Did a Virginia resident owe state income tax and interest on a sport utility vehicle won in a national contest?

Plain-English summary

The resident owed Virginia income tax and interest on the fair market value of the sport utility vehicle she won. Federal law generally includes prizes and awards in gross income, and a noncash prize is included at fair market value. Virginia begins with federal adjusted gross income, so the federally included prize value was also taxable by Virginia because no Virginia modification excluded it.

The IRS increased the resident's 2008 federal adjusted gross income after an audit. Virginia law required her to report that federal change by filing an amended state return within one year of the final determination. She did not file the amended return, allowing the Department to assess the additional tax at any time.

The resident argued that she had not been told the prize was taxable and that the charges were extensive. The Commissioner noted that only interest, not a penalty, had been assessed. Virginia law mandated interest as compensation for the use of money due to the Commonwealth, so the Department had no basis to waive it.

The ruling said the resident could pursue an offer in compromise based on doubtful collectibility if the assessment created financial hardship.

Common questions

Q: How much of a noncash contest prize is income?
A: The ruling used the fair market value of the goods or services received.

Q: Did not knowing the prize was taxable cancel the tax or interest?
A: No. The assessment was upheld, and the interest was mandatory.

Q: What had to happen after the IRS changed federal income?
A: The resident had to report the change on an amended Virginia return within one year of the final federal determination.

Citations and references

• IRC §§ 74(a) and 117.
• Va. Code §§ 58.1-301, 58.1-311, 58.1-312(A)(3), 58.1-322, and 58.1-1812.

Subject

Resident, won a national contest, but did not report the income from the contest.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-184

Original ruling text

November 13, 2012

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you appeal the Virginia individual income tax assessment issued to * (the "Taxpayer") for the taxable year ended December 31, 2008. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer, a Virginia resident, won a sports utility vehicle in a national contest during the 2008 taxable year. She filed her 2008 federal and Virginia income tax returns, but did not report the income from the contest.

The Taxpayer was audited by the Internal Revenue Service (IRS). As a result of the audit, the Taxpayer's federal adjusted gross income (FAGI) was increased to include the market value of the prize winnings. The Taxpayer failed to file an amended Virginia income tax return reflecting the IRS adjustment.

The IRS notified the Department of the changes in the Taxpayer's FAGI, and the Department issued an assessment for additional tax and interest. The Taxpayer appeals the assessment, contending she was not informed that the prize was taxable.

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). 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.

IRC § 74(a) requires the inclusion in gross income of all amounts received as prizes and awards unless such prizes or awards are specifically excluded under subsection (b), or IRC § 117. When a prize or award is made in the form of goods or services, the fair market value of the goods or services is the amount to be included in 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 authorizes the Department to assess the appropriate tax at any time. In this case, the Taxpayer failed to file an amended Virginia individual income tax return as required by Va. Code § 58.1-311 to include the fair market value of the prize.

The Taxpayer contends that the assessment, penalties and interest are extensive. However, in this instance only interest has been assessed. Virginia Code § 58.1-1812 mandates the application of interest to any assessment of tax. Interest is not assessed as a penalty for noncompliance with the tax laws. Rather, it represents a fee for the use of money that was properly due the Commonwealth. Based on the information presented, there is no basis to waive the assessed interest, and the assessment is correct as issued.

If the 2008 assessment creates a financial hardship, the Taxpayer may pursue an offer in compromise based on doubtful collectibility. If the Taxpayer should decide to request an offer in compromise, she should complete an Offer in Compromise - Individual Request for Settlement, and Financial Information Statement.

The completed form and statement will allow the Department to review and analyze the Taxpayer's financial situation. The specified information should be mailed to, Virginia Department of Taxation, Attn: CICT, P.O. Box 2475, Richmond, Virginia 23218-2475. If you have any questions about making an offer, you may contact a member of the Offer in Compromise Team at *. Upon completion of that review, a response will be issued to the Taxpayer.

The Code of Virginia sections cited and referenced forms are available on-line at www.tax.virginia.gov in the Laws, Rules and 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/1-5025182741.D