Could parents deduct contributions to Virginia 529 accounts when the money came from their children's irrevocable UGMA or UTMA custodial accounts?

Subject

Parents could not deduct 529 contributions funded with children's custodial assets

Plain-English summary

The parents could not claim the Virginia 529 deduction because the contributed assets belonged to their children. The money came from irrevocable UGMA or UTMA custodial accounts.

The husband was listed as owner of the three Virginia 529 accounts, but that did not make the parents owners of the assets transferred into them. Virginia therefore did not treat the parents as the statutory contributors.

Result: the 2011 deduction was denied and the assessment was upheld.

What this means for you

• Confirm who legally owns funds before claiming a Virginia 529 contribution deduction.
• Being listed as the 529 account owner may not establish ownership of the contributed assets.
• UGMA and UTMA gifts are irrevocable, so the source account's ownership matters.
• Keep records tracing each contribution to its legal owner.

Citations and references

• Va. Code §§ 58.1-322(D)(7)(a), 23-38.75, and 64.2-1910.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-168

Original ruling text

August 18, 2015

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 taxable year ended December 31, 2011.

FACTS

The Taxpayers, a husband and wife, filed a 2011 Virginia income tax return, claiming a deduction for contributions made to three Virginia 529 college savings accounts. The contributions were derived from a rollover of a custodial account created by the Uniform Gift to Minors Act (UGMA) or the Uniform Transfer to Minors Act (UTMA) in New Jersey. Under review, the Department concluded that a UGMA/UTMA account must be liquidated rather than rolled over in order to claim the deduction and denied the deduction. As a result, the Department issued an assessment for additional tax and interest. The Taxpayers appeal the assessment, contending that they made cash contributions to the Virginia college savings accounts and are entitled to the deduction.

DETERMINATION

Virginia Code § 58.1-322 D 7 a allows a deduction to the purchaser or contributor for the amount paid or contributed during the taxable year for a prepaid tuition contract or savings trust account entered into with the Virginia College Savings Plan. Generally, the amount deducted on any individual income tax return in any taxable year is limited to $4,000 per prepaid tuition contract or savings trust account. To the extent the purchase price or the amount paid during the year exceeds $4,000 per contract, the remainder may be carried forward and deducted in future taxable years.

In Public Document (P.D.) 10-191 (8/26/2010), the Department held that taxpayers who are listed as custodians rather than owners of Virginia College Savings Plans cannot claim the deduction allowed under Va. Code § 58.1-322 D 7. This case differs from P.D. 10-191 because the husband was listed as the owner, not the custodian, of the Virginia 529 accounts.

Virginia Code § 58.1-322 D 7 allows owners of Virginia 529 Savings Plans who make contributions to the accounts claim the deduction. Under Va. Code § 23-38.75, a "contributor" is a person who contributes money to a savings plan on behalf of a qualified beneficiary and who is listed as the owner of the savings trust account. A gift to a minor under either the UGMA or the UTMA is irrevocable. See Va. Code § 64.2­-1910. Because the contributions made to the Virginia 529 savings accounts were rolled over from the children's UGMA/UTMA accounts, the children rather than the Taxpayers were the owners of the assets contributed to the college savings plan. The Taxpayers did not own the assets for which the contributions were disbursed. Therefore, the Taxpayers would not be considered to be the contributors and would not be eligible to claim the deduction for contributions made to the three Virginia 529 college savings accounts for the 2011 taxable year.

Accordingly the assessment is upheld and an updated bill will be issued. The Taxpayers should remit payment for the outstanding balance as shown on the revised bill within 30 days from the date of the revised bill to avoid the accrual of additional interest.

The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules & 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/1-5989282305.B