Could a taxpayer claim Virginia's retirement subtraction without records showing which pension contributions another state taxed?

Plain-English summary

Virginia upheld the denial of a subtraction for pension contributions allegedly taxed by another state. The subtraction required proof that the contributions had been deductible or excluded for federal income tax purposes when made, yet were added back and taxed by another state.

The taxpayer instead repeatedly said the contributions had been taxed federally. Virginia explained that federally taxed contributions are already recovered through the federal income calculation, which Virginia uses as its starting point; another Virginia subtraction would duplicate the exclusion.

The taxpayer successfully filed a protective claim after paying the assessments, but the claim did not depend on another pending case and was decided on its merits. Difficulty locating records after more than 30 years did not meet the reconsideration criteria or prove entitlement to the subtraction.

Common questions

Did filing a valid protective claim establish the refund amount? No. It preserved the claim procedurally, but the taxpayer still had to prove the subtraction on the merits.

What records were missing? The ruling required evidence showing what contribution amounts were previously taxed and by which taxing authority.

Citations and references

• Va. Code §§ 58.1-1824 and 58.1-322.02 (11)
• 23 VAC 10-20-165 F
• P.D. 17-134

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-100

Original ruling text

May 22, 2018

Re: § 58.1-1824 Application: Individual Income Tax

Dear *:

This will respond to your letter in which you seek reconsideration of Public Document (P.D.) 17-134 (7/19/2017), and submit a protective claim for refund for the Virginia individual income tax paid by * (the “Taxpayer”) for the taxable years ended December 31, 2013 through 2015.

FACTS

The Taxpayer filed Virginia resident individual income tax returns and claimed a subtraction for pension contributions previously taxed by another state. Under audit, the Department denied the subtraction and issued assessments for additional tax and interest for each taxable year. The Taxpayer paid the assessments under protest and filed an appeal, contending he had received retirement income for a period exceeding 30 years and does not have access to the documentation requested by the Department. The Taxpayer requested an alternative means to show he is entitled to the subtraction.

In P.D. 17-134, the Department upheld the assessments issued to the Taxpayer for the 2013 through 2015 taxable years. The assessments were based on the best information available to the Department pursuant to Virginia Code § 58.1-111. The Taxpayer was provided one final opportunity to submit additional information that would more accurately reflect his Virginia taxable income. The Taxpayer now seeks reconsideration of P.D. 17-134, and asserts a protective claim for refund of taxes paid.

DETERMINATION

Protective Claim

Virginia Code § 58.1-1824 permits any person who has paid an assessment of taxes administered by the Department of Taxation to file a protective claim for refund within three years of the date of an assessment. Pursuant to the authority granted to the Department under Virginia 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 upon its merits pursuant to Virginia Code § 58.1-1821.

The Taxpayer satisfied the requirements of filing a protective claim by paying the assessments in full and asserting his rights within the statutory deadline. Because the protective claim does not involve facts or law which depend upon the resolution of a pending case, the Department will consider the claim on the merits pursuant to the administrative appeal procedures.

Reconsideration

Title 23 of the Virginia Administrative Code (VAC) 10-20-165 F permits taxpayers to request a reconsideration of a determination issued under Virginia Code § 58.1-1821. Such request, however, must meet one of the four following requirements:

The facts upon which the original determination is based are misstated by the Tax commissioner or are inaccurate, and the determination would have a different result based on a correction of the Tax Commissioner's misstatement of the facts resented or a clarification of the original facts presented in the taxpayer's administrative appeal;

The law upon which the original determination is based has been changed by legislation, court decision or other authority effective for the tax period(s) at issue;

The policy upon which the original determination is based has been misapplied, and the determination would have a different result based on the application of the proper policy; or

The taxpayer has discovered additional evidence or documentation that was not available to the taxpayer at the time the original administrative appeal was filed with the Department, and the additional evidence or documentation could produce a result different from the original determination.

Because the Taxpayer's request for reconsideration only asserts difficulty in obtaining the proof required to claim the subtraction at issue, it does not satisfy any of the requirements listed, and the Department cannot reconsider its determination in P.D. 17-­134.

Retirement Subtraction

To reiterate the Department's previous determination, to qualify for the Virginia Retirement Subtraction, contributions to a qualified plan must satisfy a two-part test: (1) they must have been deductible for federal income tax purposes; and (2) they must still have been subject to income tax in another state. Thus, qualified plan contributions on which a taxpayer paid federal income tax at the time they were made would not be eligible for the Virginia Retirement Subtraction. In contrast, the Taxpayer suggests that he is required to show that his contributions to his retirement plan were “fully taxable” by both federal and local authorities in order to qualify for the Virginia subtraction. In fact, the Taxpayer asserts several times that his contributions were taxed at the federal level when earned, but that proof is difficult to obtain.

Contributions to qualified plans that were taxed at the federal level when earned are already excluded in the federal tax computation. Because the computation of Virginia taxable income starts with a Taxpayer's federal adjusted gross income (FAGI), the contributions would already have been removed from income subject to Virginia income taxation. Allowing a Virginia subtraction where a federal exclusion already exists would allow a Taxpayer to exclude the same income twice.

For purposes of the subtraction permitted under Virginia Code § 58.1-322.02 (11) (formerly 58.1-322 C 19), a taxpayer would need to show that the contributions were excluded or deducted from their federal taxable income for the taxable year in which they were earned, but added back and included in income taxed on their state income tax return. As indicated in P.D. 17-134, subtractions are strictly construed against a taxpayer. As such, it is incumbent upon the Taxpayer to prove he is entitled to the subtraction by showing what portion of contributions were previously taxed and by whom.

CONCLUSION

Because the Taxpayer's reconsideration request does not satisfy the requirements set forth by the Department's regulation, the request cannot be granted. Therefore, the Department's determination in P.D. 17-134 is upheld. This letter constitutes the Department's final determination on this matter. The assessments have been paid in full; therefore, no further action is required.

The Code of Virginia sections, regulation, 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/1405.C