Tax Type
Individual Income Tax
Description
Federal Retirement Benefits
Topic
Taxable Income
Date Issued
08-24-1989
August 24, 1989
Re: §58.1-1821 Application: Individual Income Tax
Dear**************
This will reply to your letter of August 3, 1989, in which you request relief of penalty and interest assessed to you for taxable year 1988, as well as the suspension of collection efforts on the assessment or tax for that year pending current litigation.
FACTS
The taxpayer is a retiree or the United States government. Subsequent to the opinion Or the U. S. Supreme Court in Davis v. Michigan, the taxpayer filed a 1988 Virginia individual income tax return claiming a subtraction from federal adjusted gross income for his federal retirement benefits. The taxpayer's return was reviewed by the department and the subtraction was disallowed. The taxpayer contests the resulting assessment, requesting the waiver of penalty and interest assessed, plus the suspension of collection activity on the remainder of the assessment pending the resolution of litigation on the retroactive application Or Davis to Virginia's income tax law.
DETERMINATION
The U. S. Supreme Court mandated in Davis v. Michigan that states may not tax federal government retirees any differently than state and local government retirees. The Supreme Court did not mandate refunds to federal government retirees on a retroactive basis, in effect leaving this decision up to the state courts. Five court cases seeking such refunds are currently pending before the Circuit Courts in Alexandria, Fairfax County, and Richmond. Three cases previously filed in the U. S. District Court for the Eastern District of Virginia on this issue have been dismissed.
Similarly, the Supreme Court's opinion had no impact upon 1988 tax returns as it was actually issued during taxable year 1989. Because of this, the Department of Taxation expects all federal retirees to file their 1988 returns based on the law as it existed prior to the Davis opinion.
The department's position that 1988 returns should be filed in accordance with pre-Davis law was communicated to the public through the press immediately after the Supreme Court's decision. As such, I do not find basis for the waiver of penalty and interest in the instant matter.
In the event that refunds to federal retirees are ordered by the courts, the General Assembly enacted legislation during its recent special session to extend the statute or limitations for the filing of amended 1985 - 1988 income tax returns. Under this legislation, federal retirees would have one year from the final court decision on the refund issue in which to file refund claims with the Department of Taxation. In the present case, any tax paid on federal pension income for 1988, plus any penalty and interest, would be refunded in full with accrued interest. Because the General Assembly has already acted to hold federal retirees harmless in the event that Davis is deemed to have a retroactive effect, I do not see the need to suspend collection activities in this case pending the outcome of the pending legislation.
Therefore, based upon the foregoing, the assessment issued to the taxpayer is due and payable in full. I would also note that Va. Code §58.1-1825 mandates the payment of an assessment prior to the filing of an application for correction with the circuit court.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner