10-175 | Virginia Tax

Tax Type

Individual Income Tax

Description

Deduction for qualifying long-term healthcare insurance premiums/ Filing limitations

Topic

Credits

Statute of Limitations

Subtractions and Exclusions

Date Issued

08-11-2010

August 11, 2010

Re: § 58.1-1821 Application: Individual Income Tax

Dear *****:

This is in response to your letter in which you seek a refund of the Virginia individual income tax paid by ***** (the "Taxpayers") for the taxable years ended December 31, 2003, 2004 and 2006. I apologize for the delay in this response.

FACTS

In June 2008, the Taxpayers filed amended income tax returns for the 2003, 2004 and 2006 taxable years in order to claim a deduction for qualifying long-term healthcare insurance premiums. The Department denied refunds for the 2003 and 2004 taxable years because the returns were filed beyond the three-year statute of limitations period. In addition, the Department did not have a record of receiving the Taxpayers' 2006 amended return.

The Taxpayers appeal the denial of the refunds, contending that they relied on the erroneous tax form instructions regarding the deduction for long-term health care premiums. The Taxpayers also request that their 2006 amended return be processed and a refund issued.

DETERMINATION

Virginia Code § 58.1-322 D 10 provides a deduction for "the amount an individual pays annually in premiums for long-term health care insurance, provided the individual has not claimed a deduction for federal income tax purposes, or a credit under § 58.1-339.11."

In 1999, the General Assembly enacted House Bill 1546 (Chapter 298, 1999 Acts of Assembly) permitting the deduction cited above. As drafted the original bill granting this deduction allowed for the possibility of a double benefit, because a deduction was also permitted for federal income tax purposes. Therefore, the 1999 bill was amended to add "provided the individual has not claimed a deduction for federal income tax purposes." As the language did not include any indication of proportionality, the amendment created an all or nothing condition for the allowance of the Virginia deduction.

In 2006, House Bill 786 (Chapter 599, Acts of Assembly) and Senate Bill 287 (Chapter 570, 2006 Acts of Assembly) added an income tax credit for certain long-term care insurance premiums paid by an individual during the taxable year pursuant to an insurance policy entered into on or after January 1, 2006. In conjunction with the enactment of the credit, Va. Code § 58.1-322 D 10 was amended to add as a condition for qualification, that the deduction was not permitted if the individual had claimed the credit set forth in Va. Code § 58.1-339.11.

The enactment of the credit for certain long-term care insurance premiums led the Department to reconsider its policy with regard to the deduction for long-term health care premiums. After considering the matter, the Department issued Public Document (P.D.) 07-211 (12/5/2007) permitting a taxpayer to claim the deduction for premiums that have been not previously been used as the basis of the federal deduction or the Virginia credit. Because the change in policy coincided with the enactment of the credit under Va. Code § 58.1-339.11, it was effective for taxable years beginning on or after January 1, 2006. P. D. 07-211 did not invalidate the Department's interpretation of Va. Code § 58.1-322 D 10 or instructions provided to taxpayers with respect to the allowable amount of the deduction for taxable years beginning prior to January 1, 2006.

Statute of Limitations

Generally, Va. Code § 58.1-1823 provides that an amended return claiming a refund may be filed within three years of the last day prescribed by law for the timely filing of the return. The Taxpayers argue that the general three-year limitations period should not apply because the return instructions were incorrect as admitted by the Department in P.D. 07-211. As stated above, the Department originally interpreted the statute based on the language enacted in 1999. The change in policy occurred after the statute was amended in 2006.

Further, Va. Code § 58.1-1823 does not include a provision for extending the statute of limitations for changes in interpretations and policy resulting from a law change. Because the amended 2003 and 2004 returns were filed after the expiration of the three-year statute of limitations, the Department has no authority to accept the returns and issue the requested refunds.

2006 Amended Return

The Taxpayers also provided a copy of the amended 2006 return. Based on the information provided, this amended return has been submitted for processing. A refund will be issued, if appropriate, along with applicable interest.

The Code of Virginia sections and public document cited are available online at www.tax.virginia.gov in the Tax Policy Library section of the Department of Taxation's web site. If you have any questions about this determination, please contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Craig M. Burns
        Acting Tax Commissioner

AR/1-3695750051.E

Rulings of the Tax Commissioner