Tax Type
Individual Income Tax
Description
Penalties and interest, federal military retiree
Topic
Penalties and Interest
Date Issued
11-29-1989
November 29, 1989
Re: §58.1-1821 Application: Individual Income Tax
Dear*********
This will reply to your letter of May 24, 1989 in which you request relief of penalty assessed to and the continuation of accrual of interest only on the outstanding tax liability of your clients, **********(the "Taxpayers"), for taxable year 1988, as well as the suspension of collection efforts on the assessment of tax for that year pending current litigation.
FACTS
One of the Taxpayers is a federal military retiree. Subsequent to the opinion of the U. S. Supreme Court in Davis v. Michigan, Taxpayers filed a 1988 Virginia individual income tax return claiming a subtraction from federal adjusted gross income for federal retirement benefits.
The Taxpayers' return was reviewed by the department and the subtraction was disallowed. The Taxpayers contest the resulting assessment, requesting the waiver of penalty assessed, the continued accrual of interest only on the outstanding tax liability, plus the suspension of collection activity on the remainder of the assessment pending the resolution of litigation on the retroactive application of Davis to Virginia's income tax law.
DETERMINATION
The U. S. Supreme Court mandated in Davis v. Michigan that states may not tax pensions received by federal government retirees any differently than pensions received by 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 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 on this issue previously filed in the U. S. District Court for the Eastern District of Virginia 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 decision.
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 in the instant matter or the continuation of the accrual of interest only on the outstanding tax liability.
In the event that refunds to federal retirees are ordered by the Virginia courts, the General Assembly enacted legislation during a special session in early spring 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. 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.
However, as the result of legislation enacted by the 1989 session of the General Assembly, a Tax Amnesty program will be conducted from February 1 to March 31, 1990. At that time, the Taxpayers will be able to receive a waiver of these penalties, provided that they are eligible for the amnesty program, complete an amnesty application, and pay in full the tax and interest assessed on all bills and non-filer periods that are due.
Further collection action on these penalties will be suspended pending the start of the amnesty program provided the Taxpayers complete the attached form and return it to this office within 15 days, along with payment of the total tax and interest due. As stated on the attached form, the suspension of collection activity by the department does not relieve the Taxpayers from the responsibility to formally apply for amnesty during the amnesty period. In addition, interest will continue to accrue on the unpaid penalties during the period collection is suspended.
Thus, based upon the foregoing, the assessment issued to the Taxpayers is due and payable in full. I would also note that Virginia Code §58.1-1825 mandates the payment of an assessment prior to the filing of an application to court for correction of an assessment.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner