Did federally taxable lump-sum death benefits from annuity contracts qualify for Virginia's death-benefit subtraction without being life-insurance proceeds?

Subject

Taxpayers properly claimed the subtraction for death benefit payments.

Plain-English summary

A husband received lump-sum death benefits as beneficiary of annuity contracts with two insurance companies. The payments were included in federal taxable income, and the couple claimed Virginia subtractions for 2014 and 2015.

Virginia initially denied the subtraction because the payments were not proceeds of life insurance policies. On appeal, the Department applied the actual statutory test: the source had to be an annuity contract with an insurance company, the beneficiary had to receive a lump sum, and the payment had to be federally taxable.

The documentation established all three conditions. Virginia reversed its denials and abated the assessments.

What this means for you

• A qualifying death benefit need not come from a life-insurance policy.
• Preserve the annuity contract and beneficiary payment records.
• Show that the benefit was paid as a lump sum.
• Document that the amount was subject to federal income tax.

Citations and references

• Va. Code §§ 58.1-301, 58.1-322, 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. 17-109

Original ruling text

June 21, 2017

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek a correction of the individual income tax assessment issued to * (the “Taxpayers”) for the taxable years ended December 31, 2014 and 2015.

FACTS

The Taxpayers, a husband and wife, filed Virginia individual income tax returns for the 2014 and 2015 taxable years. They claimed subtractions for lump sum annuity death benefit payments the husband received from three annuity contracts. Under audit, the Department made several adjustments including the denial of the subtraction claimed for distributions from two of the contracts because they were not the result of life insurance policies. As a result, the Department issued assessments of additional tax for the 2014 and 2015 taxable years. The Taxpayers paid the assessment for 2014 but filed appeals for both taxable years at issue, contending the distributions met the statutory requirements for the subtraction.

DETERMINATION

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 for example Public Document (P.D.) 09-36 (3/31/2009), P. D. 10-63 (5/7/2010), P.D. 12­76 (5/9/2012), P.D. 13-149 (7/31/2013), and P.D. 14-112 (7/17/2014).

The Department disallowed the subtraction for both taxable years because the payments were not the result of a life insurance policy. The Taxpayers, however, have provided documentation to show that the lump sum payments received by the husband were each subject to federal income tax and that they resulted from annuity contracts with two separate insurance companies. As such, the Taxpayers properly claimed the death benefit subtractions. Accordingly, the Department's denials are reversed and the assessments will be abated.

The Code of Virginia sections and public documents 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/1026.B