Could a beneficiary subtract monthly survivor-annuity payments as Virginia annuity death benefits for 2007-2009?

Plain-English summary

Virginia denied the subtraction because the beneficiary's monthly survivor-annuity payments were not lump-sum death benefits from an insurance-company annuity contract. She had subtracted the federally taxable payments on her 2007, 2008, and 2009 Virginia returns.

The Department interpreted the historical subtraction as requiring three things: an annuity contract between a customer and an insurance company, a lump-sum award to the beneficiary, and federal taxation of the payment. The beneficiary's payments arose under federal law and were paid monthly, so they did not qualify.

Virginia rejected the argument that the interpretation was improperly retroactive. The Tax Commissioner had statutory authority to interpret the law, and 2012 legislation was intended to codify the same interpretation. The ruling also said tax-booklet summaries were helpful guidance but not authoritative replacements for statutes, rulings, regulations, and court decisions. The assessments and interest remained due.

What this means for you

• Verify the legal source of a survivor payment, not just the product label.
• Payment form mattered under this historical rule; monthly payments failed the lump-sum test.
• Federal taxation alone did not make the payment subtractable.
• Tax instructions may summarize rules but do not replace controlling law and official interpretations.
• Confirm current law before using this historical subtraction analysis.

Common questions

Q: Why did the monthly payments fail?
A: The historical subtraction required a lump-sum payment from a customer-insurer annuity contract.

Q: Did federal taxation make them eligible?
A: No. That was only one of three required conditions.

Q: Could the beneficiary rely on tax booklets?
A: Not as authoritative law; the ruling said they were only general guidance.

Q: What happened to the assessments?
A: The 2007-2009 additional tax and interest remained due.

Citations and references

• Va. Code §§ 58.1-322 C 32 and 58.1-203.
• 2012 Va. Acts ch. 305 (House Bill 879).
• Virginia Public Documents 09-36 and 97-497.

Subject

Subtraction for Death Benefit Payments from an Annuity

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-149

Original ruling text

July 31, 2013

Re: Ruling Request: Subtraction for Death Benefit Payments from an Annuity

Dear *:

This is in response to your letter in which you requested a ruling regarding whether the survivor annuity benefit payments that you ("the Beneficiary") received are eligible to be subtracted under Va. Code § 58.1-322 C 32. I apologize for the delay in this response.

FACTS

The Beneficiary received death benefit payments from annuities following the death of her husband. When the Beneficiary calculated her Virginia taxable income for Taxable Years 2007, 2008, and 2009, she subtracted the death benefit payments from her federal adjusted gross income pursuant to Va. Code § 58.1-322 C 32 to the extent that such payments were subject to federal income taxation.

On February 28, 2011, the Virginia Department of Taxation ("the Department") issued Notices of Proposed Assessment to the Beneficiary for Taxable Years 2007, 2008, and 2009 in which it disallowed the Beneficiary's subtraction for death benefit payments for all three taxable years, and assessed additional tax and interest to the Beneficiary. The Department disallowed the Beneficiary's death benefit payment subtractions because such benefits were paid to her on a monthly basis and not in a lump sum, and the source of the annuity payments was a federal law and not a contract with an insurance company.

DETERMINATION

Interpretation of Statutory Law

Pursuant to the version of Va. Code § 58.1-322 C 32 that existed prior to the 2012 General Assembly Session, a taxpayer is allowed a subtraction for death benefit payments received from an annuity contract to the extent that such payments are subject to federal income taxation. In order to qualify for the subtraction allowed under Va. Code § 58.1-322 C 32, the Department previously ruled that the death benefit payment is required to meet the following criteria: 1) the source of the payment is an annuity contract between a customer and an insurance company; 2) it has been awarded to the beneficiary in a lump sum; and 3) the payment is subject to taxation at the federal level. The Department determined that the intent of Va. Code § 58.1-322 C 32 was to equalize the tax treatment of death benefits for those who cannot obtain life insurance because they are uninsurable for health reasons. This is because life insurance benefit payments that are paid by reason of the death of the insured are exempt from federal taxation, and, thus, are exempt from Virginia taxation. In contrast, a portion of the death benefit payments that are paid from an annuity contract are taxable. Therefore, those who cannot obtain standard life insurance and so must utilize annuities to provide a similar benefit to their beneficiaries are treated dissimilarly for tax purposes. It was on this basis that the death benefit payments subtraction for annuity contracts was created. This subtraction was not intended to be a tax preference for retirement income. See Public Document ("P.D.") 09-36 (3/31/09).

The Beneficiary claims that the Department's interpretation of Va. Code § 58.1-322 C 32 is incorrect because it limits which death benefit payments may be subtracted beyond the limitation that existed in the statute prior to the 2012 General Assembly Session. The Beneficiary also claims that the Department's interpretation of Va. Code § 58.1-322 C 32 should not apply to her since the Department's ruling that interpreted that statute was not released until March, 31, 2009 and, therefore, would apply to her retroactively.

Under Va. Code § 58.1-203, the Tax Commissioner has broad discretion to issue rulings related to the interpretation and enforcement of Virginia's tax laws. See P.D. 97-497 (12/10/1997). The interpretation of Va. Code § 58.1-322 C 32 that limited the death benefit payments subtraction was within the Tax Commissioner's power to interpret Virginia's tax laws. Further, the Department's interpretation of Va. Code § 58.1-322 C 32 in P.D. 09-36 was codified by the clarifications made to the death benefit payments subtraction that were adopted by the General Assembly during the 2012 Session (2012 Acts of Assembly , Chapter 305, House Bill 879). 2012 House Bill 879 was intended to codify the Department's interpretation of the law as set forth in P.D. 09-36.

Reliance on Information in Virginia's Tax Booklets

The Beneficiary also claims that she should be allowed the death benefit payments subtraction because the Taxable Year 2007, 2008, and 2009 Virginia 760 Resident Individual Income Tax Booklets are misleading and incomplete, and she relied upon the information within such booklets when computing her Virginia taxable income for those taxable years. The tax booklets for Taxable Years 2007, 2008, and 2009 stated that the death benefit payments subtraction is allowed to the extent that such benefits are subject to federal taxation. These tax booklets merely paraphrased the statute and made no reference to the requirements that distinguish "death benefit payments" from other types of payments; i.e. , the source of death benefit payments must be an annuity contract between a customer and an insurance company, and that the annuity payment must be awarded to the beneficiary in a lump sum.

The information provided in Virginia's tax booklets is intended to provide helpful guidance to taxpayers. It is not intended to provide a detailed explanation of every provision or nuance of Virginia's tax law. A taxpayer must consult Virginia's statutes, ruling letters, regulations, court decisions, the Internal Revenue Code, and other sources of tax jurisprudence in order to compute his Virginia tax liability correctly. The guidance found in Virginia's tax booklets is not a substitute for these sources of Virginia's tax law and may not be relied upon as authoritative when a taxpayer is computing his Virginia taxable income.

CONCLUSION

For the foregoing reasons, the Beneficiary was not entitled to subtract the death benefit payments that she received for Taxable Yeats 2007, 2008, and 2009. Therefore, the Beneficiary remains liable for the additional taxes and interest that were assessed by the Department for Taxable Years 2007, 2008, and 2009. The Code of Virginia provisions and regulations cited, along with other reference documents, are available online in the Laws, Rules & Decisions section of the Department's website, located at www.tax.virginia.gov . If you have any questions about this determination, you may contact * in the Policy

Development Division at *.

Sincerely,

Craig M. Burns

Tax Commissioner