October 30, 2015
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek reconsideration of the Department's determination letter, issued as Public Document (P.D.) 15-50 (4/3/2015), to ***** (the "Taxpayers") for the taxable years ended December 31, 2011 and 2012.
FACTS
In P.D. 15-50, the Department held that the Taxpayers, a husband and wife, were limited to claiming the maximum $4,000 deduction for each Virginia prepaid tuition contract because the husband, who purchased the contracts, was less than 70 years old and the wife was more than 70. The Taxpayers seek a reconsideration, contending that the husband purchased the contracts as an agent on behalf of the wife. They also assert that they entered into the contract without the benefit of counsel. Finally, the Taxpayers argue that they relied on written advice from the Department on the proper method to claim the deduction.
DETERMINATION
Agency
The Taxpayers assert that the husband purchased the prepaid contracts on behalf of the wife due to her illness. In United States v. Rapoca Energy Co. 613 F. Supp 1161 (W.D. Va. 1985), the court stated that in order for an agency relationship to exist, it is necessary for an agent to be subject to a principal's control and the work must be done to benefit the principal.
It has not been the Department's policy to treat marriage as an agency relationship. 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. Further, 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. See P.D. 08-44 (4/17/2008).
In this case, the husband created the contract, listed himself as the owner, and made the contributions in his name. See P.D. 00-216 (12/7/2000), which addresses who may claim the deduction provided by Va. Code § 58.1-322 D 7 under various scenarios. Absent some clear and cogent evidence that he was acting as the agent of the wife, mere declarations of an agency relationship are not sufficient to adjust a tax liability.
Consultation with Tax Professional
The Taxpayers contend that had they consulted with a tax professional they could have established a living trust that would have allowed the husband to purchase the prepaid contracts on behalf of the wife. Even if the Department accepts this as true, the contracts were not structured in this manner. The Department relies on the actual contractual arrangement and the applicable law. In this case, the husband is listed as the purchaser and the law limits the deduction to $4,000 per contract when the purchaser is less than 70 years of age.
Written Advice
The Taxpayers argue that they received a letter from the Department in June 2012 allowing the deduction prior to receiving the September 2014 notification of the disallowance. As such, they assert that they had the right to rely on the June 2012 letter.
Virginia Code § 58.1-1835 provides that the Tax Commissioner shall abate any portion of tax, interest and penalty attributable to erroneous written advice by the Department under the following conditions:
1. The written advice was reasonably relied upon by the taxpayer and was in response to a specific written request by the taxpayer;
2. The portion of the penalty or tax did not result from a failure by the taxpayer to provide adequate or accurate information; and
3. The facts of the case described in the written advice and the request thereof are the same, and the taxpayer's business or personal operations have not changed since the advice was rendered.
Furthermore, Va. Code § 58.1-1845 sets out the Virginia Taxpayer Bill of Rights. Under subsection 4, one of the guaranteed rights is:
The right to abatement of tax, interest and penalties in accordance with § 58.1-1835, attributable to any taxes administered by the Department, when the taxpayer reasonably relies upon binding written advice furnished to the taxpayer by the Department through authorized representatives in response to the taxpayer's specific written request which provided adequate and accurate information.
Based on the above statutory provisions, the erroneous advice must be reasonably relied upon by the taxpayer, and such advice must be in writing. In addition, such written advice must be provided based on a specific request by a taxpayer who has provided sufficient and accurate facts so that the Department may issue a correct decision. In this case, the Taxpayers did not make a written request as to the proper method for claiming the deduction. Further, the June 2012 letter did not address the deduction for prepaid contracts. Rather the Department's letter merely notified the Taxpayers that their combined estimated tax payments were adjusted to agree with the actual tax payments.
Virginia receives approximately 3.7 million individual income tax returns per year. The errors that can be reported on a return can vary from simple math errors to complex tax avoidance arrangements. Accordingly, individual returns may go through several levels of review. Issues such as those identified in the June 2012 letter can be easily corrected during processing. Questions concerning the amount of a deduction or subtraction, however, usually require additional information from the taxpayer. In order to expedite return processing, such returns are merely flagged for further follow up. Thus, the fact that the Department contacts a taxpayer about a particular error on their return does not mean the rest of the return is correct. In addition, Virginia law generally allows the Department to make an assessment of underpaid tax within three years from the last day prescribed by law for the timely filing of the return. See Va. Code § 58.1-104.
CONCLUSION
Based on this review, the Department properly adjusted the Taxpayers' deduction for contributions to Virginia prepaid tuition contracts to the maximum $4,000 allowed for contributors under age 70. Accordingly, there is no basis to revise my prior determination, and the assessments are upheld. Updated bills will be issued, and the Taxpayers should remit payment for the outstanding balance as shown on the bills within 30 days from the date of the bills to avoid the accrual of additional interest.
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/1-6029520523.B