Which mortgage, charitable, mileage, uniform, and professional-dues deductions survived Virginia's documentation review?

Plain-English summary

Virginia allowed or adjusted only the deductions supported under the applicable federal substantiation rules. The couple challenged changes to mortgage interest, cash and noncash charity, mileage, uniforms, and professional dues.

Additional records showed the correct second-mortgage interest, so Virginia adjusted that deduction to the documented amount.

The cash-gift schedule exceeded the federal return, appeared to duplicate entries, and did not adequately support one professional-society contribution. Clothing donations aggregated above $5,000 required a qualified appraisal, which the couple lacked. Other donated furniture, books, tools, electronics, and personal property individually worth no more than $500 could be deducted with proper donee receipts.

Call-back trips to the taxpayers' regular medical workplaces remained personal commuting, not business mileage. Uniforms and professional dues were below the then-applicable 2%-of-FAGI floor for miscellaneous itemized expenses.

The couple received one final 30-day period to submit charitable-contribution records before the adjustment was finalized.

What this means for you

• Reconcile deduction schedules to the federal return and remove duplicates.
• Aggregate similar donated property when applying the $5,000 appraisal threshold.
• Keep donee receipts with date, place, and property descriptions.
• Call-back travel to a regular workplace can still be nondeductible commuting.

Common questions

Q: Was all mortgage interest denied?
A: No. Virginia adjusted it to the amount shown by additional records.

Q: Why was the clothing donation denied?
A: Similar clothing items exceeded $5,000 in aggregate without a qualified appraisal.

Q: Were other noncash gifts allowed?
A: Yes, subject to proper receipts for items within the applicable lower-value rules.

Citations and references

• Va. Code §§ 58.1-219, 58.1-301, and 58.1-322(D)(1).
• IRC §§ 163(a) and 170(a).
• Treas. Reg. §§ 1.67-1(a)(i), 1.170A-13, and 1.262-1(b)(5).
• Judith E. Stephenson Fast v. Commissioner, T.C. Memo 1998-272.
• Margaret Galotta Sheldon, 50 T.C. 24 (1968).

Subject

Inadequate documentation to claim the deductions.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-140

Original ruling text

August 2, 2011

Re: § 58.1-1821 Application: Individual Income Tax

Dear ****:

This will reply to your letter in which you seek correction of the individual income tax assessment issued to * (the "Taxpayers") for the taxable year ended December 31, 2010.

FACTS

Under review, the Department adjusted the Taxpayers' itemized deductions reported on their 2010 Virginia income tax return resulting in a reduction of the Taxpayers' refund. The Taxpayers appeal the adjustments to the mortgage interest deduction, cash and non-cash charitable gifts, and unreimbursed employee expenses, contending they provided adequate documentation to claim the deductions.

DETERMINATION

Virginia Code § 58.1-301 provides 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. 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).

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. However, the Department retains the authority to adjust FAGI where there is clear evidence that the amounts reported on the federal or Virginia income tax return are not consistent with the IRC. See Va. Code § 58.1-219. Virginia Code § 58.1-322 D 1 allows a taxpayer to deduct from its Virginia adjusted gross income the amount allowed for itemized deductions for federal income tax purposes.

Mortgage Interest

Under IRC § 163(a), taxpayers may deduct mortgage interest paid on a principal residence. The Department's auditor disallowed the mortgage interest claimed by the Taxpayers on a second mortgage because of insufficient documentation.

The Taxpayers have provided additional documentation reflecting the proper amount of interest paid on the second mortgage, which differed from the amount they claimed on their return. The itemized deduction for mortgage interest will be adjusted to reflect the documentation provided.

Gifts to Charity

Under IRC § 170(a), taxpayers may deduct charitable contributions of cash, tangible and intangible personal property, and services made during the taxable year. Because of Virginia's conformity to the IRC, taxpayers must meet the substantiation requirements established by federal regulation.

