Did a Form 1099's annuity label make periodic federal retirement survivor payments eligible for Virginia's death-benefit subtraction?

Subject

Federal retirement survivor payments failed the annuity subtraction

Plain-English summary

Virginia denied the subtraction because the survivor payments came from a federal retirement plan and were not a lump-sum death benefit. The taxpayer's husband had received federal retirement payments, and the continuing benefits transferred to her after his death.

Virginia required a qualifying payment to come from an annuity contract between a customer and an insurance company, be awarded to the beneficiary in a lump sum, and be federally taxable. The retirement-plan source failed that test even if a lump sum had been available.

The Form 1099's description of the income as an annuity and the shorter tax-form instructions did not change the statutory analysis. The 2008-2010 assessments were upheld.

What this means for you

• Look through the tax form's label to the actual retirement or insurance contract.
• Periodic federal retirement survivor payments were not qualifying insurance-company death benefits.
• A payment must satisfy every stated requirement, including source and lump-sum form.
• Binding-advice relief requires qualifying written advice based on a specific, accurate request.

Citations and references

• Va. Code §§ 58.1-203, 58.1-301, 58.1-322 C 32, 58.1-1835, and 58.1-1845.
• 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. 13-229

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 Virginia individual income tax assessments issued to * (the "Taxpayer") for the taxable years ended December 31, 2008 through 2010. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer is the beneficiary of a federal retirement plan. During the 2008 through 2010 taxable years, the Taxpayer claimed a subtraction for the annuity death benefit. Under audit, the Department disallowed the subtractions and issued assessments for all years at issue. The Taxpayer appeals the assessments, contending that the instructions failed to provide sufficient detail to support the intent of the statute. The Taxpayer also argues that Federal Form 1099 classified the retirement benefit payments as annuity income.

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 Taxpayer argues that the requirements specified in P.D. 09-36 were not expressed in the Code of Virginia , until after the returns were filed. However, the Department's policy was established prior to filing due date of the 2008 income tax return. 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 .

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

Under IRC § 101, 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, 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 lump sum payments from annuity contracts issued by insurance companies was enacted.

The survivor annuity payments received by the Taxpayer were issued from a retirement plan. As such, because the annuity payment was made pursuant to a retirement plan, the Taxpayer could not have qualified for the subtraction, even if she accepted a lump sum in lieu of periodic payments.

The subtraction applies to death benefit payments subject to federal income tax. However, the intent of the death benefit subtraction was to equalize treatment of certain death benefit payments resulting from contracts with life insurance companies for Virginia income tax purposes. Under the Department's interpretation and subsequent clarifying legislation, the death benefit subtraction was never intended to be permitted for payments from a retirement plan.

Interpretation of Statute

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 also 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.

Finally, the Taxpayer argues that she amended her Virginia income tax returns after receiving advice from the Department that she met the qualification to claim the subtraction.

Virginia Code § 58.1-1835 provides that the Tax Commissioner shall abate any portion of tax, interest and penalty attributable to erroneous written advice by the Department under the following conditions:

1. The written advice was reasonably relied upon by the taxpayer and was in response to a specific written request by the taxpayer;

2. The portion of the penalty or tax did not result from a failure by the taxpayer to provide adequate or accurate information; and

3. The facts of the case described in the written advice and the request thereof are the same, and the taxpayer's business or personal operations have not changed since the advice was rendered.

Furthermore, Va. Code § 58.1-1845 sets out the Virginia Taxpayer Bill of Rights. Subsection 4 sets forth one of the guaranteed rights is for:

The right to abatement of tax, interest and penalties in accordance with § 58.1-1835, attributable to any taxes administered by the Department, when the taxpayer reasonably relies upon binding written advice furnished to the taxpayer by the Department through authorized representatives in response to the taxpayer's specific written request which provided adequate and accurate information.

Based on the above statutory provisions, the erroneous advice must be reasonably relied upon by the Taxpayer, and such advice must be in writing. In addition, such written advice must be provided based on a specific request by a taxpayer who has provided sufficient and accurate facts so that the Department may issue a correct decision. Tax form instructions are only intended to provide basic information. Further, because subtractions are strictly construed against the taxpayer, it is incumbent upon the taxpayer to investigate whether they are eligible for such subtraction. The Department issues regulations, guidelines, tax bulletins and public documents, which unlike form instructions, are granted varying levels of judicial consideration. The guidance provided in the Department's tax form instructions is not a substitute for Virginia tax law or sources indicated above and are not considered authoritative in computing Virginia taxable income.

CONCLUSION

Based on this determination, the assessments for the 2008 through 2010 taxable years are upheld. Updated bills will be issued shortly.

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/1-5078854382.D