Tax Type
Individual Income Tax
Description
Subtractions from federal adjusted gross income; Contributions to benefit plans
Topic
Taxable Income
Date Issued
11-23-1994
November 23, 1994
Re: §58.1-1821 Application: Individual Income Tax
Dear*************
This will reply to your letter in which you seek the correction of an assessment issued against ********* (the"Taxpayer") for taxable years 1990 and 1991. I apologize for the delay in responding to your request.
FACTS
The Taxpayer, a Virginia resident, claimed a subtraction from the amount of federal adjusted gross income he reported on his 1990 and 1991 Virginia returns for the amount of his contributions to his employer sponsored pension plan. As a federal employee, the Taxpayer is not entitled to make pre-tax contributions to his retirement plan, group life insurance plan, and the health benefit program. The department disallowed the claimed subtractions.
The Taxpayer asserts that the department's disallowance of the subtractions violates the U.S. Supreme Court's holding in Davis v. Michigan Department of Revenue, 489 U.S. 803 (1989). Specifically, the Taxpayer claims that since federal employees are not eligible to make pre-tax payments and thus have higher taxable income amounts than their state counterparts, the Commonwealth's taxing scheme discriminates against federal employees.
DETERMINATION
Under federal law, employee benefits are considered taxable compensation unless exempted. The major exempt benefits are pension and health plans. When an employer sets up such a plan, the contributions by the employer are not included in the employee's compensation. Contributions by an employee are not deductions for the employee, and thus are made with after-tax dollars. Congress has authorized certain programs which effectively allow any employer to offer plans that have an employee's contributions made with pre-tax dollars.
Virginia has established a pension plan for its employees that does not require employee contributions, and has offered its employees the option to have employee contributions to its health plan made with pre-tax dollars. Congress requires its employees to contribute to its pension plan with after-tax dollars. The taxpayer alleges that because Virginia's income tax does not tax the contributions made on behalf of its own employees, but does tax the contributions made by federal employees, the Davis decision permits him to claim a subtraction for his federal pension contributions.
The Davis decision held that the fact that Michigan allowed a deduction for state pension income, but not for federal (or any other) pension income violated the intergovernmental immunity clause because the discrimination was based on the source of the income, that is, only payments by the state qualified. Further, Michigan's taxation of federal employees while providing an exemption for state employees violated Section 111 of Title 4 of the United States Code which permits states to tax federal employees' wages provided that the taxation does not discriminate against federal employees' pay based upon the source of the pay. Since Michigan based its taxing scheme on the source from which retirees received their pension payments, its law was invalidated.
In this case, the different tax treatment for employee benefits is not based on the source of the income. It is based on the type of plan selected by the employer. If Congress decides to offer a similar plan, federal employees would be similarly treated. Before 1983, when state employees were required to contribute after tax dollars to the state pension plan, Virginia's tax treatment was the same as currently applied to federal employees.
The fact that Virginia has chosen a package of employee benefits that, in some respects, enjoys more favorable federal and Virginia tax treatment than Congress has chosen for federal employees does not mean that Virginia has discriminated against federal employees solely because they are federal employees (or because they are not state employees, as in Davis).
For the reasons stated herein, the Taxpayer's claim is without merit. Therefore, the Taxpayer's appeal is hereby denied.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP7357O
Rulings of the Tax Commissioner