Did monthly federal retirement survivor payments qualify for Virginia's annuity death-benefit subtraction when they were not paid as a lump sum?

Subject

Monthly federal survivor payments failed the lump-sum requirement

Plain-English summary

Virginia denied the death-benefit subtraction because the survivor benefit was paid monthly rather than as a lump sum. The wife's first husband had received monthly payments from a federal retirement plan, and those benefits transferred to her after his death.

Virginia stated that the subtraction required a payment from an annuity contract between a customer and an insurance company, a lump-sum award to the beneficiary, and federal taxation of the payment. The General Assembly's 2012 amendment codified the Department's existing interpretation.

The couple's reliance on shorter tax-form instructions did not change the result. Virginia treated the instructions as general guidance rather than an authoritative statement of every statutory requirement.

What this means for you

• A continuing stream of survivor payments was not a qualifying lump-sum death benefit.
• Verify the source contract, beneficiary payment form, and federal tax treatment before claiming the subtraction.
• Tax-return instructions do not replace the statute, rulings, regulations, and cases.
• Subtractions are construed narrowly, and the taxpayer bears the eligibility burden.

Citations and references

• Va. Code §§ 58.1-203, 58.1-301, and 58.1-322 C 32.
• IRC §§ 72 and 101.
• Public Documents 09-36, 10-63, and 13-149, discussed in the ruling.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-228

Original ruling text

December 18, 2013

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the individual income tax assessment issued to * (the "Taxpayers") for the taxable years ended December 31, 2008 through 2010. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayers, a husband and wife, filed joint Virginia income tax returns for the 2008 through 2010 taxable years. They claimed a subtraction for an annuity death benefit resulting from income received after the death of the wife's first husband. Under audit, the Department disallowed the subtraction and issued assessments for additional tax and interest. The Taxpayer satisfied the assessments and filed an appeal, contending the requirements to claim the benefits as specified by the Department are not set forth in the statute or in the income tax instruction booklet.

DETERMINATION

Death Benefit Subtraction

Virginia Code § 58.1-301 provides that the terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required. For individual income tax purposes, Virginia conforms to federal law in that it starts the computation of Virginia taxable income with the federal adjusted gross income (FAGI). Income included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Va. Code § 58.1-322.

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 is received by a beneficiary of such contract and is subject to federal income taxation." In order to qualify for the subtraction, a death benefit payment must meet three requirements. First, the source of the payment must be an annuity contract between a customer 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. See Public Document (P.D.) 09-36 (3/31/2009) and P. D. 10-63 (5/7/2010).

The Taxpayers argue that the requirements specified in P.D. 09-36 were not expressed in the Code of Virginia , the legislative history, or the Virginia income tax instructions. In 2012, the General Assembly enacted legislation to clarify the intent of the law regarding the subtraction of annuity death benefits by amending Va. Code § 58.1-322 C 32 to codify the Department's policy implemented in P.D. 09-36. See Chapter 305, Acts of Assembly .

In this instance, the wife's first husband received monthly payments from a federal retirement plan. At his death, the benefits were transferred from the retiree to the wife. The annuity was not paid as a lump sum death benefit.

Interpretation of Statute

Under IRC § 101 (2006), life insurance benefit payments paid by reason of the death of the insured are exempt from federal taxation, and thus exempt from Virginia taxation. IRC § 72 (2013), however, provide that a portion of the death benefits from an annuity, including life insurance contracts, are taxable. Because death benefits were treated dissimilarly for income tax purposes, the General Assembly sought to provide relief to individuals who are unable to obtain standard life insurance. As a result, the death benefits subtraction for certain annuity contract payments was enacted.

Virginia Code § 58.1-203 grants the Tax Commissioner power to issue rulings related to the interpretation and enforcement of the laws governing taxes administered by the Department. See P.D. 97-497 (12/10/1997). The Virginia Supreme Court has consistently held that the construction of a tax statute by a state official charged with its administration is entitled to great weight. See Webster v. Department of Taxation , 219 VA. 81, 84-85, 245 S.E. 2d 252, 255 (1978) and Winchester TV Cable v. State Tax Com. , 216 Va. 289, 290, 217, S.E. 2d 885, 889 (1975).

Further, by reason of their character as legislative grants, statutes relating to deductions and subtractions allowable in computing income and credits against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See Howell's Motor Freight, Inc., et al. v. Virginia Department of Taxation , Circuit Court of the City of Roanoke , Law No. 82-0846 (10/27/1983).

Tax Form Instructions

The Taxpayers contend that the instructions for individual income tax returns are misleading and incomplete, and they relied upon the information within the instructions when computing their Virginia taxable income for those taxable years. The Department has recently addressed this issue in P.D. 13-149 (7/31/2013).

The instructions for the taxable years at issue stated that the death benefit payments subtraction is allowed to the extent that such benefits, which were received from an annuity contract, are subject to federal taxation. Tax form instructions merely paraphrase the statute and generally make no reference to the requirements for reporting amounts on a particular line of a return.

The information provided in Virginia's tax return instructions is intended to provide helpful guidance to taxpayers. It is not intended to provide a detailed explanation of every provision of or nuance of Virginia's tax law. Further, because subtractions are strictly construed against the taxpayer, it is incumbent upon the taxpayer to investigate whether he is eligible for such subtraction. 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 provided in the Department's tax form instructions 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

Based on this determination, the assessments for the 2008 through 2010 taxable years are upheld. Because the Taxpayers have satisfied the assessments, no further action is required.

The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department'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/1-4950118038.D