July 2, 2015
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, 2011 and 2012. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer filed Virginia income tax returns for the 2011 through 2013 taxable years. He claimed a subtraction for an annuity death benefit payment received from an annuity contract. The payments were received in installments. Under audit, the Department denied the subtraction because the distributions under the contract were not made in a lump sum. As a result, the Department issued an assessment for additional tax and interest for each taxable year at issue.
Because the statute providing the subtraction for an annuity death benefit payment was amended in 2012, the Taxpayer agrees with the assessment for 2013. The Taxpayer, however, appeals the 2011 and 2012 assessments, contending neither the statute nor instructions limit the subtraction to insurance contracts issued as lump sum payments for these taxable years. Further, he asserts he confirmed his interpretation in a telephone conversation with Department staff.
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), P. D. 10-63 (5/7/2010), P.D. 12-76 (5/9/2012) and P.D. 14-112 (7/17/2014).
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, provides 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.
Interpretation of Statute
The Taxpayer argues that the requirements specified by the Department were not expressed in the Code of Virginia until 2012. The Taxpayer cites the Department's 2006 Legislative Summary, issued as P.D. 06-61 (7/13/2006), to support his contention that the Department changed its policy retroactively.
The Department's legislative summaries provide taxpayers and practitioners a brief overview of recent legislative activity, but are not intended to be regarded as in-depth policy setting documents. Reflective of this, the 2006 Legislative Summary includes the following language:
The Summary is intended to provide a synopsis of enacted legislation and is for information purposes only. The Summary is not a substitute for the actual state law, local ordinances, and TAX regulations.
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., at 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 also contends that the instructions for individual income tax returns prior to 2010 did not set forth the limitation concerning lump-sum payments. The Taxpayer acknowledges that he was not aware that the 2011 and 2012 instructions set forth the Department's established policy with regard to the death benefit subtraction. The Taxpayer asserts, however, that the instructions should contain sufficient information for taxpayers to complete their Virginia return without the assistance of a tax professional.
As stated in P.D. 13-149, 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, a taxpayer should 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 authority when a taxpayer is computing his Virginia taxable income. See P.D. 13-149 (7/31/2013).
Written Advice
Finally, the Taxpayer asserts that he called the Department concerning his eligibility for the death benefit subtraction and was assured by Department staff that he met the qualification to claim the subtraction. He acknowledges that he was not asked about receiving payments in installments and did not volunteer the information.
Virginia Code § 58.1-1835 provides the right to abatement of tax, interest and penalties attributable to any taxes administered by the Department when the taxpayer reasonably relies upon binding written advice furnished to the taxpayer by the Department. See P.D. 13-229 (12/18/2013) for a more detailed explanation concerning Va. Code § 58.1-1835.
In this case, the Taxpayer did not request or receive the advice in writing. Further, he failed to provide Department staff with a full account of the facts of his situation. Accordingly, there is no basis for relief pursuant to Va. Code § 58.1-1835
CONCLUSION
Based on the information provided and the applicable law and authorities cited above, I find that the assessments issued for the 2011 through 2012 taxable years are correct. Updated bills will be issued shortly and should be paid within 30 days of the bill date to avoid the accrual of additional interest.
The Code of Virginia sections and public documents 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/1-5838539010.D