Did federal Tax Court allocation or a divorce agreement relieve a husband from Virginia liability on a joint 2010 return?

Subject

In accordance with Virginia statutes, the husband is jointly or severally liable for any assessment resulting from the joint return.

Plain-English summary

A married couple filed a joint 2010 Virginia return. IRS information later showed that the federal adjusted gross income reported to Virginia did not match the corrected federal amount, and the couple did not file a Virginia amended return. Virginia adjusted the return and assessed additional tax.

The husband said he did not know about his wife's income and sought innocent-spouse-style relief. A federal Tax Court decision had denied relief from the federal debt but allocated 50% to each spouse. Virginia explained that the federal court's jurisdiction and allocation concerned federal liability, not Virginia's joint-return rules.

The couple later divorced, and the husband said he alone was paying despite their property settlement. That contract did not bind the Department because Virginia was not a party; any contractual claim ran against the former spouse.

Virginia law made each spouse jointly and severally liable for the entire liability arising from a joint return. The husband therefore remained liable and the assessment was upheld.

Common questions

Did lack of knowledge of the spouse's income eliminate Virginia liability? No. The joint return made each spouse responsible for its contents and the full resulting tax.

Did the federal Tax Court's 50-50 result bind Virginia? No. It addressed federal tax liability.

Did the divorce settlement protect the husband from Virginia collection? No. It could govern rights between former spouses but did not bind the Department.

Citations and references

• Va. Code §§ 58.1-301, 58.1-311, 58.1-312 A 3, and 58.1-341 B 1.
• IRC §§ 6015, 6512 B, and 7463.
• Smith v. Smith, 3 Va. App. 510, 351 S.E.2d 593 (1986); P.D. 99-103.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-251

Original ruling text

December 23, 2015

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

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

FACTS

The Taxpayers, a husband and a wife, filed a joint Virginia individual income tax return for the 2010 taxable year. The Department received information from the Internal Revenue Service (IRS) that the federal adjusted gross income (FAGI) reported to the IRS did not match the FAGI reported to the Department. The Department adjusted the FAGI based on the IRS information and issued an assessment. The husband appeals the assessment, contending he had no knowledge of his wife's income and requests relief from the tax liability resulting from the change in 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 federal adjusted gross income (FAGI).

Change in Federal Adjusted Gross Income

Virginia Code § 58.1-311 requires any individual to report a change or correction in federal taxable income within one year of the final determination of such change or correction by filing an amended return with the Department. If the taxpayer fails to file an amended return, Va. Code § 58.1-312 A 3 permits the Department to assess the appropriate tax at any time. The Taxpayers failed to file a Virginia amended income tax return to report the changes to FAGI, the starting point for the Virginia income tax calculation. As such, the Department adjusted the Taxpayer's return based on the federal changes as provided under Va. Code § 58.1-312 A 3.

Innocent Spouse

The husband asserts that he had no knowledge of his wife's income. The information provided shows the Taxpayer and his wife claimed a foreign income exclusion on their 2010 federal income tax return in which the wife's income was used in the calculation.

The husband requested relief from joint and several liability on a joint return as prescribed under Internal Revenue Code (IRC) § 6015. The request was heard by the United States Federal Tax Court (the Court). The Court held that the wife's income was considered an item of community income and therefore properly included in the Taxpayers' gross income. The Court determined that the husband was not entitled to relief from the federal tax debt but held each spouse liable for 50% of their liability. Pursuant to IRC § 6512 B, petitions made to a federal tax court are generally limited to a review of deficiencies assessed by the IRS. Notwithstanding the ruling issued by the Federal Tax Court, the Court's jurisdiction is over deficiency assessments imposed by Subtitle A. See IRC § 7463.

The Taxpayers divorced in January 2014. The husband argues that in spite of a Property Settlement and Separation Agreement issued by the Virginia circuit court, he is the only one making payments to satisfy the Virginia tax. In Public Document (P.D.) 99-103 (05/10/1999), the Department ruled that for Virginia income tax purposes, property settlement agreements are contracts and are subject to the same rules of information, validly, and interpretation as other contracts. Smith v. Smith , 3 VA App. 510, S.E. 2d 593 (1986). Because the Department is not a party to the contract, it is not bound by its provisions. The role of the Department, however, is to properly administer the laws regarding taxation. The only party to whom the husband could seek relief from the tax is the other party in the contract, his wife.

Further, Va. Code § 58.1-341 B 1 provides that a husband and wife who file a joint tax return are jointly and severally liable for the tax liability. This means that each party to the return is individually liable for its contents and the entire tax liability arising therefrom and further entails "a joint or several obligation." Therefore, the tax liability may attach to one spouse individually or to both spouses jointly.

CONCLUSION

The evidence provided demonstrates the husband agreed to file a joint Virginia individual income tax return with his spouse. In accordance with Virginia statutes, the husband is jointly or severally liable for any assessment resulting from the joint return. Accordingly, the assessment is upheld.

The Code of Virginia sections, and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions 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/1-6044910782.D