Tax Type
Estate Tax
Description
Assessment of Inheritance Tax
Topic
Computation of Tax
Date Issued
08-30-1999
August 30, 1999
Re: Sec. 58.1-1821 Application: Inheritance Tax
Dear ****
This will reply to your letter in which you contest the assessment of inheritance tax on the remainder interest of your client, the estate of ***** (the ``Taxpayer').
FACTS
On January 1, 1980, the Virginia Estate Tax Act of 1978 took effect. This act is effective for transfers of Virginia gross estates on or after January 1, 1980. Prior to the effective date of this act, decedents or decedents with Virginia property were subject to the Virginia Inheritance Tax.
A Virginia resident (the ``Testator') died testate in 1942. Her estate was left as life interests to her four children with the remainder of the estate being left to her grandchildren. In 1964, one of the testator's grandchildren (the ``Decedent') died intestate. At the time of that grandchild's death, the remainder interest could not be valued because some of the life tenants were alive and could have produced more grandchildren. A Virginia inheritance tax return was filed in 1965, and inheritance tax was paid in 1967. The value to the Taxpayer without the remainder interest was minimal so that the inheritance tax paid was based on the federal credit for state death taxes rather than the value of the estate. The department allowed the Taxpayer's administrator to defer the payment of inheritance tax on the remainder interest until the termination of the precedent temporary interest.
The department has instituted a procedure in which it periodically contacts individuals with interests in estates with remainder interests for the purpose of settling inheritance taxes prior to the termination of the precedent temporary interests. In 1992, the department contacted one of the life tenants for the purpose of settling the Taxpayer's estate. The department received no response.
In 1997, the final life tenant died, which effectively vested the Testator's remainder interest. In 1998, the Taxpayer's administrator filed a supplemental inheritance tax return in order to pay the tax due on the remainder interest. This assessment was based on the value of the remainder property in 1998. In addition, the department disallowed a deduction for federal estate tax previously paid and an exemption on the Taxpayer's original inheritance tax return.
You have made a number of arguments as to why the Taxpayer should pay no inheritance tax on the remainder interest, or in the alternative, a reduced tax.
DETERMINATION
A. The Taxpayer's estate owes no inheritance tax because the period of limitations has run.
Code of Virginia Sec. 58-179.1 provides that any inheritance tax shall be assessed within three years after the return is filed. The final life tenant died in 1997. The Taxpayer was assessed additional inheritance tax in December of 1998 and the Taxpayer's administrator filed the supplemental inheritance return after the department's assessment.
You contend that a portion of the inheritance tax on the remainder interest was included and taxed on the Taxpayer's original inheritance tax return filed in 1965. Because tax on this remainder interest was partially paid when the original return was filed, and Virginia does not recognize partial remainders, the remainder interest must have been included in the original return. Thus, you contend the department is prohibited from assessing any additional inheritance tax beyond the three-year statute of limitations on the original return.
Pursuant to Code of Virginia Sec. 58-152, inheritance taxes are levied on each beneficiary's share of inherited property. The tax is based on the actual value of the inherited property with the rates determined by the relationship of the beneficiary to the decedent. See Code of Virginia Sec. 58-153. However, Code of Virginia Sec. 58-162 provides that the inheritance tax as calculated in Code of Virginia Sec. 58-152 shall equal the greater of the tax based on the actual value of the inherited property or the credit allowed for state death taxes by Sec.2011 of the Internal Revenue Code (``IRC').
In the Taxpayer's case, the inheritance tax paid was equal to the federal credit for state death taxes because the inheritance tax due on the measurable estate at the time of death was less than the credit allowed for state death taxes by the IRC. This payment satisfied the inheritance tax on the measurable assets of the Taxpayer but not on the remainder interest vested. The Taxpayer still owed inheritance tax on the remainder interest. The residue of the Taxpayer could not be taxed until the remainder interest vested. Thus, the assessment on the Taxpayer's remainder interest could not occur until the filing of the supplemental inheritance tax return in 1998. As such, assessment of additional inheritance tax was made within the statute of limitations.
B. If the Taxpayer's estate owes inheritance tax on the remainder interest, it should be valued in 1992.
In 1992, the department contacted a surviving life tenant in order to settle the remainder interest. The department received no response. You contend that the department's notice to the life tenant was defective because it should have sent the notice to the Taxpayer's siblings. You believe that the department should value that property in 1992 out of the fundamental principle of fairness and equity.
Pursuant to Code of Virginia Sec. 58-173, the ``[d]epartment may effect like settlement of the entire tax on estates in which remainders are involved, without awaiting the termination of precedent temporary interests or estates.' This section gives the department the authority to settle remainder interests before they vest in order to ease the settlement of such interests. The department is not required to settle remainder interests before they vest. Rather the department attempts to settle such matters in order to ease the administrative burden on personal representatives and on the department.
In the instant case, the Taxpayer's administrator passed away in 1975 without naming a successor administrator. In the absence of notification of a successor administrator, the department in good faith tried to contact the individual listed on the department's records in order to settle the estate. The department received no response. The department has no choice but to consider the lack of response as a rejection of its offer to settle the estate. As such, the department must accept the 1997 valuation.
