Tax Type
Estate Tax
Description
Economic Growth and Tax Relief Reconciliation Act of 2001
Topic
Credits
Estates and Trusts
Date Issued
09-07-2004
September 7, 2004
Re: § 58.1-1821 Application: Estate Tax
Dear **************:
This will reply to your letter in which you request a refund for a portion of the Virginia estate tax paid by the ******************** (the "Estate”). I apologize for the delay in this response.
FACTS
***** (the "Decedent") died in 2002. The Estate timely filed its Virginia estate tax return and paid the estate tax due. Because the Decedent had owned real property in ***** ("State A"), the Estate paid estate tax to State A.
The Estate claimed a credit on the Virginia estate tax return for the estate tax paid to State A. State A conforms to the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") provisions that reduce the credit for state death taxes on which many states base their death taxes. Because Virginia does not conform to the provision of EGTRRA that phases out the estate tax credit, you assert the out-of-state credit that the Estate claimed against the Virginia estate tax was less than the tax imposed by Virginia on the State A property.
You contend that the resulting difference in Virginia estate tax liability is tantamount to Virginia imposing an estate tax on the State A estate, which is unconstitutional. As such, you request a refund of a portion of the Virginia estate tax equal to the difference of liability had Virginia reduced the credit in conformity with EGTRRA.
DETERMINATION
Under present law, a gift tax is imposed on lifetime transfers and an estate tax on transfers at death. The estate and gift tax are unified so that a single graduated rate applies to cumulative taxable transfers made by a taxpayer during his or her lifetime and at death. A unified credit is available for property transfers by gift and at death. The unified credit effectively exempts from tax transfers of estates that fall below a certain value.
Virginia imposes an estate tax that is equal to the maximum amount of the credit for state death taxes allowed by Internal Revenue Code (IRC) § 2011, as it existed on January 1, 1978. Va. Code § 58.1-901; see also Public Document ("P.D.") 88-71 (5/2/88). IRC § 2011 allows a credit against the federal estate tax for any estate, inheritance, legacy, or succession taxes actually paid to any state with respect to any property included in the decedent's gross estate. The maximum amount of the credit allowable for state death taxes is determined under a graduated rate table, based on the size of the decedent's adjusted taxable estate.
State A conforms to EGTRRA's phase out of the state death tax credit. As such, the Decedent's State A estate tax liability was effectively reduced by 25%. EGTRRA phases out the state death tax credit allowed against the federal estate tax in 25% increments beginning in 2002, and is fully repealed in 2005. In 2002, the year of the Decedent's death, the graduated rates in the table for the state death tax credit had been reduced by 25%.
Virginia Code § 58.1-902(B) provides that if a decedent owns real and tangible personal property outside of Virginia, a credit is available for any death taxes paid to the other state for which a credit is allowed under IRC § 2011. The credit is equal to the lesser of:
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- 1. The amount of the death tax paid the other state and credited against the federal estate tax; or
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- 2. An amount computed by multiplying the federal credit by a fraction, the numerator of which is the value of that part of the gross estate over which another state or states have jurisdiction to the same extent to which Virginia would exert jurisdiction under this chapter with respect to the residents of such other state or states and the denominator of which is the value of the decedent's gross estate.
In the instant case, the Virginia credit is equal to the amount of the death tax paid to State A. You contend that the greater Virginia estate tax liability incurred by the Estate is tantamount to taxing State A property, which violates the Due Process Clause of the United States Constitution. You aver that Senior v. Braden et. al., 295 U.S. 422 (1935), held that it is a "fundamental principle of constitutional due process that an interest in real estate cannot be taxed by a state in which the real estate is not located." In addition, you state that Frick v. Commonwealth of Pennsylvania, 268 U.S. 473 (1925), held that the attempt to tax the transfer of tangible personal property that has an actual situs outside the state is unconstitutional. In Frick, the Pennsylvania estate tax was imposed on the transfer of the property from the deceased, whether such property was located within or without Pennsylvania. The court found this statute unconstitutional because Pennsylvania lacked jurisdiction over property located in other states.
Virginia Code § 58.1-902(A) provides for a tax equal to the maximum credit for state death taxes allowable by IRC § 2011 for transfers of the taxable estate of every resident. The Virginia estate tax is a tax on the transfer of an estate that is measured by value of property in the estate and not a tax on the underlying property. Virginia's estate tax is imposed on the transfer of the taxable estate as defined in IRC § 2051. Under the IRC, a taxable estate is equal to the value, at the time of death, of all property, real or personal, tangible or intangible, wherever it is located less certain deductions including unpaid indebtedness, funeral and administrative expenses, charitable bequests, and bequests to a surviving spouse. Accordingly, Virginia's estate tax is not simply a tax on the transfer of property, but a tax on the net value of an individual's entire holdings at death. As such, the court decisions cited have no bearing on Virginia law.
As noted above, Virginia allows for a credit against the Virginia Estate Tax due based upon "[t]he amount of the death tax paid the other state and credited against the federal estate tax," or a prorated portion of that amount based upon the value of the gross estate located in that state. Va. Code § 58.1-902(B). That Virginia credit was allowed in this case. The choice of the State A's legislature to conform its death tax laws to federal law is an election made in the exercise of its sovereignty. Similarly, the choice of Virginia's legislature to deconform from federal law by leaving intact its Virginia Estate Tax Act after the federal change is an exercise of its sovereignty. No action, or inaction, of State A's legislature in the wake of the federal change to the federal estate tax credit under IRC § 2011 can create a circumstance that renders the Virginia Estate Tax Act unconstitutional. I find no merit in your arguments to the contrary. I am compelled to point out that your letter incorrectly states, “Virginia amended its law to avoid observing the reduction in the state death tax credit that began in 2002.” The error is repeated twice more in your letter. Virginia did not change its law as you suggest and Virginia is unlike those states that “changed their law to reject the 25% reduction to the allowable state death tax credit,” described in your letter. Virginia’s definition of the “’Federal credit’ … as it existed on January 1, 1978” found in Va. Code § 58.1-901 long preceded the federal change in IRC § 2011.
In addition, you are requesting that Virginia refund the amount of estate tax that would have been credited had State A not conformed to EGTRRA. In essence, you are requesting a refund of estate tax that was not paid to State A. Virginia law clearly limits the credit for tax paid to another state to the amount of tax actually paid to the other state and credited against the federal estate tax.
Based on the foregoing, your request for a refund of a portion of the Virginia estate tax paid by the Estate is denied. The Code of Virginia sections and public documents cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have any questions regarding this determination, please contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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- Kenneth W. Thorson
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AR/48742B
Rulings of the Tax Commissioner