Did federal qualified-funeral-trust treatment require Virginia to tax the trust at its lowest fiduciary rate?

Plain-English summary

Virginia refused to tax the qualified funeral trust automatically at the state's lowest fiduciary rate. The trust calculated tax from average income per funeral contract, which placed it in the minimum bracket. The audit instead applied the rate corresponding to the trust's total Virginia taxable income.

Federal law allowed qualifying trusts to elect QFT treatment and file on behalf of individual beneficiaries. Virginia conformity required a Virginia fiduciary return, but did not import federal concepts that contradicted Virginia's own statutes.

Virginia law taxed estates and trusts under the individual rate schedule, ranging in this ruling from 2% to 5.75%. Because the trust's 2010 income exceeded the minimum-rate level, the additional assessment was upheld.

Common questions

Q: Did federal QFT status fix the Virginia rate at 2%?
A: No. Virginia applied its graduated individual rate schedule to the trust's Virginia taxable income.

Q: Did Virginia conformity control the filing obligation?
A: Yes, but it did not override the state rate statutes.

Citations and references

• Va. Code §§ 58.1-301, 58.1-320, and 58.1-360.
• IRC § 685.
• Virginia Public Documents 97-497 and 10-76.

Subject

Qualified funeral trust

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-38

Original ruling text

April 4, 2012

Re: § 58.1-1821 Application: Fiduciary Income Tax

Dear *:

This will reply to your letter in which you seek correction of the fiduciary income tax assessment issued to * (the "Taxpayer") for the taxable year ended December 31, 2010.

FACTS

The Taxpayer is a qualified funeral trust (QFT) that filed a Virginia fiduciary income tax return for the 2010 taxable year. The Taxpayer calculated its fiduciary tax liability based on the average income per contract. This resulted in the fiduciary trust being taxed at 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 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 (IRC) § 685. Under this election, the QFT files income tax returns on behalf of the individual beneficiaries. In accordance with Virginia's conformity with the IRC, 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 IRC.

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. See P.D. 10-76 (5/18/2010).

Based on the foregoing, the Department's adjustments to the Taxpayer's 2010 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 documents 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,

Craig M. Burns

Tax Commissioner

AR/1-4840006385.B