Could taxpayers subtract a 2011 long-term gain from selling real property under Virginia's qualified-technology-business subtraction?

Subject

Long-Term Capital Gain; Taxpayers had not provided evidence that the gain was attributable to an investment in a qualified business

Plain-English summary

Virginia denied the subtraction because the taxpayers' long-term capital gain came from selling real property, not from an investment in a qualifying technology business. The 2011 subtraction was narrower than a general exclusion for all long-term capital gains.

The statute required the gain to be attributable to a qualified business or another technology business approved by the Secretary of Technology, with its principal office or facility in Virginia and less than $3 million in prior-year annual revenue. The return instructions also stated the qualified-business requirement and pointed to the investment-credit statute.

The taxpayers said a Department representative agreed with their interpretation, but Virginia could abate an assessment for erroneous advice only when an employee gave that advice in writing. There was no written record. No penalty had actually been assessed; the added amount was interest, which Virginia said was mandatory on tax properly due.

What this means for you

• Do not treat Virginia's qualified-business subtraction as applying to every federal long-term capital gain.
• Keep proof identifying the investment, the business, its Virginia location, its revenue, and any required approval.
• Tax-form instructions summarize the statute but do not replace its conditions.
• Relief for erroneous Department advice requires written advice and a record of the question presented.

Common questions

Q: Why did the real-estate gain fail?

A: It was not attributable to an investment in a qualifying technology business.

Q: Did the return instructions allow every long-term gain?

A: No. They stated that the income had to come from a qualified or approved technology-business investment.

Q: Was a penalty imposed?

A: No. The assessment included tax and interest, and the ruling described the interest as mandatory rather than a penalty.

Citations and references

• Va. Code §§ 58.1-301, 58.1-322(C)(35), 58.1-339.4, 58.1-1812, and 58.1-1835.
• Howell's Motor Freight, Inc. v. Virginia Department of Taxation, Law No. 82-0846 (Roanoke Cir. Ct. Oct. 27, 1983).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-53

Original ruling text

April 3, 2015

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the individual income tax assessment issued to * (the "Taxpayers") for the 2011 taxable year.

FACTS

The Taxpayers filed a Virginia individual income tax return for the 2011 taxable year, claiming a subtraction for long-term capital gain. Under review, the Department denied the subtraction because the Taxpayers had not provided evidence that the gain was attributable to an investment in a qualified business. The Taxpayers filed an appeal, contending that the form instructions indicated that any long-term capital gain was eligible for the subtraction. The Taxpayers also assert that a representative from the Department agreed with their interpretation of the instructions. They ask that the Department allow the subtraction and abate any assessed penalties.

DETERMINATION

Long-Term Capital Gain

Virginia Code § 58.1-301 provides that 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 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.

By reason of their character as legislative grants, statutes relating to deductions and subtractions allowable in computing income and credits allowed 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 Dep't of Taxation , Circuit Court of the City of Roanoke, Law No. 82-0846 (10/27/1983).

Virginia Code § 58.1-322 C 35 provides for a subtraction for any income taxed as a long-term capital gain for federal income tax purposes, or any income taxed as investment services partnership income (otherwise known as investment partnership carried interest income). However, Va. Code § 58.1-322 C 35 also contains the following restriction:

To qualify for a subtraction under this subdivision, such income shall be attributable to an investment in a "qualified business," as defined in § 58.1 339.4 [describing certain technology businesses], or in any other technology business approved by the Secretary of Technology, provided the business has its principal office or facility in the Commonwealth and less than $3 million in annual revenues in the fiscal year prior to the investment. [Insert added.]

In this case, the Taxpayers subtracted the long-term capital gain they recognized from the sale of real property. As such, the income was not attributable to an investment in a qualifying technology business as required by Va. Code § 58.1-322 C 35. Accordingly, the Department properly denied the subtraction.

Tax Form Instructions

The Taxpayers contend that the wording of the tax return instructions indicated that they could subtract any long-term capital gain. 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.

The instructions for the 2011 return state that income taxed as long-term capital gain for federal tax purposes may be subtracted "provided the income is attributable to an investment in a 'qualified business' as defined in Va. Code § 58.1-339.4 or in any other technology business approved by the Secretary of Technology." Virginia Code § 58.1-339.4 provides a tax credit for qualified equity and subordinated debt investments. The fact that the subtraction is tied to a statute addressing stock and other forms of investment gives the taxpayer notice that the subtraction does not include gains from the sale of real estate.

Written Advice

The Taxpayers also contend that a representative of the Department agreed with their interpretation of the instructions that the long term capital gain should be eligible for the subtraction. Virginia Code § 58.1-1835 authorizes the Tax Commissioner to abate an assessment or a portion of an assessment that is attributable to erroneous advice furnished to the taxpayer in writing by an employee of the Department acting in his official capacity. In this case, there is no record of the questions presented to the Department's representative or evidence that the advice was provided in writing. Accordingly, there is no basis for relief under Va. Code § 58.1-1835.

Penalty

In addition to requesting that the subtraction be reinstated, the Taxpayers request that no penalties be assessed. In this case, the assessment included additional taxes due plus interest, but no penalties were assessed. The Taxpayers should be aware, however, that Va. Code § 58.1-1812 mandates the application of interest to any assessment of tax. Interest is not assessed as a penalty for noncompliance with the tax laws. Rather, it represents a fee for the use of money that was properly due the Commonwealth.

CONCLUSION

The long-term capital gain recognized by the Taxpayers from the sale of real property was not eligible for the qualified technology business subtraction. The assessment, therefore, is upheld. An updated bill will be issued shortly. The Taxpayers should remit payment within 30 days of the date of the bill to avoid the accrual of additional interest

The Code of Virginia sections 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/1-5810123124.M