C. If the Taxpayer's estate owes inheritance tax on the remainder interest, the exemption and deductions on the supplemental inheritance tax return should be allowed.
Virginia provides for the deduction of estate administration expenses when determining a decedent's taxable estate. In the instant case, an exemption was used in the Taxpayer's original inheritance tax return in calculating the inheritance tax on the Taxpayer's estate. This exemption may not be deducted a second time when the remainder interest is taxed.
You contend that the deduction for federal estate taxes paid should be allowed on the supplemental inheritance tax return. Virginia allows a deduction for federal estate taxes paid when determining the taxable estate for inheritance tax purposes. The federal estate tax was not deducted on the Taxpayer's original inheritance tax return. Therefore, this deduction will be allowed on the supplemental inheritance tax return.
D. If the Taxpayer's estate owes inheritance tax on the remainder interest, the department should allow a credit against the current inheritance tax based on a percentage of the inheritance tax paid for the original return because of the time value of money.
The Taxpayer contends that because of the unique circumstance of the instant case, that the department should allow a credit proportional to the value of the 1967 estate as compared to the value of the 1997 estate. Alternatively, the Taxpayer argues that the 1967 payment of inheritance tax was an overpayment because the remainder interest could not be calculated at the Taxpayer's death. Therefore, interest which has accrued on this 1967 payment should offset any inheritance tax due.
Code of Virginia Sec. 58-173 expressly provides that the tax shall be assessed on the actual value of the reminder interest at the time that the interest vests. Virginia law does not provide for a credit against inheritance tax assessed against remainder interests when a taxpayer dies before his remainder interest vests. Such a credit would be contrary to the intent of the statute to value remainder interests at the time the beneficiary is entitled to possession of the interest.
The payment of inheritance tax on the original return was based on the value of the Taxpayer's estate at the time of his death. It was not based on the remainder interest which had not yet vested. Because the value of the federal credit for state death taxes exceeded the amount of inheritance tax based on the value of the Taxpayer's estate, the inheritance tax equaled the federal credit for state death taxes. Such payment was used to satisfy the inheritance taxes due on the Taxpayer's estate at his death. This payment was not an overpayment of inheritance tax and no interest is due.
T
herefore, the assessment of additional inheritance tax against the Taxpayer has been adjusted in accordance with the attached schedule. Please remit the inheritance tax and interest due on the remainder interest to *****, Office of Tax Policy, Virginia Department of Taxation, P.O. Box 1880, Richmond, Virginia 23218-1880 within 30 days to avoid the accrual of interest. If you have any questions about this determination, you may contact ***** at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/20677B
Re: Sec. 58.1-1821 Application: Inheritance Tax
Dear ****
This will reply to your letter in which you contest the assessment of inheritance tax on the remainder interest of your client, the estate of ***** (the ``Taxpayer').
FACTS
On January 1, 1980, the Virginia Estate Tax Act of 1978 took effect. This act is effective for transfers of Virginia gross estates on or after January 1, 1980. Prior to the effective date of this act, decedents or decedents with Virginia property were subject to the Virginia Inheritance Tax.
A Virginia resident (the ``Testator') died testate in 1942. Her estate was left as life interests to her four children with the remainder of the estate being left to her grandchildren. In 1964, one of the testator's grandchildren (the ``Decedent') died intestate. At the time of that grandchild's death, the remainder interest could not be valued because some of the life tenants were alive and could have produced more grandchildren. A Virginia inheritance tax return was filed in 1965, and inheritance tax was paid in 1967. The value to the Taxpayer without the remainder interest was minimal so that the inheritance tax paid was based on the federal credit for state death taxes rather than the value of the estate. The department allowed the Taxpayer's administrator to defer the payment of inheritance tax on the remainder interest until the termination of the precedent temporary interest.
The department has instituted a procedure in which it periodically contacts individuals with interests in estates with remainder interests for the purpose of settling inheritance taxes prior to the termination of the precedent temporary interests. In 1992, the department contacted one of the life tenants for the purpose of settling the Taxpayer's estate. The department received no response.
In 1997, the final life tenant died, which effectively vested the Testator's remainder interest. In 1998, the Taxpayer's administrator filed a supplemental inheritance tax return in order to pay the tax due on the remainder interest. This assessment was based on the value of the remainder property in 1998. In addition, the department disallowed a deduction for federal estate tax previously paid and an exemption on the Taxpayer's original inheritance tax return.
You have made a number of arguments as to why the Taxpayer should pay no inheritance tax on the remainder interest, or in the alternative, a reduced tax.
DETERMINATION
A. The Taxpayer's estate owes no inheritance tax because the period of limitations has run.
Code of Virginia Sec. 58-179.1 provides that any inheritance tax shall be assessed within three years after the return is filed. The final life tenant died in 1997. The Taxpayer was assessed additional inheritance tax in December of 1998 and the Taxpayer's administrator filed the supplemental inheritance return after the department's assessment.
