Tax Type
Individual Income Tax
Description
Retirement account holding U.S. Treasury obligations
Topic
Subtractions and Exclusions
Taxability of Persons and Transactions
Date Issued
01-31-1984
January 31, 1984
RE: Ruling Request: Individual Income Tax
Dear ****
This will reply to your letter of August 31, 1983 requesting a ruling on the tax treatment of distributions from an individual retirement account holding U.S. Treasury obligations.
§ 58-151.03 of the Code of Virginia imposes a tax on the Virginia taxable income for each taxable year of every individual. Virginia Code § 58-151.013 provides that the Virginia taxable income of a resident individual (the "taxpayer") means his federal adjusted gross income for the taxable year, with the modifications specified in the §. Sub§ (c)(l) permits a subtraction, to the extent included in federal adjusted gross income, for interest or dividends on obligations of the United States.
Under the Internal Revenue Code, a distribution from an individual retirement account is included in the recipient's gross income as ordinary income for the taxable year in which the distribution is received (except for rollovers that are tax-free transfers and for tax-free withdrawals of excess payments). If the individual retirement account holds only U.S. Treasury obligations, a taxpayer who is regarded as being the true owner of the underlying exempt obligation and who receives a distribution from the account would be entitled to subtract from his federal adjusted gross income for the taxable year the distribution is received that portion of the IRA distribution attributable to interest. In other words, the interest received in the IRA distribution would retain its exempt status in the hands of the "true owner" taxpayer. However, because exemptions from taxation are strictly construed, if the IRA held both tax-free U.S. Treasury obligations and taxable securities, all distributions from the IRA would be presumed taxable unless the taxpayer-recipient could substantiate the exempt portion of the distribution.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner