Document Number
14-112
Tax Type
Individual Income Tax
Description
Subtraction for an annuity death benefit limits/insurance contracts issued as lump sum payments
Topic
Federal Conformity
Subtractions and Exclusions
Taxable Income
Date Issued
07-17-2014

July 17, 2014



Re: § 58.1-1821 Application: Individual Income Tax

Dear *****:

This will reply to your letter in which you seek correction of the Virginia individual income tax assessments issued to ***** (the "Taxpayer") for the taxable years ended December 31, 2009 and 2010. I apologize for the delay in responding to your appeal.
FACTS

The Taxpayer is the beneficiary of a federal retirement plan. The Taxpayer claimed a subtraction for an annuity death benefit on the 2009 and 2010 Virginia income tax returns. Under audit, the Department disallowed the subtractions and issued assessments for both taxable years. The Taxpayer appeals the assessments, contending neither the statute nor instructions limit the subtraction to insurance contracts issued as lump sum payments.

DETERMINATION

Death Benefit Subtraction

Virginia Code § 58.1-301 provides that the terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code (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 the 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.

Pursuant to Va. Code § 58.1-322 C 32, a taxpayer is allowed a subtraction of the death benefit payments from an annuity contract that is received by a beneficiary of such contract and is subject to federal income taxation. In order to qualify for the subtraction, a death benefit payment must meet three requirements. First, the source of the payment must be an annuity contract between a customer and an insurance company. Second, the annuity payment must have been awarded to the beneficiary in a lump sum. Finally, the payment must be subject to taxation at the federal level. See Public Document (P.D.) 09-36 (3/31/2009), P. D. 10-63 (5/7/2010), and P.D. 12-76 (5/9/2012).

The Taxpayer argues that the subtraction is derived from a death benefit paid to her as the annuitant and that an annuity contract existed between the federal government and her husband. The Taxpayer further argues that she meets the definition of an annuitant under Title 5 U.S.C. § 8341. As indicated above, however, meeting the definition of an annuity is not the only requirement for the subtraction.

Under IRC § 101, life insurance benefit payments paid by reason of the death of the insured are exempt from federal taxation, and thus exempt from Virginia taxation. IRC § 72, however, provides that a portion of the death benefits from an annuity, including life insurance contracts, are taxable. Because death benefits were treated dissimilarly for income tax purposes, the Virginia General Assembly sought to provide relief to individuals who are unable to obtain standard life insurance. As a result, the death benefits subtraction for lump sum payments from annuity contracts issued by insurance companies was enacted. See P.D. 13-149 (7/31/2013).

The Taxpayer contends that a contract existed between the decedent and his employer. The survivor annuity payments received by the Taxpayer were issued from a retirement plan. Under the Department's interpretation and subsequent clarifying legislation, the death benefit subtraction was never intended to be permitted for payments from a retirement plan. The intent of the death benefit subtraction was to equalize treatment of certain death benefit payments resulting from contracts with life insurance companies for Virginia income tax purposes. The subtraction applies to death benefit payments subject to federal income tax. Because the annuity payment was made pursuant to a retirement plan the Taxpayer could not have qualified for the subtraction, even if the Taxpayer accepted a lump sum in lieu of periodic payments.

Interpretation of Statute

The Taxpayer argues that the requirements specified in P.D. 09-36 were not expressed in the Code of Virginia until 2012. Virginia Code § 58.1-203 grants the Tax Commissioner power to issue rulings related to the interpretation and enforcement of the laws governing taxes administered by the Department. See P.D. 97-497 (12/10/1997). The Virginia Supreme Court has consistently held that the construction of a tax statute by a state official charged with its administration is entitled to great weight. See Webster v. Department of Taxation, 219 VA. 81, 84-85, 245 S.E. 2d 252, 255 (1978) and Winchester TV Cable v. State Tax Com., 216 Va. 289, 290, 217, S.E. 2d 885, 889 (1975).

Further, by reason of their character as legislative grants, statutes relating to deductions and subtractions allowable in computing income and credits against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See Howell's Motor Freight, Inc., et al. v. Virginia Department of Taxation, Circuit Court of the City of Roanoke, Law No. 82-0846 (10/27/1983).

Tax Form Instructions

The Taxpayer also contends that the instructions for individual income tax returns are misleading and incomplete, and she relied on them when computing her Virginia taxable income for those taxable years. The Department has previously addressed this issue in P.D. 13-149.

The instructions for the taxable years at issue stated that the death benefit payments subtraction is allowed to the extent that such benefits, which were received from an annuity contract, are subject to federal taxation. Tax form instructions merely paraphrase the statute and generally make no reference to the requirements for reporting amounts on a particular line of a return.

The information provided in Virginia's tax return instructions is intended to provide helpful guidance to taxpayers. It is not intended to provide a detailed explanation of every provision of or nuance of Virginia's tax law.

Written Advice

The Taxpayer argues that individuals rely on the knowledge base of the Department's
employees and believes it is unfair that such advice is required to be in writing. Virginia Code § 58.1-1835 provides that the Tax Commissioner shall abate any portion of tax, interest and penalty attributable to erroneous written advice by the Department under the following conditions:
  • 1. The written advice was reasonably relied upon by the taxpayer and was in response to a specific written request by the taxpayer;
    2. The portion of the penalty or tax did not result from a failure by the taxpayer to provide adequate or accurate information; and
    3. The facts of the case described in the written advice and the request thereof are the same, and the taxpayer's business or personal operations have not changed since the advice was rendered.

Furthermore, Va. Code § 58.1-1845 sets out the Virginia Taxpayer Bill of Rights. Under subsection 4, one of the guaranteed rights is:
    • The right to abatement of tax, interest and penalties in accordance with § 58.1-1835, attributable to any taxes administered by the Department, when the taxpayer reasonably relies upon binding written advice furnished to the taxpayer by the Department through authorized representatives in response to the taxpayer's specific written request which provided adequate and accurate information.

Based on the above statutory provisions, the erroneous advice must be reasonably relied upon by the taxpayer, and such advice must be in writing. In addition, such written advice must be provided based on a specific request by a taxpayer who has provided sufficient and accurate facts so that the Department may issue a correct decision.

CONCLUSION

Based on reasoning set forth above, the assessments for the 2009 through 2010 taxable years are upheld. Updated bills will be issued shortly and should be paid within 30 days of the bill date to avoid the accrual of additional interest.

The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department'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
Tax Commissioner


AR/1-5333533317.D

Rulings of the Tax Commissioner

Last Updated 09/22/2014 13:46