Did Virginia's mistaken allowance of a federal retirement survivor subtraction for 2007 require the same subtraction for 2008-2010?

Subject

Earlier audit allowance did not protect later survivor payments

Plain-English summary

Virginia upheld the 2008-2010 assessments even though an auditor had mistakenly allowed the taxpayer's similar subtraction for 2007. The taxpayer was receiving periodic survivor benefits from a federal employee retirement plan, not a qualifying lump-sum death benefit from an insurance-company annuity contract.

The 2007 review did not create binding protection for later years. The earlier examination covered one year, the amount fell within audit tolerance for lump-sum distributions, and the supplied information did not reveal that payments would continue in later years. By 2010, the fixed series of payments was clear.

Virginia also rejected reliance on abbreviated tax-form instructions, which did not replace the governing statute and authorities.

What this means for you

• A prior audit's no-change letter does not necessarily authorize the same treatment in later years.
• Binding-advice relief requires the same facts, adequate information, reasonable reliance, and qualifying written advice tied to a specific request.
• Continuing retirement survivor payments did not satisfy the ruling's contract and lump-sum requirements.
• Fully disclose recurring-payment terms when requesting or relying on tax guidance.

Citations and references

• Va. Code §§ 58.1-203, 58.1-301, 58.1-322 C 32, 58.1-1835, and 58.1-1845.
• IRC §§ 72 and 101.
• Public Documents 09-36, 10-63, and 13-149, discussed in the ruling.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-227

Original ruling text

December 18, 2013

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the Virginia individual income tax assessments issued to * (the "Taxpayer") for the taxable years ended December 31, 2008 through 2010. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer filed Virginia income tax returns for the 2008 through 2010 taxable years. She claimed a subtraction for an annuity death benefit resulting from income received from a federal employee retirement plan. Under audit, the Department disallowed the subtraction and issued assessments for additional tax and interest. The Taxpayer appeals the assessments, contending the Department's policy regarding the subtraction is not set forth in the statute or in the income tax instruction booklet. Further, she asserts the Department reviewed her 2007 return and allowed the death benefit subtraction.

DETERMINATION

Death Benefit Subtraction

Virginia Code § 58.1-301 provides that the 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 the 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.

Pursuant to Va. Code § 58.1-322 C 32, a taxpayer is allowed a subtraction of "the death benefit payments from an annuity contract that is received by a beneficiary of such contract and is subject to federal income taxation." In order to qualify for the subtraction, a death benefit payment must meet three requirements. First, the source of the payment must be an annuity contract between a customer and an insurance company. Second, the annuity payment must have been awarded to the beneficiary in a lump sum. Finally, the payment must be subject to taxation at the federal level. See Public Document (P.D.) 09-36 (3/31/2009) and P. D. 10-63 (5/7/2010).

The Taxpayer asserts that the statute does not provide for the requirements detailed in P.D. 09-36 and 10-63. In 2012, the General Assembly enacted legislation to clarify the intent of the law regarding the subtraction of annuity death benefits by amending Va. Code § 58.1-322 C 32 to codify the Department's policy implemented in P.D. 09-36. See Chapter 305, Acts of Assembly .

The Taxpayer received a retirement survivor benefit from the federal government, and the benefits were transferred from a retiree recipient to the Taxpayer. The Taxpayer states that though the annuity was not paid as a lump sum death benefit, the lump sum death benefit was an option.

Under IRC § 101 (as amended in 2006), life insurance benefit payments paid by reason of the death of the insured are exempt from federal taxation, and thus exempt from Virginia taxation. IRC § 72 (as amended in 2013), however, provides that a portion of the death benefits from an annuity, including life insurance contracts, are taxable. Because death benefits were treated dissimilarly for income tax purposes, the General Assembly sought to provide relief to individuals who are unable to obtain standard life insurance. As a result, the death benefits subtraction for certain annuity contract payments was enacted.

Interpretation of Statute

Virginia Code § 58.1-203 grants the Tax Commissioner power to issue rulings related to the interpretation and enforcement of the laws governing taxes administered by the Department. See P.D. 97-497 (12/10/1997). The Virginia Supreme Court has consistently held that the construction of a tax statute by a state official charged with its administration is entitled to great weight. See Webster v. Department of Taxation , 219 VA. 81, 84-85, 245 S.E. 2d 252, 255 (1978) and Winchester TV Cable v. State Tax Com. , 216 Va. 289, 290, 217, S.E. 2d 885, 889 (1975).

Further, by reason of their character as legislative grants, statutes relating to deductions and subtractions allowable in computing income and credits against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See Howell's Motor Freight, Inc., et al. v. Virginia Department of Taxation , Circuit Court of the City of Roanoke , Law No. 82-0846 (10/27/1983).

Tax Form Instructions

The Taxpayer argues that the Department conducted an audit of the 2007 death benefit subtraction in June 2010. The Department allowed the subtraction and issued a statement that no further action was required. The Department later audited the 2008 through 2010 tax years and denied the death benefit subtraction. The Taxpayer believes that if the Department had issued a statement properly advising her of its policies regarding the subtraction for the 2007 taxable year, she would not have claimed the subtraction in subsequent years.

The Taxpayer also contends that the instructions for individual income tax returns are misleading and incomplete, and she relied upon the information within the instructions when computing their Virginia taxable income for those taxable years. The Department has recently addressed this issue in P.D. 13-149 (7/31/2013).

The instructions for the taxable years at issue stated that the death benefit payments subtraction is allowed to the extent that such benefits, which were received from an annuity contract, are subject to federal taxation. Tax form instructions merely paraphrase the statute and generally make no reference to the requirements for reporting amounts on a particular line of a return.

The information provided in Virginia's tax return instructions is intended to provide helpful guidance to taxpayers. It is not intended to provide a detailed explanation of every provision or nuance of Virginia's tax law. Further, because subtractions are strictly construed against the taxpayer, it is incumbent upon the taxpayer to investigate whether he is eligible for such subtraction. A taxpayer must consult Virginia's statutes, ruling letters, regulations, court decisions, the Internal Revenue Code, and other sources of tax jurisprudence in order to compute his Virginia tax liability correctly. The guidance provided in the Department's tax form instructions is not a substitute for these sources of Virginia's tax law and may not be relied upon as authoritative when a taxpayer is computing his Virginia taxable income.

Written Advice

In July 2010, the Department contacted the Taxpayer requesting documentation for the death benefit subtraction reported on her 2007 income tax return. Based on information provided by the Taxpayer, the Department issued a letter, dated August 22, 2010, indicating that the matter had been resolved and no further action was necessary. As a result of this letter, the Taxpayer requests that the death benefit subtraction for the 2010 taxable year be permitted.

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 facts on which the determination for the 2007 taxable year was based are different from those for 2010. The Department's examination included only one taxable year, the amount claimed as a subtraction was within the tolerance levels for individuals receiving lump sum death benefit distributions, and the information provided by the Taxpayer, although accurate with regard to the amount of the subtraction, did not indicate annuity payments would be made in subsequent years. Based solely on this evidence, the Department's auditor permitted, albeit incorrectly, the subtraction on the 2007 return. For the 2010 taxable year, however, the Taxpayer was clearly receiving a series of payments at fixed intervals, for a fixed number of years. In an October 2011 letter defending the assessments for the 2008 through 2010 taxable years, the same auditor states correctly that the death benefit subtraction cannot be permitted continuously.

CONCLUSION

Based on this determination, the assessments for the 2008 through 2010 taxable years are upheld. Updated bills will be issued shortly.

The Code of Virginia sections and public documents cited 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 about this determination, please contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4930707500.D