Could taxpayers carry forward excess prepaid-tuition contributions even though they claimed no deduction in the contribution year?

Plain-English summary

The taxpayers contributed to six individual prepaid-tuition accounts in 2011 but claimed no deduction that year. They later claimed carryforward deductions on their 2012 and 2013 returns, which the audit denied because no initial deduction had been taken.

Virginia held that skipping the available 2011 deduction did not automatically eliminate the statutory carryforward for amounts exceeding the annual limit per contract. Because the contributions to the six accounts exceeded what could have been deducted in 2011, the legitimate excess could carry forward, and the assessments were abated.

Citations and references

• Va. Code § 58.1-322.03 7 a
• P.D. 14-167

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-47

Original ruling text

April 16, 2018

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you request correction of the individual income tax assessments issued to * (the “Taxpayers”) for the taxable years ended December 31, 2012 and 2013. I apologize for the delay in responding to your appeal.

FACTS

During 2011, the Taxpayers, a husband and wife, made contributions to six individual prepaid tuition accounts. The Taxpayers claimed no deductions for these contributions on their 2011 Virginia income tax return. When filing their 2012 and 2013 Virginia returns, the Taxpayers claimed a deduction for the carry forward amount from the 2011 contributions. Under audit, the subtractions on the 2012 and 2013 returns were denied on the basis that no initial subtraction was claimed. The Department issued assessments for additional tax and interest. The Taxpayers filed an appeal, contending they were eligible to carry forward the unused portion of the contributions to subsequent taxable years even though they did not claim deductions in 2011.

DETERMINATION

Virginia Code § 58.1-322.03 7 a allows a deduction to the purchaser or contributor for the amount paid or contributed during the taxable year for a prepaid tuition contract or savings trust account entered into with the Virginia College Savings Plan. Generally, the amount deducted on any individual income tax return in any taxable year is limited to $4,000 per prepaid tuition contract or savings trust account. To the extent the purchase price or the amount paid during the year exceeds $4,000 per contract, the remainder may be carried forward and deducted in future taxable years.

In disallowing the deductions, the auditor cited Public Document (P.D.) 14-167 (9/10/2014). In P.D. 14-167, the Department held that a taxpayer could not carry forward amounts that were eligible for a deduction in a previous tax year. Because the Taxpayers were eligible to claim a deduction on their 2011 return but failed to do so, the auditor concluded they were not eligible to claim a carry forward deduction in subsequent taxable years.

The Taxpayers argue that Virginia statutes have no prerequisite for claiming the carry forward amounts. Virginia Code § 58.1-322.03 7 a provides a carry forward for any amount exceeding $4,000 for each contract purchased during a taxable year. The fact that a taxpayer does not claim the subtraction in the year of purchase is not an automatic bar from claiming amounts that could be carried forward to subsequent taxable years. Further, P.D. 14-167 only prohibits claiming amounts that could have been properly deducted in previous taxable years, not amounts that could be legitimately carried forward.

In this case, the Taxpayers failed to claim the deduction for the 2011 taxable year and are prohibited by the statute of limitations from amending their 2011 return. Because the contributions made to the six accounts exceeded the maximum deductions that could have been claimed during the taxable year as provided in Virginia Code § 58.1-322.03 7 a, the Taxpayers were eligible to carry forward the unused amount. As such, the audit will be returned to the auditor to be adjusted according to this determination, and the assessment will be abated.

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/1194.o