Tax Type
Individual Income Tax
Description
Conformity to federal returns
Topic
Taxable Income
Date Issued
10-03-1986
October 3, 1986
Re: Virginia Code §58.1821 Application
Individual Income Tax
Dear ****************
I would like to apologize for the delay in responding to your letter of March 15, 1986 in which you make application for correction of the department's decision to deny your refund requests for taxable years 1971 and 1972. However, because of the complexity of the issues involved and the length of time that has transpired since you originally requested the refunds, this response has been delayed.
FACTS
You filed amended Virginia individual income tax returns for taxable years 1970, 1971 and 1972 in March, 1974 requesting refunds. These refund requests were based upon amended federal individual income tax returns filed to claim a charitable contribution deduction for gifts of patent rights and the royalty free use of your invention and a foreign expropriation loss. In June, 1974 the department denied your request for refunds and instead issued assessments for 1971 and 1972. Through a long series of correspondence between yourself and the department, the assessments for taxable years 1971 and 1972 were abated in full in 1984.
You are now requesting that the department honor your original request for refunds. In support of your refund requests, you have submitted copies of Internal Revenue Service examination reports of your returns for the years in question. These Internal Revenue Service documents verify that for taxable year 1971 you were allowed an itemized deduction for an "abandonment loss". The documents that you have submitted do not establish that you were allowed any amount of charitable deduction for the value of the patent rights and the royalty free use of your invention. You explained in you application that even though the Internal Revenue Service agreed that you would probably be allowed these deductions if you pursued the matter in the courts, the precedent set by your case would materially affect the U.S. Treasury. Under the circumstances you signed a federal waiver, Form 2297 and did not pursue the matter through the federal courts.
Since you did not sign a similar waiver with the Commonwealth of Virginia, you contend that you should be allowed this charitable gift deduction on your amended Virginia returns.
DETERMINATION
Prior to taxable years beginning on and after January 1, 1972, Virginia's income tax structure was separate and independent from the federal income tax structure. Virginia's definition of taxable income and the items that constituted taxable income, did not rely on the federal definition of taxable income. The time at which certain items of income and deduction were recognized, in the computation of Virginia taxable income, also differed.
Generally, Virginia law prior to conformity required that items of income and deduction be recognized within the taxable year that payment was made or gain or loss occurred. The applicable Virginia statute for taxable years 1970 and 1971, Virginia Code §58-81 (attached), required that both losses (d) and charitable contributions (m) be deducted in the same taxable year in which they occurred. There was no provision under that section for prorating the value of a patent, license or royalty over the life of the patent. Neither was there a provision under that section for the carryover of a loss, such as the one you claimed on your return.
Based upon the information that you have provided, your claimed deduction for a charitable contribution arose from a patent that was granted in 1961 and your claimed foreign expropriation loss arose from an action taken by the Israeli government in In order for either of these items to have been deductible on your Virginia returns prior to Virginia's conformity with federal income tax law, the deduction would have had to have been claimed in the year of the action that first gave rise to the deduction. Therefore, no deduction was allowable on your amended Virginia returns for taxable years 1970 and 1971.
For taxable years beginning on and after January 1, 1972, Virginia conformed its income tax to the federal income tax. The computation of Virginia taxable income for individuals begins with federal adjusted gross income with certain modifications. Likewise, Virginia itemized deductions are equal to federal itemized deductions with certain modifications. Any amendment or change to federal taxable income will also change Virginia taxable income. Virginia Code §58.1-1823 provides that:
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- - Any person filing a tax return required for any tax administered by the Department of Taxation may, within three years from the last day prescribed by law for the timely filing of the return, or within sixty days from the final determination of any change or correction in the liability of the taxpayer for any federal tax upon which the state tax is based, whichever is later, file an amended return with the Department. If the Department is satisfied, by evidence submitted to it or otherwise, that the tax assessed and paid upon the original return exceeds the proper amount, the Department may reassess the taxpayer and order that any amount excessively paid be refunded to him.
- - Any person filing a tax return required for any tax administered by the Department of Taxation may, within three years from the last day prescribed by law for the timely filing of the return, or within sixty days from the final determination of any change or correction in the liability of the taxpayer for any federal tax upon which the state tax is based, whichever is later, file an amended return with the Department. If the Department is satisfied, by evidence submitted to it or otherwise, that the tax assessed and paid upon the original return exceeds the proper amount, the Department may reassess the taxpayer and order that any amount excessively paid be refunded to him.
Absent substantiation that these amounts were actually allowed as deductions, decreasing your federal taxable income, the department is without authority to grant your request for a refund for taxable year 1972.
Therefore, based upon all of the evidence submitted, the department finds no basis to make any further adjustment to the amended returns that you filed for taxable years 1970, 1971 and 1972.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner