Could unused Virginia land-preservation tax credits pass through a residuary will clause when the credit holder died before July 1, 2018?

Plain-English summary

A taxpayer died in December 2016 holding unused Virginia land-preservation tax credits. Her will specifically gave away certain real estate and left the rest of the estate to residuary beneficiaries. Those beneficiaries later asked Virginia to transfer the credits to them.

The Department denied the transfer for two reasons: the owner died before the new statutory effective date, and a general residuary clause did not name a “designated beneficiary” for the credits.

The July 1, 2018 death-date rule

Virginia historically treated tax credits as legislative privileges personal to the taxpayer. Prior Department rulings held that land-preservation credits did not survive death.

The 2018 General Assembly changed that rule, allowing unused credits to transfer by will, bequest, another transfer instrument, or intestate succession. But Chapter 560 expressly limited the change to a taxpayer death occurring on or after July 1, 2018, regardless of when the credits were earned.

Because the decedent died in December 2016, the new transfer authority did not apply.

Why the residuary clause was also insufficient

Va. Code § 58.1-513(C)(3) requires the bequest to a designated beneficiary. The Department said a residuary gift — all property left after debts, estate expenses, and specific bequests — does not specifically designate the transferee of the land-preservation credits.

Thus, even apart from the death-date problem, the will language did not satisfy the Department's beneficiary requirement.

What this means for you

• The credit holder's date of death controls the new transfer rule. Death before July 1, 2018 was outside it.
• A general residuary clause may be too broad. The Department expects a beneficiary designated for the credits.
• Tax credits do not automatically behave like ordinary estate property. Statutory transfer conditions must be followed exactly.
• The credits' earning date did not change the result. The legislation expressly focused on the death date.

Common questions

Q: Could the heirs use the 2018 law because they requested transfer in December 2018?

A: No. The operative condition was the taxpayer's death date, which was in December 2016.

Q: Would intestate succession ever work?

A: The new statute permits it for qualifying deaths, but the December 2016 death was outside the effective-date rule.

Q: Why didn't the residuary beneficiaries qualify?

A: The Department interpreted “designated beneficiary” to require more than a general gift of whatever estate property remained.

Citations and references

• Va. Code § 58.1-513(C)(3) — designated-beneficiary transfer rule
• 2018 Acts of Assembly, Chapter 560 — deaths on or after July 1, 2018
• Deputy v. duPont, 308 U.S. 488 (1940)
• MedChem (P.R.), Inc. v. Commissioner, 295 F.3d 118 (2002)
• Howell's Motor Freight, Inc. v. Virginia Department of Taxation, Law No. 82-0846 (Roanoke Cir. Ct. 10/27/1983)
• Related Virginia rulings cited: P.D. 02-108, P.D. 05-170, P.D. 17-165

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 19-68

Original ruling text

June 25, 2019

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you protest the Department’s denial of the transfer of land preservation tax credits to * (the “Taxpayers”).

FACTS

The decedent died in December 2016 while holding unused land preservation tax credits. Her will made a specific bequest regarding certain real property she owned, and she left the remainder of her estate to the Taxpayers. The Taxpayers notified the Department in December 2018 that the decedent’s remaining credits had been transferred to them. The Department declined to recognize the transfer, and the Taxpayers filed an appeal, contending that the credits were transferrable by will.

DETERMINATION

In general, a taxpayer does not have a right to any tax credit. In Public Document (P.D.) 02-108 (7/1/2002), the Department stated that “[c]redits, deductions or exemptions allowed in the computation of an income tax are privileges accorded as a matter of legislative grace and not as a matter of taxpayer right.” See also Deputy v. duPont , 308 U.S. 488, 60 S.Ct 363 (1940), MedChem (P.R.), Inc. v. Comm'r , 295 F.3d 118, 2002 U.S. Appeals LEXIS 13831(2002) and 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). Therefore, in most instances tax credits are personal to the taxpayer and do not survive him or her. The Department has previously ruled that land preservation tax credits are not transferrable upon death. See P.D. 05-170 (12/5/2005) and P.D. 17-165 (9/13/2017).

The General Assembly recently permitted land preservation tax credits to be transferred by will, bequest or other instrument of transfer, or by intestate succession as provided by law. See 2018 House Bill 1460 (Chapter 560, Acts of Assembly ). The new provision expressly provided, however, that such transfers would only be permitted “upon the death of a taxpayer occurring on and after July 1, 2018, regardless of when such unused credits were earned.” See id . Because the decedent in this case died in December 2016, the credits were not eligible to be transferred by her will.

I would note that the statute requires the bequest to be made to a “designated beneficiary.” See Virginia Code § 58.1-513 C 3. In the Department’s opinion, a residuary bequest of all property remaining after all debts and estate expenses are paid and specific bequests are made does not satisfy the statutory requirement that the transferee be a “designated beneficiary.”

The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. 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/1926.M

Related Documents

02-108

05-170

17-165