Tax Type
Individual Income Tax
Description
Death Benefit Subtraction
Topic
Federal Conformity
Returns and Payments
Subtractions and Exclusions
Taxable Income
Date Issued
12-18-2013
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, 2010 and 2011.
FACTS
The Taxpayer claimed a subtraction for a death benefit annuity for the 2010 and 2011 taxable years for income received from annuities purchased from several insurance companies. The income was received in each year at issue. Under audit, the Department disallowed the subtractions and issued assessments for the 2010 and 2011 taxable years. The Taxpayer appeals the assessments, contending the instructions and the Virginia statute were not consistent with the Department's policy.
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).
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 certain annuity contract payments was enacted in 2006. See Chapter 617, Acts of Assembly. In 2012, the General Assembly enacted legislation (Chapter 305, Acts of Assembly) codifying the Department's interpretation of the existing statute. See P.D. 13-149 (7/31/2013).
Interpretation of Statute
The Taxpayer argues that the requirements specified in P.D. 09-36 were not expressed in the Code of Virginia, until the General Assembly enacted legislation in 2012. Although not retroactive, in enacting 2012 House Bill 879 (Chapter 305, Acts of Assembly), the General Assembly declared its intent that a death benefit payment may only qualify for the subtraction if all three requirements were met. As such, the provisions support the Department's interpretation of the law and to provide relief to individuals who are unable to obtain standard life insurance for their loved ones.
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 Taxpayer argues that the Department's instructions did not reflect the Department's policy.
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 or nuance of Virginia's tax law.
CONCLUSION
Based on this determination, the assessments for the 2010 and 2011 assessments 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 *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-5427787791.D
Rulings of the Tax Commissioner