Tax Type
Estate Tax
Description
Definition of federal credit
Topic
Credits
Date Issued
05-02-1988
May 2, 1988
Re: §58.1-1821 Application; Virginia Estate Tax
§58.1-901 Definition of Federal Credit
Dear*****************
This is in response to your letter of May 26, 1987, in which you protested the denial of a refund of Virginia Estate Tax. I apologize for the delay in responding.
Facts
The Virginia estate tax return was timely filed and the tax due thereon was paid. The federal estate tax liability was zero because the Gross Estate Tax was fully absorbed by the unified credit, the credit for state death taxes, and the credit for tax on prior transfers In the course of an audit by the Internal Revenue Service, the marital deduction was increased. This adjustment reduced the Gross Estate Tax by an amount equal to the credit for state death taxes, which the I.R.S. disallowed. As a result, the federal tax liability was still fully absorbed by the unified-credit and credit for tax on prior transfers.
You have requested a refund of the full amount of the Virginia Estate Tax paid because the I.R.S. disallowed the credit for state death taxes. The department has refunded only the amount of the credit for state death taxes which is attributable to the impact of the change in the amount of the marital deduction on the "adjusted taxable estate" defined in I.R.C. §2011.
Discussion
Virginia law imposes an estate tax in ". . . the maximum amount of the credit for state death taxes allowable by §2011 of the United States Internal Revenue Code . . ." Thus, we must look to the Internal Revenue Code to determine the amount allowable or, in this case, the order in which the federal credits are to be taken.
Under §2011 I.R.C., the amount of the credit is defined and several limitations are imposed. The critical limitation for purposes of this case is that contained in §2011(f) which provides that "The credit provided by this section shall not exceed the amount of the tax imposed by section 2001, reduced by the amount of the unified credit."
The credit for tax on prior transfers contains a limitation in §2013(c) which provides that
-
- "The credit provided in this section shall not exceed the amount by which -
(A) the estate tax imposed by section 2001 or 2101 (after deducting the credits provided for in sections 2010, 2011, 2012, and 2014)..."
- "The credit provided in this section shall not exceed the amount by which -
You have cited two cases in which the courts of other states have found that no state tax was due in similar situations. We have reviewed the cases and are not persuaded that they apply to Virginia's law. The Florida case, Dickinson v. Maurer, 229 So. 2d 247 (Fla. 1969), was based on a provision of the Florida constitution which permitted an estate tax. The court found "that it was the intent of the people of Florida that the State of Florida would impose such taxes but only such taxes upon estates of decedents as could be paid to Florida and deducted from the federal taxes- without increasing by one jot or one tit[t]le the total tax burden upon such estates."
Similarly, the Washington case, Estate of Turner v. Department of Revenue, 106 Wash.2d 649, 724 P.2d 1013 (1986), was based on the intent of Washington's voters in passing an initiative which repealed an inheritance tax and replaced it with a "pick up" tax similar to Virginia's. As in the Florida case, the court found that the voters intended that no state tax would be imposed unless a federal tax were imposed.
Virginia's legislative history is significantly different. You have stated that the House Finance Subcommittee which recommended the 1978 legislation expressed a purpose to compete with Florida in attracting wealthy individuals.
However, the subcommittee also had other concerns, one of which was revenue. As emphasized in a dissenting statement by one of the members, the 1978 legislation resulted in a revenue loss to the Commonwealth. Thus it is important to note two instances in which actions by the General Assembly differ from the recommendations of the subcommittee.
First, the 1978 General Assembly added an important proviso to the subcommittee's draft definition of "federal credit" for Virginia purposes: "In no event shall such amount be less than the federal credit allowed by §2011 of the Internal Revenue Code as it existed on January 1, 1978." Compare 1978 Acts of Assembly, chapter 838, to Appendix IX of the "Report of the House Finance Subcommittee on Inheritance and Gift Tax Laws," 1978 House Document No. 18.
Second, in 1981 the General Assembly amended the definition of "federal credit" to change the word "allowed" to "allowable." 1981 Acts of Assembly, chapter 94 (SB 558) o The Legislative Impact Statement prepared by the Department of Taxation (copy enclosed) states that "the amendment is needed to assure that the Virginia tax is not dependent on whether or not proper credit is claimed on the federal returns."
These two actions by the General Assembly clearly indicate an intent that the Virginia estate tax could, under certain conditions, be imposed in an amount which may be greater than the amount actually allowed under the Internal Revenue Code or, as in this case, in situations when no federal tax is actually imposed. Because Virginia's intent is contrary to the intent found by the Florida and Washington courts their decisions have no application to the interpretation of Virginia law.
Determination
Accordingly, the amount of the refund was properly computed and the denial of the balance of your refund request was proper.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner