Tax Type
Individual Income Tax
Retail Sales and Use Tax
Description
Income from criminal activities
Topic
Collection of Tax
Taxability of Persons and Transactions
Date Issued
09-15-1987
September 15, 1987
Re: §58.1-1821 Application; Individual Income Tax
§58.1-313 Jeopardy Assessment;
Dear ***************
This is in response to your letters of May 7, July 1, and July 2, 1987. You have requested reconsideration of the determination in my letter dated April 16, 1987, based on returns filed for 1985 and 1986.
Facts
The taxpayer was arrested in May of 1986 at which time the police seized grams of cocaine and approximately ************* in cash. The taxpayer was charged with the possession of cocaine with the intent to distribute. The jury found the taxpayer guilty of possession only and he is currently incarcerated.
The department was informed by the police that the taxpayer had been a major source of cocaine in the area, and that the cash seized represented one week's profit (later corrected to two week's profit). The taxpayer told the police at the time of his arrest that he had been unemployed from September, 1985, until his arrest in May, 1986, and that the cash seized was his accumulated savings and gambling winnings.
Based on this information the department concluded that the taxpayer had received substantial income, that collection of the income tax for 1986 was in jeopardy, estimated the amount of tax liability, and issued a jeopardy assessment for that amount.
In my letter of April 16, 1987, that jeopardy assessment was reduced based on subsequent information furnished by the police. on April 14, 1987, the department assessed income tax for 1985 and sales tax for the eight months the taxpayer was known to have been selling cocaine.
You have now filed Virginia income tax returns on behalf of your client for 1985 and 1986 and request abatement of the department's assessments of income tax for 1985 and 1986 and sales tax for September, 1985, through May, 1986.
Determination
You place great reliance on the fact that your client was charged with possession with intent to distribute and convicted of mere possession. Because he was not charged with, or convicted of, selling cocaine, and evidence of drug sales was not introduced at his criminal trial, you contend that the department cannot assess income and sales tax based on drug sales.
First, the assessment of taxes is not affected by decisions by the Commonwealth's Attorney as to which crimes to prosecute and what evidence to introduce in criminal trials. Income and sales tax liability does not depend on a criminal conviction. For example, if police observe a sales transaction, they may not be able to prove beyond a reasonable doubt that the substance sold was cocaine without a laboratory analysis. But the fact that something tangible has been exchanged for cash is all that is necessary to show that a taxable sale has occurred.
Second, the burden of proof is entirely different. The Commonwealth must prove a criminal defendant guilty beyond a reasonable doubt. An assessment of tax is presumed correct under Section 58.1-205, and the taxpayer has the burden of proving that the assessment is wrong. Dept. of Taxation v. Lucky Stores, 217 Va. 121, 225 S.E. 870 (1976).
The department has credible information that the taxpayer has accrued substantial income and sales tax liability, and has made a reasonable estimate of the tax liability pursuant to §58.1-111. You have not shown that the assessments are erroneous or improper.
We cannot accept the returns you filed on behalf of your client. They purport to be joint returns, however neither the taxpayer nor his spouse has signed the returns. Only you have signed them as the preparer.
In addition, on March 11, 1987, you were advised that the department would require a copy of the federal returns as well as the Virginia returns for 1985 and 1986. You have not supplied a copy of the federal return for either year. The signed Virginia returns and the copies of the federal returns should be mailed to:
Supervisor
Technical Services Section
Department of Taxation
P.O. Box 6-L
Richmond, VA 23282
Determination
Accordingly, the assessments of income and sales tax liability are correct as made. The returns you filed are being returned to you for proper signature. Pursuant to §58.1-310 the department requires that a complete copy of the federal returns for 1985 and 1986, with all schedules and W-2 statements, be furnished along with the properly executed Virginia returns.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner