Did Virginia federal conformity let a qualified funeral trust use the lowest state income-tax rate regardless of its income?

Subject

Qualified funeral trust owed tax under Virginia's graduated rate schedule

Plain-English summary

Virginia required the qualified funeral trust to use the Commonwealth's graduated individual income-tax schedule rather than the lowest rate for all of its income. The trust had calculated its 2006 and 2007 fiduciary liability at Virginia's minimum rate, arguing that federal qualified-funeral-trust treatment used the lowest federal rate.

Virginia conformity did not extend that far. It generally adopted federal terminology and began with federal adjusted gross income, but it did not import federal concepts that conflicted with Virginia statutes.

Section 58.1-360 imposed tax on estates and trusts at the individual rates in § 58.1-320. At the time, that schedule ranged from 2% to 5.75% depending on Virginia taxable income. Because the trust's income exceeded the minimum-rate bracket, Virginia upheld the additional assessments.

What this means for you

• A federal trust election can determine filing treatment without controlling Virginia's tax rate.
• Virginia conformity starts the state calculation but does not replace express state rate statutes.
• A qualified funeral trust needed to file a Virginia fiduciary return and apply the rate corresponding to its taxable income under the law used here.
• The quoted brackets are historical; verify current rates.

Common questions

Why did federal treatment not control the Virginia rate?

Virginia's own statutes expressly imposed the individual rate schedule on estates and trusts.

What rate range did the ruling apply?

From 2% to 5.75%, depending on Virginia taxable income.

Were the assessments removed?

No. The application for relief was denied.

Citations and references

• IRC § 685.
• Va. Code §§ 58.1-301, 58.1-320, and 58.1-360.
• Virginia Public Document 97-497.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-76

Original ruling text

May 18, 2010

Re: § 58.1-1821 Application: Fiduciary Income Tax

Dear *:

This will reply to your letter in which you seek correction of the corporate income tax assessments issued to * (the "Taxpayer") for the taxable years ended December 31, 2006 and 2007. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a qualified funeral trust (QFT) that filed Virginia fiduciary income tax returns for the 2006 and 2007 taxable years. The Taxpayer calculated its fiduciary tax liability based on the lowest rate available on the Virginia income tax rate schedule.

On audit, the Department determined that the Taxpayer's income exceeded the income level set at the minimum rate and assessed additional tax. The Taxpayer appeals the assessments, contending that QFTs are taxed at the lowest rate at the federal level and that conformity requires that Virginia also tax QFTs at the lowest tax rate.

DETERMINATION

Public Document (P.D.) 97-497 (12/10/1997) addresses the treatment of QFTs for Virginia fiduciary income tax purposes. Certain trusts can elect to be treated as a QFT if they meet the requirements of Internal Revenue Code § 685. Under this election, the QFT files income tax returns on behalf of the individual beneficiaries. In accordance with Virginia's conformity with the Internal Revenue Code, QFTs are also required to file a Virginia fiduciary income tax, return.

The Taxpayer asserts that QFTs are taxed at the federal level at the lowest rate on the federal income tax rate schedule. The Taxpayer believes, therefore, that Virginia is required to assess QFTs at Virginia's lowest income tax rate because the Commonwealth conforms with the Internal Revenue Code.

Virginia Code § 58.1-301 provides that terminology and references used in Title 58.1 of the Virginia Code will generally have the same meanings as provided in the Internal Revenue Code unless a different meaning is clearly required. Virginia "conforms" to federal law because it starts the computation of Virginia taxable income with federal adjusted gross income (FAGI). Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia . Therefore, the Department will not follow Internal Revenue Code provisions that contradict Virginia's statutes and regulations.

Virginia Code § 58.1-360 imposes an income tax on the Virginia taxable income of all estate and trusts at the rates for individuals prescribed in Va. Code § 58.1-320. Virginia Code § 58.1-320 provides a rate schedule for income tax ranging from a minimum of 2% to a maximum rate of 5.75% of a taxpayer's Virginia taxable income. As such, the Taxpayer would be liable for Virginia fiduciary income tax on QFTs at the rate corresponding to its Virginia taxable income as set out in the rate schedule provided in Va. Code § 58.1-360.

Based on the foregoing, the Department's adjustments to the Taxpayer's 2006 Virginia income tax return are correct, and the Taxpayer's application for relief is denied. Accordingly, the assessments are upheld and are now due and payable. An updated bill notice will be issued shortly to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid the accrual of additional interest.

The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department of Taxation's web site. If you have any questions about this determination, please contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3895318677.B