You contend that a portion of the inheritance tax on the remainder interest was included and taxed on the Taxpayer's original inheritance tax return filed in 1965. Because tax on this remainder interest was partially paid when the original return was filed, and Virginia does not recognize partial remainders, the remainder interest must have been included in the original return. Thus, you contend the department is prohibited from assessing any additional inheritance tax beyond the three-year statute of limitations on the original return.
Pursuant to Code of Virginia Sec. 58-152, inheritance taxes are levied on each beneficiary's share of inherited property. The tax is based on the actual value of the inherited property with the rates determined by the relationship of the beneficiary to the decedent. See Code of Virginia Sec. 58-153. However, Code of Virginia Sec. 58-162 provides that the inheritance tax as calculated in Code of Virginia Sec. 58-152 shall equal the greater of the tax based on the actual value of the inherited property or the credit allowed for state death taxes by Sec.2011 of the Internal Revenue Code (``IRC').
In the Taxpayer's case, the inheritance tax paid was equal to the federal credit for state death taxes because the inheritance tax due on the measurable estate at the time of death was less than the credit allowed for state death taxes by the IRC. This payment satisfied the inheritance tax on the measurable assets of the Taxpayer but not on the remainder interest vested. The Taxpayer still owed inheritance tax on the remainder interest. The residue of the Taxpayer could not be taxed until the remainder interest vested. Thus, the assessment on the Taxpayer's remainder interest could not occur until the filing of the supplemental inheritance tax return in 1998. As such, assessment of additional inheritance tax was made within the statute of limitations.
B. If the Taxpayer's estate owes inheritance tax on the remainder interest, it should be valued in 1992.
In 1992, the department contacted a surviving life tenant in order to settle the remainder interest. The department received no response. You contend that the department's notice to the life tenant was defective because it should have sent the notice to the Taxpayer's siblings. You believe that the department should value that property in 1992 out of the fundamental principle of fairness and equity.
Pursuant to Code of Virginia Sec. 58-173, the ``[d]epartment may effect like settlement of the entire tax on estates in which remainders are involved, without awaiting the termination of precedent temporary interests or estates.' This section gives the department the authority to settle remainder interests before they vest in order to ease the settlement of such interests. The department is not required to settle remainder interests before they vest. Rather the department attempts to settle such matters in order to ease the administrative burden on personal representatives and on the department.
In the instant case, the Taxpayer's administrator passed away in 1975 without naming a successor administrator. In the absence of notification of a successor administrator, the department in good faith tried to contact the individual listed on the department's records in order to settle the estate. The department received no response. The department has no choice but to consider the lack of response as a rejection of its offer to settle the estate. As such, the department must accept the 1997 valuation.
C. If the Taxpayer's estate owes inheritance tax on the remainder interest, the exemption and deductions on the supplemental inheritance tax return should be allowed.
Virginia provides for the deduction of estate administration expenses when determining a decedent's taxable estate. In the instant case, an exemption was used in the Taxpayer's original inheritance tax return in calculating the inheritance tax on the Taxpayer's estate. This exemption may not be deducted a second time when the remainder interest is taxed.
You contend that the deduction for federal estate taxes paid should be allowed on the supplemental inheritance tax return. Virginia allows a deduction for federal estate taxes paid when determining the taxable estate for inheritance tax purposes. The federal estate tax was not deducted on the Taxpayer's original inheritance tax return. Therefore, this deduction will be allowed on the supplemental inheritance tax return.
D. If the Taxpayer's estate owes inheritance tax on the remainder interest, the department should allow a credit against the current inheritance tax based on a percentage of the inheritance tax paid for the original return because of the time value of money.
The Taxpayer contends that because of the unique circumstance of the instant case, that the department should allow a credit proportional to the value of the 1967 estate as compared to the value of the 1997 estate. Alternatively, the Taxpayer argues that the 1967 payment of inheritance tax was an overpayment because the remainder interest could not be calculated at the Taxpayer's death. Therefore, interest which has accrued on this 1967 payment should offset any inheritance tax due.
Code of Virginia Sec. 58-173 expressly provides that the tax shall be assessed on the actual value of the reminder interest at the time that the interest vests. Virginia law does not provide for a credit against inheritance tax assessed against remainder interests when a taxpayer dies before his remainder interest vests. Such a credit would be contrary to the intent of the statute to value remainder interests at the time the beneficiary is entitled to possession of the interest.
The payment of inheritance tax on the original return was based on the value of the Taxpayer's estate at the time of his death. It was not based on the remainder interest which had not yet vested. Because the value of the federal credit for state death taxes exceeded the amount of inheritance tax based on the value of the Taxpayer's estate, the inheritance tax equaled the federal credit for state death taxes. Such payment was used to satisfy the inheritance taxes due on the Taxpayer's estate at his death. This payment was not an overpayment of inheritance tax and no interest is due.
T
herefore, the assessment of additional inheritance tax against the Taxpayer has been adjusted in accordance with the attached schedule. Please remit the inheritance tax and interest due on the remainder interest to *****, Office of Tax Policy, Virginia Department of Taxation, P.O. Box 1880, Richmond, Virginia 23218-1880 within 30 days to avoid the accrual of interest. If you have any questions about this determination, you may contact ***** at ****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/20677B
Rulings of the Tax Commissioner