Could an estate transfer unused Virginia Land Preservation Tax Credits that remained when the original credit holder died?

Subject

Land Preservation Tax Credits

Plain-English summary

A landowner received Virginia Land Preservation Tax Credits after donating a conservation easement in 2010. He died in 2015 with unused credit remaining, and his estate's co-executors asked to transfer the balance to another taxpayer.

Virginia denied the request. Although this credit is transferable during the holder's lifetime, tax credits are statutory privileges rather than personal property that automatically passes to an estate. Section 58.1-513 C required the taxpayer holding the credit to complete the transfer and file notice with the Department.

The decedent could claim the credit on his final income tax return. Any amount that would otherwise have carried forward was extinguished at death because he could no longer perform the required transfer and notice acts. The ruling also noted that the General Assembly had twice rejected bills that would have expressly allowed post-death transfers.

What this means for you

• Do not assume an unused tax credit passes with other estate property.
• A Land Preservation Tax Credit transfer must be completed by the taxpayer holding the credit under the statutory procedure.
• Estate planning should address unused transferable credits while the holder is alive.
• The final return may use available credit, but unused carryover did not survive under this ruling.

Common questions

Q: Was the unused credit personal property of the estate?

A: No. The Department treated tax credits as privileges granted by statute, not personal property rights.

Q: Could the co-executors file the transfer notice after death?

A: No. The statute required the credit-holding taxpayer to transfer the credit and notify the Department.

Citations and references

• Va. Code § 58.1-513 C.
• P.D. 02-108, P.D. 05-170, and P.D. 11-20.
• Deputy v. du Pont, 308 U.S. 488 (1940), and New Colonial Ice Co. v. Helvering, 292 U.S. 435 (1934).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-165

Original ruling text

September 13, 2017

Re: Request for Ruling: Individual Income Tax

Dear *:

This will reply to your letter in which you request a ruling as to whether the estate of * (the “Estate”) may transfer Land Preservation Tax Credits (the “Credit”) held by the decedent credit holder at the time of his death.

FACTS

* (the “Decedent”) had placed a conservation easement on real property and received a Credit in February 2010. The Decedent passed away in March 2015. At the time of his death he had a balance of unused Credit.

The co-executors of the Estate request permission to transfer the unused Credit. They contend that the Credit is personal property that passed directly to the Estate upon a Decedent's death. The co-executors also assert that the Estate was a taxpayer and that taxpayers are statutorily entitled to transfer the Credit.

RULING

In general, a taxpayer does not have a right to any tax credit. In Public Document (P.D.) 02-108 (7/1/2002), the Department stated that “[c]redits, deductions or exemptions allowed in the computation of an income tax are privileges accorded as a matter of legislative grace and not as a matter of taxpayer right.” See also Deputy v. duPont , 308 U.S. 488, 60 S.Ct 363 (1940), MedChem (P.R.), Inc. v. Comm'r , 295 F.3d 118, 2002 U.S. Appeals LEXIS 13831(2002) and 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) . Therefore, in most instances tax credits are personal to the taxpayer and do not survive him or her.

Unlike most other credits, the Land Preservation Tax Credit is transferable. Virginia Code § 58.1-513 C provides:

Any taxpayer holding a credit under this article may transfer unused but otherwise allowable credit for use by another taxpayer on Virginia income tax returns. A taxpayer who transfers any amount of credit under this article shall file a notification of such transfer to the Department in accordance with procedures and forms prescribed by the Tax Commissioner.

Thus, any taxpayer holding land preservation tax credits may transfer unused but otherwise allowable credits to another taxpayer for use on that taxpayer's Virginia income tax return. The transferring taxpayer is then required to file a notification with the Department.

In this case, because the donation was made by the Decedent before his death, the Credit would be claimed on his final income tax return. Any amount of the Credit that was not usable on that return would have been available for carryover, had the Decedent lived.

The Estate contends that as a general rule, legal title to personal property of the deceased passes directly to the personal representative until distributed to the heirs. See Strader v. Metropolitan Life Insurance Co. , 128 Va. 238, 105 S.E. 74 (1920), Broaddus v. Broaddus , 144 Va. 727, 130 S.E. 794 (1925), and Prudential Ins. Co. v. Stephens , 498 F. Supp. 155, 1980 U.S. Dist. LEXIS 14118 (1980). As stated above, tax credits are a privilege, not personal property. None of the three cases cited by the Estate involve tax credits, exemptions or deductions.

Moreover, Va. Code § 58.1-513 C requires lifetime acts on the part of a taxpayer who wishes to transfer a Credit. It is the taxpayer holding the Credit who must transfer the Credit, and it is that transferring taxpayer who is required to file a notification with the Department after the transfer is completed. See Public Document (P.D.) 05-170 (12/5/2005) and P.D. 11-20 (2/18/2011). In this case, because the Decedent was deceased, he could not perform either of these acts. Thus, any carryover amounts of the Credit were extinguished at the death of the Decedent.

In addition, a credit, deduction or exemption may only be allowed if there “is clear provision therefor.” See New Colonial Ice Co. v. Helvering , 292 U.S. 435, 54 S.Ct. 788 (1934). The General Assembly has twice rejected a clear provision (House Bill 450 in 2006 and House Bill 1820 in 2011) that would allow for the transfer of the credit after the individual who earned the credit has passed away.

As indicated above, the Department has ruled that an income tax credits are privileges granted by the legislature and not personal property to which a taxpayer may have a right. Accordingly, the Estate's request for permission to transfer the unused Credit of the Decedent cannot be approved.

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 ruling, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1224.B