Did a federally taxable lump-sum annuity death benefit qualify for Virginia's income subtraction even though it was not life-insurance proceeds?

Subject

Taxpayers properly claimed the subtraction for the annuity distribution.

Plain-English summary

A married couple claimed a Virginia subtraction for a lump-sum annuity death benefit received by the wife. The Department initially disallowed it because the payment did not come from a life-insurance policy.

Virginia explained that Va. Code § 58.1-322 C 32 imposed three requirements: the source must be an annuity contract between a customer and an insurance company, the beneficiary must receive the payment in a lump sum, and the payment must be subject to federal income tax.

The taxpayers documented that the wife's lump-sum payment was federally taxable and came from an annuity contract with an insurance company. Because those facts satisfied the statute, the payment qualified even though it was not life-insurance proceeds. Virginia reversed the adjustment and said it would issue a refund.

What this means for you

For this Virginia subtraction, the ruling focused on the annuity contract, lump-sum beneficiary payment, and federal tax treatment. It did not add a separate requirement that the payment arise from a life-insurance policy.

Citations and references

• Va. Code §§ 58.1-1824, 58.1-1821, 58.1-301, and 58.1-322 C 32.
• P.D. 09-36, P.D. 10-63, P.D. 12-76, P.D. 13-149, and P.D. 14-112.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-207

Original ruling text

December 1, 2016

Re: § 58.1-1824 Application: Individual Income Tax

Dear *:

This will reply to your letter in which * (the “ Taxpayers”) request a refund of individual income tax paid for the taxable year ended December 31, 2013.

FACTS

The Taxpayers, a husband and wife, filed a Virginia income tax return for the 2013 taxable year. They claimed a subtraction for a lump sum annuity death benefit payment the wife received from an annuity contract. Under audit, the Department denied the subtraction because the distribution was not the result of a life insurance policy and issued an assessment of additional tax due. The Taxpayers paid the assessment and appealed, contending that the distribution met the statutory requirements for the subtraction.

DETERMINATION

Protective Claim

Pursuant to the authority granted the Department under Va. Code § 58.1-1824, a protective claim for refund can be held pending the outcome of another case before the courts or the claim may be decided based upon its merits pursuant to Va. Code § 58.1­1821. As permitted by statute, the Taxpayers' request has been treated as an appeal under Va. Code § 58.1-1821.

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), P. D. 10-63 (5/7/2010), P.D. 12-76 (5/9/2012), P.D. 13-149 (7/31/2013) and P.D. 14-112 (7/17/2014).

The Department disallowed the subtraction because it was not the result of a life insurance policy. In this case, the Taxpayers have provided documentation to show that the lump sum payment received by the wife was subject to federal income tax and that it resulted from an annuity contract with an insurance company. As such, the Taxpayers properly claimed the subtraction for the annuity distribution. Accordingly, the Department's adjustment will be reversed and a refund will be issued.

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/797.B