Could this couple deduct carried-forward Virginia 529 contributions and subtract gain from publicly traded Virginia-company stock?

Subject

College Savings Account Deduction; Long-Term Capital Gain Subtraction

Plain-English summary

A married couple claimed two different Virginia income modifications for 2012 and 2013. Virginia allowed their carried-forward deductions for contributions to two Virginia 529 accounts but denied their subtraction for gain from corporate stock.

The couple documented contributions to two prepaid college tuition contracts made between 2004 and 2006. Department records showed substantial unused contribution amounts remained for 2012 and 2013. Under Va. Code § 58.1-322 D 7 a, the annual deduction was generally limited to $4,000 per contract, with excess contributions carried forward, so the claimed deductions were allowed.

The long-term capital-gain subtraction had narrower requirements. The gain had to come from an investment in a qualified technology business or another approved technology business with a Virginia principal office or facility and less than $3 million in prior-year annual revenue. The stock was publicly traded, and the corporation's annual reports showed revenue far above $3 million, so the gain did not qualify.

The couple's reliance on commercial tax software did not change the result. Virginia's software approval tested processing compatibility, not computational accuracy. The case was returned to the auditor for adjustment consistent with the ruling.

Citations and references

• Va. Code §§ 58.1-301, 58.1-322 C 35, 58.1-339.4, and 58.1-322 D 7 a.
• P.D. 13-50.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-187

Original ruling text

September 19, 2016

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 assessments issued to * (the “Taxpayers”) for the 2012 and 2013 taxable years.

FACTS

The Taxpayers filed their 2012 and 2013 Virginia income tax returns, claiming deductions for contributions made to two Virginia 529 college savings accounts. They also claimed subtractions for long-term capital gains. Under review, the Department denied the deductions because the Taxpayers had not provided evidence that they made contributions to the 529 accounts. The subtractions were denied because the Taxpayers had not shown that the gains were attributable to investments in a qualified business.

The Taxpayers filed an appeal, contending that they made cash contributions to the Virginia college savings accounts and are entitled to the deductions. They also contend that the long-term capital gains were eligible for the subtractions because they were claimed in accordance with commercial tax preparation software.

DETERMINATION

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).

Long-Term Capital Gain Subtraction

The Taxpayers claimed a subtraction for a long-term capital gain from the sale of stock of a corporation (the “Corporation”) headquartered in Virginia. Virginia Code § 58.1­322 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 § 58.1­339.4 [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 and Emphasis added.]

To be a qualified business, a business must meet the requirements of Va. Code § 58.1-339.4. One of the requirements is that the business must be primarily engaged in, or be primarily organized to be engaged in, technological fields such as advanced computing, advanced materials, advanced manufacturing, agricultural technologies, biotechnology, electronic device technology, energy, environmental technology, information technology, medical device technology, or nanotechnology. It is not clear whether the Corporation was engaged in eligible technological fields.

However, the stock of the Corporation was traded on a major stock exchange. Its annual reports indicate that it earned far in excess of $3 million in annual revenues during the taxable years at issue. Thus, the gains were 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 subtractions claimed for the capital gains earned from the sale of the Corporation's stock.

Tax Preparation Software

The Taxpayers contend that they were following the instructions provided by the tax software when claiming the subtraction. The Department recognizes that tax preparation software is commonly used by tax professionals and individuals for tax return completion. The fact that a particular software program has been approved by the Department, however, is not meant to imply its computational accuracy. Software presented to the Department for approval is reviewed to test conformity to the Department's processing requirements. The Department provides test case specifications, but does not guarantee computational accuracy of the software. See Public Document (P.D.) 13-50 (4/24/2013).

College Savings Account Deduction

Virginia Code § 58.1-322 D 7 a allows a deduction to the purchaser or contributor for the amount paid or contributed during the taxable year for a prepaid tuition contract or savings trust account entered into with the Virginia College Savings Plan. Generally, the amount deducted on any individual income tax return in any taxable year is limited to $4,000 per prepaid tuition contract or savings trust account. To the extent the purchase price or the amount paid during the year exceeds $4,000 per contract, the remainder may be carried forward and deducted in future taxable years.

The Taxpayers have provided documentation that they made contributions to two different prepaid college tuition contracts between 2004 and 2006. The Taxpayers have claimed deductions for the 529 contributions for each taxable year since the initial contribution. According to the Department's records, a substantial amount of the contributions remained for utilization for both the 2012 and 2013 taxable years. As such, the deductions they claimed for contributions to 529 Virginia savings accounts will be allowed.

CONCLUSION

The deductions for the Taxpayers' contributions to the Virginia 529 savings account were properly claimed for the 2012 and 2013 taxable years. However, the long-term capital gain recognized by the sale stock was not eligible for the qualified technology business subtraction. The case will be remanded back to the auditor to be adjusted pursuant to this determination. An updated bill will then be issued. The Taxpayers should remit payment within 30 days of the bill to avoid the accrual of additional interest.

The Code of Virginia sections and public document 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/1-6284577096.B