Could Virginia keep a wife's share of joint refunds for her husband's business tax liabilities from before their marriage?

Subject

Wife's refunds to offset tax liabilities is entitled to relief as an innocent spouse

Plain-English summary

Virginia had to refund the wife's share of the 2004 and 2006 joint-return overpayments because her husband's converted business-tax liabilities arose before their marriage. She had not filed joint returns with him during the 1989-1994 years when those liabilities accrued.

The Commissioner explained that Virginia law did not contain an “innocent spouse” provision and therefore did not automatically incorporate federal IRC § 6015. Virginia spouses filing a joint return are generally jointly and individually liable for tax arising from that return.

This case was different because the seized refunds came from later joint-return years and the underlying debts belonged to the husband from pre-marriage years. Department policy did not hold one spouse liable for the other's earlier separate liabilities. The wife therefore received the portion of the overpayments produced by tax paid on her income.

What this means for you

• Virginia's result did not rest on the federal innocent-spouse statute.
• Joint filing generally creates joint and several liability for the tax arising from that return.
• A spouse's separate debt from years before the marriage may require allocation of a later joint refund.
• The refundable amount depended on the portion attributable to the wife's income, not necessarily the entire joint refund.

Common questions

Did Virginia adopt federal innocent-spouse relief? No. The ruling expressly said Virginia was not required to follow IRC § 6015.

Was the entire joint refund returned? The ruling promised the amount of overpayment stemming from tax paid by the wife.

Citations and references

• Va. Code §§ 58.1-1824, 58.1-1821, 58.1-301, and 58.1-341(B)(1).
• 23 VAC 10-110-240(C)(3)(b); IRC § 6015.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-44

Original ruling text

April 17, 2008

Re: § 58.1-1824 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you appeal the Department's seizure of the 2004 and 2006 individual income tax refunds for * (the "Taxpayers") to satisfy delinquent Virginia tax liabilities.

FACTS

The Taxpayers (a husband and wife) filed joint Virginia income tax returns reporting tax overpayments for the taxable years at issue. The Department used the refunds to offset tax liabilities resulting from penalties assessed under Va. Code § 58.1-1813 against the husband for liabilities accrued by two businesses from 1989 through 1994.

You (the "wife") contend that your husband accrued the tax liabilities before you were married and the wife is entitled to relief as an innocent spouse. The wife requests that the portion of the refunds resulting from taxes paid by her be refunded.

DETERMINATION

Protective Claim

Pursuant to the authority granted the Tax Commissioner under Va. Code § 58.1-1824, a protective claim for refund can be held pending the outcome of another case before the courts or the claim may be decided based upon its merits pursuant to Va. Code § 58.1-1821. As permitted by statute, the wife's request has been treated as an appeal under Va. Code § 58.1-1821.

Innocent Spouse

Virginia's conformity to federal law is set forth in Va. Code § 58.1-301, which provides that the terms used in the Virginia income tax statutes will have the same meanings as used in the Internal Revenue Code (IRC). As such, Virginia's conformity to federal law is limited to the actual use of a specific term in a Virginia statute. Conformity does not extend to terms, concepts, or principles not specifically provided in Title 58.1 of the Code of Virginia .

Under federal law, a husband and wife are jointly and severally liable for the entire income tax on a joint return. Under § 6015 of the IRC, in certain circumstances when a spouse intentionally hides income or otherwise falsifies a return, relief from joint liability is accorded to an innocent spouse.

The Code of Virginia does not contain a provision that includes the term that addresses an "innocent spouse." Accordingly, the Department is not required to follow the federal innocent spouse rule.

Joint Liability

Virginia Code § 58.1-341 B 1 provides that a husband and wife who file a joint tax return are liable jointly and individually for their tax liabilities. Title 23 of the Virginia Administrative Code (VAC) 10-110-240 C 3 b provides that joint and several liability "means that each party to the return is individually liable for its contents and the entire tax liability arising therefrom . . . .' Therefore, each spouse is liable for the tax liability arising from the joint return.

In this case, the wife did not file joint returns with her spouse during the 1989 through 1994 taxable years. In fact, the wife was not married to her husband during the years that the husband's tax liability was accrued. None of the husband's converted assessments were accrued during the 2004 and 2006 taxable years.

It has been the Department's policy to not hold one spouse liable for past tax liabilities of the other spouse accrued in years before a return was jointly filed. As such, the wife is not liable for the husband's converted tax assessments. Therefore, the wife is entitled to a refund of the tax overpayment stemming from her income accrued during the 2004 and 2006 taxable years.

A refund will be issued shortly for the amount of tax paid by the wife. The Code of Virginia sections and regulation cited, as well as forms and other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library 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,

Janie E. Bowen

Tax Commissioner

AR/1-1805961334B