Did interest on obligations issued directly by a Federal Home Loan Bank qualify for Virginia's U.S.-obligation subtraction?

Subject

Federal Home Loan Bank qualify for the subtraction.

Plain-English summary

Interest on obligations issued directly by a Federal Home Loan Bank qualified for Virginia's subtraction. The taxpayers had claimed a subtraction for U.S.-obligation interest and dividends, but the audit originally disallowed it because their supporting information was incomplete.

On appeal, the Department reconciled portions of the Forms 1099 with schedules attached to the federal return. It also confirmed that notes, bonds, and other obligations issued directly by the Federal Home Loan Bank were within the qualifying category.

The records supported the taxpayers' revised subtraction, so Virginia abated the 2006 assessment.

What this means for you

• The ruling covered interest on obligations issued directly by a Federal Home Loan Bank.
• Broker statements and Forms 1099 must be detailed enough to trace the qualifying income.
• Incomplete documentation can cause an audit disallowance even when the underlying instrument qualifies.
• The Department's published instrument list was described as subject to change as laws and interpretations evolved.

Common questions

Did all investment income associated with a Federal Home Loan Bank automatically qualify?

The ruling specifically confirmed notes, bonds, and other obligations issued directly by the bank.

What happened to the assessment?

It was abated after the Department reconciled the supporting documents.

Citations and references

• Va. Code § 58.1-322(C)(1).
• P.D. 94-281, discussed as the Department's list of qualifying instruments.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-218

Original ruling text

September 16, 2010

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the individual income tax assessment issued to * (the "Taxpayers") for the 2006 taxable year.

FACTS

On their 2006 income tax return, the Taxpayer's claimed a subtraction for interest and dividends from obligations of the United States. Under audit, the Department disallowed the subtraction because sufficient information was not provided to support the subtraction. The Taxpayers appeal the assessment, contending the statements provided from the investment companies should be sufficient to support the subtraction claimed.

DETERMINATION

Virginia Code § 58.1-322 C 1 provides a subtraction, to the extent included in federal adjusted gross income, for:

Interest or dividends on obligations of the United States and on obligations or securities of any authority, commission or instrumentality of the United States to the extent exempt from state income taxes under the laws of the United States including, but not limited to, stocks, bonds, treasury bills, and treasury notes, but not including interest on refunds of federal taxes, interest on equipment purchase contracts, or interest on other normal business transactions.

In this case, the Department requested the Taxpayers provide information to substantiate the subtraction claimed on their 2006 income tax return. In reviewing their records, the Taxpayers discovered that they may have understated the subtraction. In order to support the revised amount, the Taxpayers submitted portions of federal information returns (Form 1099) issued by brokers and financial intuitions.

Based on the information provided, the Department's auditor was unable to verify that amount of the subtraction claimed by the Taxpayers. In addition, the auditor concluded the amounts received from the Federal Home Loan Bank may have included interest ineligible for the subtraction.

The Appeals and Rulings unit has analyzed the information provided. Although the information was incomplete, the Department has been able to reconcile portions of the Form 1099s provided coupled with some schedules attached to the Taxpayer's federal income tax return to the revised subtraction.

In Public Document (P.D.) 94-281, the Department published a list of instruments that qualified for the subtraction. Although this list continues to be subject to change without notice as laws and interpretations change and evolve, the Federal Home Loan Bank was included on the list. A review of the federal laws governing this organization confirms that interest paid on notes, bonds and other obligations issued directly by the Federal Home Loan Bank qualify for the subtraction. As such the assessment will be abated.

The Code of Virginia section and public document cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions, you may contact * in the Department's Office of Policy and Administration, Appeals and Rulings at ***.

Sincerely,

Craig M. Burns

Acting Tax Commissioner

AR/1-4467770225.D