Could a surviving annuitant claim Virginia's disability-income subtraction when the recipient was not permanently and totally disabled?

Subject

Surviving annuitant did not qualify for the disability-income subtraction

Plain-English summary

Virginia denied a disability-income subtraction to a surviving annuitant who was not himself permanently and totally disabled. The husband's former spouse had been permanently and totally disabled and elected reduced payments that would continue to him after her death. He received those payments and reported them as disability income.

Virginia said the subtraction required two conditions: the individual had to receive disability income, and the individual had to be absent from work because of a permanent and total disability. The husband satisfied the first condition but not the second.

Because income subtractions are strictly construed against the taxpayer, the source of the payments in the former spouse's disability did not substitute for the husband's own qualifying disability. Virginia upheld the adjustments for 2006 and 2007, and the outstanding assessments remained payable.

What this means for you

• Receiving an annuity labeled or reported as disability income is not enough by itself.
• The taxpayer claiming the subtraction must satisfy the permanent-and-total-disability requirement.
• A deceased spouse's qualifying disability does not automatically carry the subtraction to a surviving annuitant.
• Virginia construes statutory income subtractions narrowly.

Common questions

Did the ruling dispute that the payments were disability income?

No. It accepted that the husband received income reported as disability income but found that he was not permanently and totally disabled.

Why did the subtraction fail?

The husband was not absent from work because of his own permanent and total disability, which Virginia treated as a required condition.

What happened to the assessments?

They were upheld and remained due and payable.

Citations and references

• Va. Code § 58.1-322(C)(4)(b), as cited in the ruling.
• IRC §§ 22(c)(2)(B)(iii), 22(e)(3), 72, and 105(a).
• Howell's Motor Freight, Inc. v. Virginia Department of Taxation, Law No. 82-0846 (Roanoke City Cir. Ct. Oct. 27, 1983).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-153

Original ruling text

July 28, 2010

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This is in response to your letter in which you seek correction of the individual income tax assessment issued to * (the "Taxpayers") by the Department for the taxable years ended December 31, 2006 and 2007. I apologize for the delay in this response.

FACTS

The Taxpayers, a husband and wife, filed a joint individual income tax return for the taxable years at issue. They claimed a subtraction for disability income received by the husband as the surviving spouse of an individual previously receiving qualifying disability income payments. The husband was remarried during the taxable years at issue.

Under review, the Department disallowed the subtraction because the husband was not permanently and totally disabled, and assessments were issued. The Taxpayers appeal the assessments, contending that disability income received by the husband qualifies for the subtraction.

DETERMINATION

Under certain conditions, Va. Code § 58.1-322 C 4 b provides an individual income tax subtraction for up to $20,000 of disability income as defined under Internal Revenue Code (IRC) § 22(c)(2)(B)(iii). "Disability income" is defined under this section

of the IRC to be:

[t]he aggregate amount includable in the gross income of the individual for the taxable year under section 72 or 105(a) to the extent such amount constitutes wages (or payments in lieu of wages) for the period during which the individual is absent from work on account of permanent and total disability.

Based on the statutory requirements, an individual must meet two tests in order to be allowed a subtraction for disability income.

1. The individual must receive disability income, and

2. The individual must be absent from work because of a permanent and total disability.

By reason of their character as legislative grants, statutes relating to deductions and subtractions allowable in computing income and credits against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See Howell's, Motor Freight, Inc., et al. v. Virginia Department of Taxation , Circuit Court of the City of Roanoke , Law No. 82-0846 (10/27/1983).

In this case, the husband's former spouse became permanently and totally disabled and began receiving disability income payments. She elected an option to receive reduced disability income payments so that the payments would continue to the husband in the event of her death. After the she passed away in 2004, the husband began receiving distributions as the surviving annuitant continuing to report them as disability income under IRC § 72(m)(7). The Taxpayers claimed a subtraction for this disability income on their 2006 and 2007 Virginia individual income tax returns.

Under IRC § 22(e)(3), "permanent and total disability" means:

[a]n individual is permanently and totally disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.

While the husband did receive income reported as disability income during the taxable years at issue, he was not permanently and totally disabled. Therefore, the income did not qualify for the subtraction under Va. Code § 58.1-322 D 4 b.

Accordingly, the auditor's adjustment is upheld and the assessment remains due and payable. A schedule is enclosed showing the current outstanding balance. No additional interest will accrue provided the total outstanding balance is paid within 30 days from the date of this letter. Payment should be sent to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, Post Office Box, 27203, Richmond, Virginia 23218-7203, Attention: *.

The Code of Virginia section cited is available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this determination, you may contact * at ***.

Sincerely,

Linda Foster

Deputy Tax Commissioner

AR/1-3440658323.E