Did additional construction-business records reduce a couple's 2004 and 2005 Virginia income assessments?

Plain-English summary

Virginia revised both assessments after reviewing additional construction-business information. The new records did not validate the income amounts originally reported, but they did show that the audit had failed to allow any business expenses.

For 2004, Virginia revised the calculation but denied a claimed first-mortgage payoff. Paying a loan or mortgage reduces a liability and is not itself a business expense. For 2005, the Department accepted the taxpayers' computation.

Revised assessments would be issued using the Department's enclosed schedule. The published text does not reproduce that schedule, so the precise dollar changes are not available from this source.

Common questions

Q: Did the appeal records fully validate the original returns?
A: No. They supported revisions, but not the amounts originally reported.

Q: Was paying off the first mortgage deductible as a business expense?
A: No. Virginia treated it as repayment of a liability.

Citations and references

• Va. Code §§ 58.1-219, 58.1-301, and 58.1-322.
• David J. Edwards, T.C. Memo 2002-169.

Subject

Virginia income tax liability has been adjusted with additional information provided.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-33

Original ruling text

March 26, 2012

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter, in which you seek correction of the Virginia individual income tax assessments issued to * (the "Taxpayers") for the taxable years ended December 31, 2004 and 2005. I apologize for the delay in responding to your letter.

FACTS

The Taxpayers, a husband and wife, were audited by the Department for the 2004 and 2005 taxable years. The auditor requested additional documentation with regard to the husband's construction business. After reviewing the documentation provided, the auditor adjusted the Taxpayers' federal adjusted gross income (FAGI) for the taxable years at issue and issued assessments. The Taxpayers appeal the assessments, contending the audit overstates their FAGI.

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 FAGI. Income included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Va. Code § 58.1-322.

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.

The Taxpayers have provided additional information with the appeal concerning the husband's construction business. The information does not support the amounts originally reported in the Taxpayers' Virginia income tax returns. A review of the information, however, shows that it is sufficient to revise the Department's assessments, which did not provide for any business expenses that might have been incurred by the Taxpayer.

For the 2004 taxable year, the Department made an adjustment to disallow a deduction for the payoff of a first mortgage. Payments to satisfy a loan or mortgage reduce a liability and are not business expenses. See David J. Edwards , TC Memo 2002-169. The enclosed schedule illustrates the Department's revisions to the Taxpayer's calculations. The Department will accept the Taxpayers' computations for the 2005 taxable year.

As such, the Taxpayers' Virginia income tax liability has been adjusted in accordance with this determination. Revised assessments will be issued shortly. They should be paid within 30 days from the date of the notice to avoid the accrual of additional interest.

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/1-4748993193.B