Tax Type
Individual Income Tax
Description
Federal pension income
Topic
Payment and Refund
Date Issued
08-31-1989
August 31, 1989
Re: §58.1-1821 Application: Individual Income Tax
Dear *********
This will reply to your letter of July 31, 1989, in which you appeal an individual income tax assessment for taxable year 1988.
FACTS
The taxpayer is a retiree of the United States government. Subsequent to the opinion of 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 assessment of additional tax, penalty, and interest.
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, the department's assessment of additional tax, penalty, and interest was proper in this case.
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 of 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.
Thank you for your comments on the retirement income subtraction that will be effective for taxable year 1989. I have enclosed a summary of the new subtraction for your review and information.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner