Tax Type
Individual Income Tax
Description
Converted Taxpayers' individual income tax returns
Topic
Assessment
Fiduciary
Date Issued
03-15-2005
March 15, 2005
Re: § 58.1-1821 Application: Individual Income Tax
Dear *********:
This will reply to your letter in which you seek correction of the individual income tax assessments issued to ***** (the "Taxpayers") for the taxable years ended December 31, 1997 through 2001. I apologize for the delay in responding to your letter.
FACTS
The Taxpayers are individuals who filed for Chapter 11 bankruptcy. The bankruptcy court assigned certain income to the bankruptcy estate and assigned the Taxpayers as debtors in possession. In accordance with Internal Revenue Service ("IRS") procedures, the Taxpayers were required to file an individual income tax return to report non bankruptcy related income and a second return to report income assigned by the court to the bankruptcy estate. In accordance with Internal Revenue Code ("IRC") § 1398, income is to be computed on a separate individual income tax return, and then reported on a fiduciary income tax return as a transmittal form for the bankruptcy estate.
The Taxpayers filed federal and Virginia individual income tax returns for both their personal income and the income from the bankruptcy estate. The Department received information from the IRS indicating that the Taxpayers' fiduciary income tax returns for the 1997 through 2001 taxable years had been adjusted. As a result, the Department converted the Taxpayers' individual income tax returns with regard to the bankruptcy estate to fiduciary income tax returns, disallowing the deduction for individuals aged 62 and over, itemized deductions, and personal exemptions.
The Taxpayers contest these adjustments, stating that the two Virginia individual income tax returns constitute a married couple filing their annual income tax return in two separate pieces and that the deductions should be allowable on both income tax returns.
DETERMINATION
Virginia Code § 58.1-301 provides that terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the IRC unless a different meaning is clearly required. For individual income tax purposes, Virginia conforms to federal law, in that it starts the computation of Virginia taxable income with federal adjusted gross income ("FAGI"). Income included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Va. Code § 58.1-322.
Virginia Code § 58.1-381 requires that every resident estate or trust, or nonresident estate or trust with Virginia taxable income that files a federal income tax return must also file a Virginia fiduciary income tax return. For estates and trusts, Virginia law starts the computation of Virginia taxable income with federal taxable income ("FTI"). Income included in the FTI of a resident estate or trust is subject to taxation by Virginia, unless it is eligible for the Virginia fiduciary adjustment in Va. Code § 58.1-361.
The federal income tax return of a bankruptcy estate is completed in accordance with IRC § 1398. An individual income tax return is computed, using Form 1040, then certain amounts are transferred to Form 1041, U.S. Income Tax Return For Estates and Trusts. In conformity with Va. Code § 58.1-381, the bankruptcy estate will likewise complete and file a Virginia fiduciary income tax return, reporting the federal taxable income from the federal fiduciary tax return and applicable exemptions, deductions and credits. As such, the Department was correct in converting the bankruptcy estate individual income tax return to a fiduciary income tax return.
The Taxpayers also aver that the Department improperly disallowed the deduction for individuals aged 62 and over, itemized deductions, and personal exemptions, each of which is set forth in Va. Code § 58.1-322. Virginia Code § 58.1-361 A states, in pertinent part, that the Virginia taxable income of a resident estate or trust means its federal taxable income for the taxable year to which there shall be added or subtracted, as the case may be, the share of the estate or trust in the Virginia fiduciary adjustment. Title 23 of the Virginia Administrative Code 10-115-50, in turn, specifies that the adjustments allowable to an estate or trust, set forth in Va. Code § 58.1-322, do not include those in § 58.1-322 D.
As noted earlier, the Virginia statutes entitle a Virginia resident to claim a deduction for individuals aged 62 and over, itemized deductions and personal exemptions. For purposes of conformity with the Internal Revenue Service's process for the filing of a separate tax return for the debtor in possession, the Department recognizes and conforms to that process. Nothing in the Code of Virginia, however, allows the Taxpayers the double benefit of claiming such deductions and exemptions on both the Taxpayers' individual income tax return and the debtor in possession return. Only one such benefit per taxpayer, per tax year is allowed, regardless of the number of returns that may be required to be filed.
Accordingly, the Department was correct in disallowing the deductions for individuals aged 62 and over, itemized deductions, and personal exemptions on the bankruptcy estate's fiduciary income tax return. The assessments issued by the Department for the taxable years in question are upheld. A schedule of the assessments showing the balances due is enclosed. Payment of the assessments should be sent to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23261-7203, Attention: *****. Payment must be made within 30 days from the date of this letter to avoid the accrual of additional interest. In addition, failure to submit full payment within this 30-day period may also result in the imposition of an additional 20% penalty on the tax due under the terms of Virginia's recent Amnesty. See the enclosure entitled "Important Payment Information."
The Code of Virginia sections and regulations cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department's web site, located at www.policylibrary.tax.virginia.gov. If you have any questions regarding this determination, you may contact ***** at *****.
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- Sincerely,
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- Kenneth W. Thorson
- Tax Commissioner
- Kenneth W. Thorson
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AR/44132E
Rulings of the Tax Commissioner