January 21, 2020
Re: § 58.1-1824 Application: Individual Income Tax
This will reply to your letters in which you claim a refund of individual income tax paid by ***** (the “Taxpayer”) for the taxable years ended December 31, 2016, through 2018.
The Taxpayer was a retired federal employee who received a pension from the Civil Service Retirement System (CSRS). As a CSRS retiree, the Taxpayer was not eligible to receive federal Social Security benefits, which are subtracted for purposes of computing Virginia taxable income under Virginia Code § 58.1-322.02 3.
The Taxpayer filed Virginia resident income tax returns for the 2016 through 2018 taxable years. The Taxpayer submits claims for refunds for each year, arguing that Virginia law discriminates against federal Civil Service Retirement System (CSRS) employees in violation of Title 4 U.S.C. § 111, and he should be entitled to an equivalent subtraction for computing Virginia taxable income as the individuals who receive Social Security or Railroad Retirement benefits.
Pursuant to the authority granted the Department under Virginia Code § 58.1-1824, a protective claim for refund can be held pending the outcome of another case before the courts or the claim may be decided based upon its merits pursuant to Virginia Code § 58.1-1821. As permitted by statute, the Taxpayer’s request has been treated as an appeal under Virginia Code § 58.1-1821.
A Virginia court has already held that Virginia does not discriminate against federal CSRS employees based on the source of their pay or compensation, as prohibited by Title 4 U.S.C. § 111. In that case, the Department’s demurrer was sustained and the case was dismissed with prejudice. See Karl Edward Beisel v. The Virginia Department of Taxation and Craig Burns, Circuit Court of the City of Chesapeake, Case No. CL 15-2 (2015), the order for which was reported as Public Document (P.D.) 16-7 (2/23/2016). The plaintiff subsequently appealed to the Supreme Court of Virginia. The Court, however, refused the petition for appeal, ruling that there was no reversible error in the circuit court's judgment. See SCV record #151221 (11/19/2015).
The Taxpayer believes a recent opinion of the United States Supreme Court, Dawson vs. Steager, 139 S.Ct. 698 (2019), invalidates the prior decision of the Virginia court. Dawson involved a retired federal law enforcement officer living in West Virginia whose pension benefits were taxable under state law, unlike retired West Virginia state law enforcement officers whose pension benefits were not. Citing Davis v. Michigan Dep’t of Treasury, 489 U.S. 803, 109 S.Ct. 1500 (1989), the Court stated that a state violates § 111 when “it treats retired state employees more favorably than retired federal employees and no ‘significant differences between the two classes’ justify the differential treatment.” [Emphasis added.] See Dawson at 139 S.Ct. 698, 708.
Unlike the issue in Dawson, the Taxpayer essentially continues to argue that Virginia law discriminates against CSRS employees because it does not provide a subtraction similar to that granted to recipients of other federal benefits such as Social Security and Railroad Retirement. This appears to be essentially the same argument that was previously rejected by the Virginia courts and was not the issue in Dawson, which involved a direct comparison between state and federal law enforcement employees. Because the issue has already been addressed by the Virginia court system, the Taxpayer’s claims for refunds for the 2016 through 2018 taxable years are not granted.
If you have any questions regarding this response, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Craig M. Burns