Did Virginia allow a 2006 college-savings deduction when checks were mailed in December 2006 but posted to the accounts in January 2007?

Subject

IRA rolled to VCSP for deposit into accounts set up for the Taxpayers' children

Plain-English summary

The Department allowed the deduction in the year the checks were mailed, not the later year when the accounts posted them. The taxpayers took a taxable IRA distribution and instructed the IRA institution to mail the full amount directly to the Virginia College Savings Plan administrator for their children's accounts.

Virginia's deduction statute required an amount paid or contributed during the taxable year but did not define the contribution date. The Department applied unconditional-delivery and postmark principles. Because the checks were postmarked December 29, 2006 and sent for unconditional delivery, the contributions counted for 2006 even though posted January 3, 2007.

What this means for you

• For these facts, the mailing date controlled the contribution year.
• Direct mailing for unconditional delivery was essential to the result.
• The ruling did not exclude the IRA distribution from income; it addressed the separate Virginia deduction for the college-savings contributions.
• The Department abated the assessment after allowing the 2006 deduction.

Common questions

Did the January posting date move the deduction to 2007?

No. The Department used the December 2006 postmark date.

Did the ruling say the IRA distribution itself was tax-free?

No. The distribution was included in federal adjusted gross income; the dispute concerned the Virginia college-savings deduction.

Citations and references

• Va. Code §§ 58.1-322(D)(7)(a), 58.1-9, and 58.1-301.
• 23 VAC 10-20-165(C)(3).
• IRC §§ 529 and 7502.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-272

Original ruling text

December 16, 2010

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the individual income tax assessment issued to * (the "Taxpayers") for the 2006 taxable year. I apologize for the delay in responding to your appeal.

FACTS

On December 29, 2006 the Taxpayers took a distribution from an individual retirement account (IRA). The distribution was included in the Taxpayer's 2006 federal adjusted gross income (FAGI). The Taxpayers instructed the financial institution holding the IRA to mail checks for the entire amount of the distribution directly to the institution that administers the Virginia College Savings Plan (VCSP) for deposit into accounts set up for the Taxpayers' children.

The Taxpayers claimed a deduction against their 2006 Virginia taxable income for the contributions, pursuant to Va. Code § 58.1-322 D 7 a. Under audit, the Department denied the deduction for the 2006 taxable year because the transferred funds were not posted until early January 2007. The Taxpayers appeals the assessment, contending the transfers were made within the 2006 taxable year under rules established by the Internal Revenue Service.

DETERMINATION

Virginia Code § 58.1-322 D 7 a allows a deduction, subject to certain limitations, to the purchaser or contributor for the amount paid or contributed during the taxable year for a prepaid tuition contract or savings trust account entered into with the VCSP. The Taxpayers made valid contributions to a Virginia savings trust account (VEST) for each of their children. The question, however, is in which taxable year are the Taxpayers eligible for the deduction.

Virginia statute does not specifically define what constitutes a contribution made during a taxable year. Generally, a contribution is made at the time of its unconditional delivery. For example, a check that is mailed to a charity is considered delivered on the date you mail it. Under Va. Code § 58.1-9, the filing date of a return or a payment made by mail is the date of the postmark on the envelope. Although limited to returns and payments, the Department has administratively applied the use of the postmark for determining timeliness of appeals filed with the Department. See Title 23 of the Virginia Administrative Code (VAC) 10-20-165 C 3.

Further, Va. Code § 58.1-301 provides that terminology and references used in Title 58.1 of the Code of Virginia will have the same meanings as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required in that it starts the computation of Virginia taxable income with federal adjusted gross income (FAGI). As such, any income included in the FAGI of a Virginia resident is subject to taxation in Virginia, unless it is specifically excluded by a Virginia modification pursuant to Va. Code § 58.1-322.

A VEST is established under the authority of IRC § 529. This section makes no provision for deadline dates of contributions to qualified tuition programs. Thus, the date of the contribution would fall to the general rules for timely filing documents and payments under the IRC § 7502. Under this section, unless otherwise provided, the date of delivery for any document required to be filed or any payment required to be made under authority of any provision of the IRC is deemed to be made by the postmark date of such mailing.

In this instance, the Taxpayers contend they mailed their contributions on December 29, 2006, and the contributions posted to the prepaid tuition accounts on January 3, 2007. Because the contributions were postmarked in 2006 for unconditional delivery, the deduction will be permitted on the Taxpayers' 2006 Virginia income tax return. Accordingly, the assessment at issue will be abated.

The Code of Virginia sections and regulation cited are 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 * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Linda D. Foster

Deputy Tax Commissioner

AR/1-3975279317.D