Cash Gifts

The Department adjusted the cash contributions based on the bank statements and receipts provided. The Taxpayers have provided a list of cash contributions. The reported total exceeds the amount they reported on the federal return. It appears that a number of items are listed twice on the Taxpayers' schedule and, therefore, cannot be relied upon as accurate documentation for the amount of the deduction. In addition, there is insufficient documentation to substantiate the Taxpayers' donation to a professional society.

Non-Cash Gifts

The Taxpayers donated clothing, furniture, books, tools, electronics and other personal property. The Taxpayers provided schedules showing that items were valued based on commercial tax preparation software and on-line auction sites. The Department disallowed the entire, deduction because the aggregate value of the donation exceeded $5,000, and the Taxpayers did not provide an appraisal.

Under IRS regulations, substantiation requirements for gifts of property other than money vary depending on the amount of the deduction claimed. The regulations set up three tiers of deductions, for amounts up to and including $500, greater than $500 but less than $5,000, and greater than $5,000, and require greater substantiation for each tier. See Treas. Reg. § 1.170A-13. For purposes of meeting the $5,000 amount claimed for items of "similar property," such property is aggregated whether or not it is donated to the same charity. See Treas. Reg. § 1.170A-13(c)(1)(i). Pursuant to Reg. § 1.170A-13(c)(1), a taxpayer must obtain a qualified appraisal to substantiate the donation of similar items that have an aggregated value of greater than $5,000.

A portion of the Taxpayer's non-cash charity gift was for an aggregate of clothing that was valued at more than $5,000. A donation of clothing valued at greater than $5,000 requires the submission of a qualified appraisal. See Judith E. Stephenson Fast v. Commissioner , TC Memo 1998-272. Because the Taxpayers have not provided an appraisal valuing the clothing, the auditor properly disallowed the clothing as an itemized deduction.

The remaining donated property was comprised of furniture, books, tools, electronics and other personal property. Under Treas. Reg. § 1.170A-13(b)(1), the taxpayer need only have a receipt from the donee containing the name and address of the donee, the date and place of the contribution, and a description of the property on the receipt. Because no individual item claimed is worth more than $500, the regulations covering non-cash contributions of $500 or less are applicable. See Treas. Reg. § 1.170A-13(b)(3). The Taxpayers were entitled to itemize and deduct the value of the contribution of these items.

Miscellaneous Itemized Expenses

Vehicle Expenses

The Taxpayers each claimed the standard mileage rate for traveling to their place of business for call-backs. The auditor disallowed this deduction because commuting to a place of business is not a deductible business expense.

A taxpayer's costs of commuting to his place of business are personal expenses and do not qualify as deductible business expense. See Treas. Reg. § 1.262-1(b)(5). In Margaret Galotta Sheldon , 50 TC 24 (4/14/1968), the Tax Court held that even the costs of commuting to one's place of business due to call-backs are considered personal expenses and do not qualify as deductible business expenses.

In this case, the Taxpayers indicate that getting called back to their place of employment resulted from their occupations in the medical field. As mentioned above, mileage for such commuting is not eligible as an itemized deduction.

Other Miscellaneous Itemized Expenses

The Taxpayers deducted the costs of uniforms and their professional dues. Pursuant to Treas. Reg. § 1.67-1(a)(i), unreimbursed employee expenses subject to the 2% FAGI floor include uniforms and professional dues. Because the collective amount of the Taxpayer's miscellaneous itemized expenses is less than 2% of their FAGI, the auditor properly disallowed these deductions.

CONCLUSION

I will give the Taxpayers one last opportunity to provide documentation with regard to the itemized deduction for charitable contributions. The documentation should be submitted within 30 days from the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attention: *. Upon receipt, the assessment will be adjusted to reflect this determination the documentation provided, if appropriate. If the documentation is not received within the allotted time, the assessment will be adjusted in accordance with this determination and an updated bill will be issued.

The Code of Virginia sections cited 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,

Craig M. Burns

Tax Commissioner

AR/1-4774357511.B