Was Virginia's fiduciary tax assessment against a bankruptcy estate valid when it missed the federal prompt-determination deadlines and denied a debtor credit?

Plain-English summary

Virginia abated a fiduciary assessment against a bankruptcy estate because the Department missed the federal prompt-determination deadlines: notice of examination within 60 days and completion within 180 days.

The estate also succeeded on the credit issue. Federal bankruptcy law transferred the debtor's state and local tax attributes, including the historic rehabilitation credit, to the estate.

Citations and references

• 11 U.S.C. §§ 505(b)(2) and 346(a), (i)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-128

Original ruling text

June 26, 2018

Re: § 58.1-1821 Application: Fiduciary Income Tax

Dear *:

This will reply to your letter in which you seek correction of the fiduciary income tax assessment issued to the * (the “Taxpayer”) for the taxable year ended December 31, 2012. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer, a bankruptcy estate, filed a fiduciary income tax return, along with a request for prompt determination, for the 2012 taxable year in May 2016 by mail delivered to the Commissioner of the Revenue as directed by the Department's instructions. In February 2017, the Department disallowed a historic tax credit and issued an assessment. The Taxpayer appealed, contending the assessment should be abated because the tax attributes of the debtor became the property of the Taxpayer and could be used to offset the Taxpayer's liability. In addition, the Taxpayer asserts that the Department failed to issue the assessment in the time period required after receiving the request for prompt determination.

DETERMINATION

United States bankruptcy law allows a bankruptcy trustee to obtain a prompt determination of a state tax liability incurred by a bankruptcy estate during the administration of the case. Title 11 of the United States Code (U.S.C.) § 505(b)(2) states, in relevant part:

A trustee may request a determination of any unpaid liability of the estate for any tax incurred during the administration of the case by submitting a tax return for such tax and a request for such a determination to the governmental unit charged with responsibility for collection or determination of such tax. Unless such return is fraudulent, or contains a material misrepresentation, the estate, the trustee, the debtor, and any successor to the debtor are discharged from any liability for such tax-

Upon payment of the tax shown on such return, if-

Such governmental unit does not notify the trustee, within 60 days after such request, that such return has been selected for examination; or

Such governmental unit does not complete such an examination and notify the trustee of any tax due, within 180 days after such request or within such additional time as the court, for cause, permits . . .

The Taxpayer's request and the return were properly filed pursuant to the instructions for filing fiduciary income tax returns with Virginia for the 2012 tax year. Accordingly, the Department was required to notify the trustee within 60 days that the return had been selected for audit and such audit was required to be completed within 180 days following the receipt of such request. Because no such notification occurred, and the assessment was issued more than 180 days after the request was made, the assessment will be abated.

In addition, a bankruptcy estate assumes the state and local tax attributes of the debtor, including any attribute subject to carryforward such as the historic rehabilitation tax credit. See 11 U.S.C. § 346(a) and (i). Therefore, the Taxpayer could properly claim the debtor's historic rehabilitation tax credit on its 2012 fiduciary income tax return. Accordingly, even if the Department had timely issued the assessment, the Department erroneously disallowed the credit.

The Code of Virginia section cited is 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/1565.A