Tax Type
Individual Income Tax
Description
Government retirement income
Topic
Persons Subject to Tax
Date Issued
04-26-1994
April 26, 1994
Re: §58.1-1821 Application: Individual Income Tax
Dear*************
This will reply to your letter in which you seek to have your 1991 and future year income tax liabilities offset by the amount of taxes you claim have been illegally collected during earlier periods.
FACTS
Based upon the United States Supreme Court's decision in Davis v. Michigan Department of Treasury, which held that the unequal tax treatment of federal and state government retirees was unconstitutional, you offset the amount of tax you owed for taxable year 1991 with the amount of taxes you paid to the Commonwealth during taxable years 1985-1988 on retirement income received. The department issued an assessment for your nonpayment of taxes for taxable year 1991, which you have since paid. You are now requesting a refund of such amounts paid.DETERMINATION
You claim that since the imposition of tax on retirement income you received during taxable years 1985-88 was illegal, you are entitled to offset subsequent tax liabilities. The refund of taxes paid on federal retirement income received during taxable years 1985-88 is the issue in Harper v. Virginia Department of Taxation, which is currently being litigated.
On June 18, 1993, the United States Supreme Court held in Harper that Davis was to be retroactively applied; however, it did not specifically require Virginia to issue refunds to federal retirees for 1988 or the previous taxable years in question (1985-1987). The Supreme Court remanded the case to the Virginia courts to resolve certain other issues which would ultimately determine whether refunds are to be issued.
Recently, the Circuit Court of the City of Alexandra held that Virginia is not required to issue refunds to federal retirees as they could have challenged Virginia's income tax prior to the U.S. Supreme Court's 1989 decision in Davis by seeking a declaratory judgement in the circuit court. Unless you filed a declaratory judgement action prior to the Davis decision pursuant to the Alexandra decision you are not due a refund for taxable year 1988 (or any other year) and the department does not have any authority to issue refunds or to offset your 1991 and any future year tax liability by the amount of taxes you paid during taxable years 1985-88.
Even though the Harper litigation continues to be before the Virginia Supreme Court, Governor Allen has aggressively pursued a negotiated resolution of this matter that will be equitable for federal retirees and all Virginia taxpayers. In this regard, Attorney General Gilmore has recently announced a settlement program which, if approved by the General Assembly when it reconvenes in May, will provide federal retirees with four installment payments equal to 50 percent of the total tax they paid on federal retirement income received during the taxable years 1985-88. If a retiree chooses not to accept the settlement option, the retiree will have to file suit in the Circuit Court of the City of Richmond by September 15, 1994, and wait for the courts to finally decide the Harper refund issue.
The Department of Taxation will be in contact with you and other members of the federal retirement community with information and forms as soon as possible after the final details of the settlement plan are approved by the General Assembly.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/7148O
Rulings of the Tax Commissioner