Could a Virginia land-preservation tax credit be transferred before the Department issued it, contingent on later approval?

Subject

Issuance required before transferring land-preservation credit

Plain-English summary

Virginia refused to allow a contingent transfer of a land-preservation tax credit before the Department had actually issued the credit.

The 2006 legislation changed the process from simply acknowledging credits to requiring taxpayers to apply and receive an issued credit. Until the Department issued the notice, the donor possessed no credit to transfer. A transferee could use the credit for the taxable year in which the transfer occurred and later years, but not for a taxable year ending before the transfer date.

The requester proposed letting taxpayers complete transfers before year-end subject to later Department approval. The Commissioner rejected that approach. If issuance occurred in a later taxable year, the transfer also had to wait until that later year—even if the qualifying donation occurred earlier.

The ruling says this result followed from the issuance-and-transfer statute, not from the separate $100 million cap for 2007. It also noted that transferees received an 11-year carryforward period from the year the credit was issued, compared with the prior five-year period and the 10-year period available to the person making the qualifying donation.

What this means for you

• A qualifying donation did not itself create a transferable credit under the process analyzed here; Department issuance did.
• A donor could not transfer a credit it did not yet possess.
• A transferee could not claim the credit for a taxable year ending before the transfer.
• Year-end timing mattered: delayed issuance could push both the transfer and first use into the next year.
• The ruling treated the restriction as statutory, not as an administrative response to whether the annual cap would be reached.

Common questions

Could the transfer be made contingent on later approval?

No. The Commissioner said no transfer could occur until the Department had issued the credit to the donor.

Could a later-issued credit be used for the donation year?

Not by a transferee if that taxable year ended before the transfer. The ruling ties transferee use to the year in which the transfer occurred.

Was the restriction caused by the 2007 credit cap?

No. The ruling says it resulted from the statutory changes governing issuance and transfer.

How long could a transferee carry the credit forward?

The ruling states that transferred credit could not be used more than 11 years after the Department originally issued it.

Citations and references

• Va. Code § 58.1-512(D)(b)(5), as quoted in the ruling.
• Virginia Department of Taxation forms LPC-1 and LPC-2, as discussed in the ruling.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-201

Original ruling text

November 30, 2007

Re: Ruling Request: Date of Use of Transferred Land Preservation Tax Credits

Dear *:

This is in response to your e-mail of October 12, 2007, in which you requested a ruling regarding the Land Preservation Tax Credit (the "Credit").

FACTS

The instructions for the new LPC-2 form, which is used to notify the Department of Taxation ("TAX") of a transfer of the Credit, state, "The transfer or allocation must be completed before the end of a taxable year in order for the recipient to use the credit for that taxable year." In addition, the instructions for this form and the new LPC-1 form, which is used to apply for the Credit, notify taxpayers that, for donations made on or after January 1, 2007, transfers cannot be made until TAX has issued the Credit for the donation.

You have written to request that TAX reconsider its position that credits cannot be transferred until a credit acknowledgement has been issued. You state that this policy is due to the new $100 million cap for 2007. You believe, however, that the cap may not be reached this year and, thus, that the transfer restriction is not necessary. In addition, you feel that this restriction is unfair because it may be difficult for taxpayers to complete the required actions by the end of the year. You ask that, as a compromise, TAX allow taxpayers to transfer credits contingent upon approval from TAX, even if such approval happens after the end of the year.

RULING

During the 2006 legislative session, several changes were made to the Credit. One of the major changes was to require taxpayers to apply for the Credit. Thus, TAX is no longer simply acknowledging the Credit as has been done in the past. Instead, TAX must actually issue the Credit. As a result, a taxpayer who has made a donation that qualifies for the Credit does not possess any Credit until he or she receives the notice indicating that TAX has issued the Credit to the taxpayer.

Modifications were also made to the transferal process of the Credit, in particular to the timing of the transfer. The law now states, "Any taxpayer to whom a credit has been transferred may use such credit for the taxable year in which the transfer occurred and unused amounts may be carried forward to succeeding taxable years, but in no event may such transferred credit be used more than 11 years after it was originally issued by the Department or in any taxable year of such taxpayer that ended prior to the date of transfer." Va. Code § 58.1-512 D b 5.

Thus, a taxpayer to whom a Credit has been transferred may not use the Credit for a taxable year prior to the taxable year in which the transfer has occurred. A transfer may not occur, however, until the transferring party actually possesses the Credit. As taxpayers now must apply for the Credit, it is clear that a transferor cannot possess such Credit until it has been issued by TAX. Therefore, TAX cannot allow a transferred Credit to be claimed for a taxable year prior to the one in which it was issued or transferred. This is true even when the issuance of the Credit occurs in a taxable year after the one in which the qualifying donation occurred. Please note that this restriction is not due to the $100 million cap, but is instead required by the changes in the law relating to the issuance and transfer of the Credit.

Even if I were not bound by the law, however, I find your argument that this restriction is unfair because it may be difficult for taxpayers to complete the required actions by the end of the year to be unpersuasive. The new $100 million cap was well publicized, as were the time restrictions that various conservation agencies, the Department of Conservation and Recreation, and TAX would be facing towards the end of the year. Thus, taxpayers were aware that waiting until later in the year to apply for and transfer credits could result in credits not being issued until 2008 and, thus, that transfers could not be made until that year.

Please note that, despite the timing restriction, transferees are given an advantage in that they are allowed an eleven-year carryover period from the year of issuance for the Credit. This is substantially longer than the previous carryover period, which was five years from the year or the origination of the Credit. It is also longer than the carryover period allowed to those who actually make the qualifying donation, which is ten years from the year of origination.

I trust that this reply answers your ruling request. The Code of Virginia sections cited and other reference documents are available on-line in the Tax Policy Library section of the Department of Taxation's website located at www.tax.virqinia.gov. If you should have any questions regarding this ruling, you may contact * in the Office of Tax Policy, Policy Development Division, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner