Could Virginia residents reopen the 2004 refund period after another state assessed tax on the same rental income in 2009?

Subject

Statute of limitation

Plain-English summary

Virginia denied the 2004 refund as untimely. The taxpayers owned rental property in another state. That state assessed 2004 tax in February 2009, and the taxpayers filed an amended 2004 Virginia return in March 2009 seeking a credit for tax paid there.

The regular three-year Virginia deadline expired May 2, 2008. Paying another state's assessment did not trigger the two-year exception for payment of an assessment, because that provision concerned a Virginia assessment or self-assessment.

The taxpayers also argued that the other-state payment affected their 2009 federal return. But the federal-change exception required the Virginia amended return to address the same taxable year affected by the federal change, not reopen 2004 because of a 2009 effect.

Finally, the one-year exception following another state's final determination applied only when the taxpayer had previously claimed the other-state tax credit on the Virginia return. The taxpayers had not done so. The Commissioner said no statutory provision authorized the late refund, despite the resulting double-tax concern.

What this means for you

• Track Virginia's normal refund deadline even while another state is auditing an older year.
• An assessment by another state is not a Virginia assessment for the payment-based exception.
• Federal-change relief generally follows the same taxable year as the federal adjustment.
• The other-state audit exception described here required a credit already claimed on the original Virginia return.

Common questions

When did the ordinary 2004 deadline expire?

The return was due May 2, 2005, so the ruling calculated the three-year amended-return deadline as May 2, 2008.

Did the protective-claim label preserve the refund?

No. The Commissioner treated the request as an appeal on the merits and found every applicable limitations period expired.

Citations and references

• Va. Code §§ 58.1-1824, 58.1-1821, 58.1-1823, and 58.1-1820.
• Va. Code § 58.1-311.
• Va. Code § 58.1-332.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-64

Original ruling text

April 21, 2011

Re: § 58.1-1824 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you submit a protective claim concerning the denial of a Virginia individual income tax refund for * (the "Taxpayers") for the taxable year ended December 31, 2004.

FACTS

The Taxpayers are Virginia residents who owned rental property in * (State A). In February 2009, an audit by State A resulted in an income tax assessment. An amended 2004 Virginia income tax return was filed in March 2009 claiming a credit for income tax paid to State A. The Department denied the refund because the return was filed beyond the statute of limitations.

The Taxpayers have appealed the denial of the refund, contending they could claim a refund within one year of State A's final determination. In the alternative, they argue that the State A assessment impacted their 2009 federal income tax return, thereby opening up the statute to allow them to file an amended return within one year of a final determination by the Internal Revenue Service (IRS). The Taxpayers also assert that a refund could be permitted because the claim resulted from the payment of an assessment and their amended Virginia return raised issues solely related to the State A assessment.

DETERMINATION

Pursuant to the authority granted the Tax Commissioner under Va. Code § 58.1­1824, a protective claim for refund can be held pending the outcome of another case before the courts or the claim may be decided based upon its merits pursuant to Va.Code § 58.1-1821. As permitted by statute, the Taxpayers' request has been treated as an appeal under Va. Code § 58.1-1821.

Generally, Va. Code § 58.1-1823 allows a taxpayer to file an amended return within three years from the last day prescribed by law for the timely filing of the return. The Taxpayers' 2004 return was due May 2, 2005. In order to timely file an amended return, the Taxpayers would have head to have filed on or before May 2, 2008. In this case, the Taxpayers' 2004 amended return was filed in March 2009, well after the general statute of limitations had expired. Virginia Code § 58.1-1823 also includes a number of exceptions to the general rule when specific circumstances are present.

Pursuant to Va. Code § 58.1-1823 A (iv), a taxpayer may file an amended return within two years after the payment of an assessment provided such amended return raises issues solely relating to such assessment and the claim does not exceed the amount of such payment. The Taxpayers believe the payment of the State A assessment permits them to file an amended return under this provision. However, for the purposes of this section, an assessment results when a notice is issued by the Department or a taxpayer self-assesses a tax by filing a Virginia return. See Va. Code § 58.1-1820. As such, the State A assessment does not open the statute of limitations for the Taxpayers to file an amended Virginia return under this provision.

Virginia Code § 58.1-1823 A (ii) permits a taxpayer one year from the final determination of a federal change or correction to file an amended return to request a refund. The Taxpayers argue that the requirement set forth under § 58.1-1823 A (ii) was met because payment of the assessment in 2009 to State A for the 2004 taxable year resulted in a reduction of their 2009 federal taxes. This provision of Va. Code § 58.1-1823 cannot be interpreted exclusive of Va. Code § 58.1-311. This requires a taxpayer audited by the IRS to file an amended return for the taxable year any resulting changes or corrections occurred and report the changes to the Department within one year of the final determination of the change. Thus, an amended return filed under Va. Code § 58.1-1823 A (ii) must be for the same taxable year for which a change in federal income tax liability occurred.

Under Va. Code § 58.1-1823 A (v), a taxpayer has one year from the final determination of a change made by any other state to file an amended return to request a refund resulting from credits for taxes paid to other states. The Taxpayers believe that when this provision of Va. Code § 58.1-1823 was enacted, it was drafted with the understanding of situations such as occurred in their case, which has resulted in income being subject to taxation in two states. This provision, however, clearly states that a taxpayer must have previously claimed a credit for taxes paid to such state tax pursuant to Va. Code § 58.1-332 in order to file an amended return claiming a refund resulting from an audit conducted by another state.

I have thoroughly reviewed the facts and the Taxpayers' circumstances, but I am unable to find any provision under Title 58.1 of the Code of Virginia that would authorize me to grant the Taxpayers' request for refund because it was submitted after all applicable statute of limitation provisions expired. While I empathize with your situation, I am bound by the clear requirements under the law. Accordingly, your request for refund for the 2004 taxable year is denied.

The Code of Virginia sections and public documents cited are available on-line 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,

Craig M. Burns

Tax Commissioner

AR/1-4580822747.E