for which she will no longer be jointly or severally liable.
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 1981 through 1993. The Taxpayer was a resident of Virginia and aware of the requirement to file a Virginia income tax return. Nevertheless, he intended to evade the Virginia income tax by claiming to be a Tennessee resident, filing federal tax returns from a Tennessee address, and failing to file the required Virginia income tax returns for the taxable years 1981 through 1993.
In conclusion, based on the information provided, the assessment for the taxable year 1980 has been abated. There is, however, no basis to abate the tax, fraud penalties, or interest assessed for the taxable years 1981 through 1993. The outstanding assessments for the taxable years 1981 through 1988 and 1991 through 1993 were correctly assessed and have been adjusted for additional interest. The outstanding assessments for the taxable year 1989 and 1990 have been reduced as a result of the income shown on the separate returns filed by the Taxpayer's wife. A schedule of these adjusted assessments is attached, and the amount of the assessments total ******** . This amount should be remitted within the next 60 days to *** , Office of Tax Policy, Department of Taxation, Post Office Box 1880, Richmond, Virginia 23218-1880.
In addition to the outstanding assessments, additional assessments will be issued by the department for the taxable years 1984 through 1988 and 1991 through 1993. These assessments represent the tax effect of losses reported on the separate returns filed by the Taxpayer's wife. A schedule to estimate the amount of the liability is enclosed for your reference. Assessments will be forthcoming under a separate 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 his 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 may be sent to at the address indicated above.
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/9993N
Rulings of the Tax Commissioner