Could beneficiaries subtract federally taxable annuity death-benefit payments from Virginia income when the benefits were not paid in a lump sum?

Plain-English summary

Virginia denied the subtraction because the survivor annuity benefits were not paid in a lump sum. A married couple subtracted the wife's federally taxable death-benefit payments from their 2008 and 2009 Virginia income.

The Department said a qualifying payment had to satisfy three conditions: it came from an annuity contract between an annuitant and an insurance company, it was awarded to the beneficiary in a lump sum, and it was subject to federal income tax.

The wife's payments failed the second condition. Virginia therefore upheld the assessments for both years. The ruling also stated that Chapter 305 of the 2012 Acts of Assembly codified the Department's lump-sum policy described in P.D. 09-36.

Common questions

Q: Was federal taxation of the payment enough to qualify?
A: No. Federal taxability was only one of the three requirements Virginia applied.

Q: Did the Department treat installment survivor benefits as a lump sum?
A: No. The ruling expressly found that these survivor annuity payments failed the lump-sum criterion.

Citations and references

• Va. Code § 58.1-322(C)(32).
• Chapter 305, 2012 Acts of Assembly.
• Virginia Public Document 09-36.

Subject

Annuity death benefit payments must be in a lump sum in order to qualify for the subtraction.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-76

Original ruling text

May 9, 2012

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you contest the individual income tax assessments issued to * (the "Taxpayers") for the taxably years ended December 31, 2008 and 2009.

FACTS

The Taxpayers are a husband and wife. The wife received a distribution of death benefit payments from a life insurance annuity (the "Annuity") during the taxable years ended December 31, 2008 and 2009. The Taxpayers subtracted the death benefit payments from their 2008 and 2009 Virginia individual income tax returns.

The Taxpayers were audited by the Department, and the subtraction for the death benefits was disallowed on the basis that the distribution was not made in a lump sum. The Department issued assessments to the Taxpayers for additional tax for the 2008 and 2009 taxable years. The Taxpayers appeal the assessments, contending that the there is no requirement that the death benefit payments from a life insurance annuity be made in a lump sum in order to claim the subtraction.

DETERMINATION

Pursuant to Va. Code § 58.1-.322 C 32, a taxpayer is allowed a subtraction of "the death benefit payments from an annuity contract that are received by a beneficiary of such contract and are subject to federal income taxation."

The Taxpayers contend that neither the death benefit subtraction provision nor the Virginia individual income tax return instructions require the annuity death benefit payments be made in a lump sum in order to claim the subtraction. In Public Document (P.D.) 09-36 (3/31/2009), the Department determined that in order to qualify for the subtraction allowed under Va. Code § 58.1-322 C 32, a death benefit payment must meet three requirements. First, the source of the payment must be an annuity contract between a customer (the Annuitant) and an insurance company. Second, the annuity payment must have been awarded to the beneficiary in a lump sum. Finally, the payment must be subject to taxation at the federal level.

Based on the information provided, the survivor annuity benefit payments in this case do not satisfy the second criterion.

During the 2012 session of the Virginia General Assembly legislation was enacted clarifying the intent of the law regarding the subtraction of annuity death benefits. Chapter 305, Acts of the Assembly , codified the Department's policy promulgated in P.D. 09-36 with regard to the requirement that annuity death benefit payments be made in a lump sum in order to qualify for the subtraction.

Based on the information provided, I find that the Department's adjustments are correct. Accordingly, the 2008 and 2009 assessments remain due and payable. Updated bills will be mailed to the Taxpayers.

The Code of Virginia sections and public documents cited and other reference documents are available on-line in the Tax Policy Library section of the Department of Taxation's web site located at www.tax.virginia.gov. 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/1-4898706169.B