Did stock acquired in 2006 qualify for Virginia's long-term-capital-gain subtraction because it did not vest until 2011?

Subject

Taxpayer was not eligible to claim the subtraction for a long-term capital gain

Plain-English summary

A taxpayer claimed Virginia's subtraction for long-term capital gain from an investment in a qualifying technology business. He acquired the stock in 2006, but it was nontransferable until it vested in 2011.

Virginia held that the investment occurred when the stock was acquired in 2006 because it was acquired with the intent to produce future gain. Vesting in 2011 did not move the investment date into the statute's April 1, 2010 through June 30, 2020 window. The Department therefore denied the subtraction.

Citations and references

• Va. Code §§ 58.1-301, 58.1-322 C 35, and 58.1-339.4.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-37

Original ruling text

March 28, 2017

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 “Taxpayer”) for the taxable year ended December 31, 2012.

FACTS

The Taxpayer filed a Virginia individual income tax return for the 2012 taxable year, claiming a subtraction for a long-term capital gain. Under review, the Department denied the subtraction because the Taxpayer had not provided evidence that the gain from the sale of stock was attributable to an investment in a qualified business. The Taxpayer appealed, contending he was eligible to claim the subtraction because the gain met all the statutory requirements.

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.

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. To qualify for a subtraction under this subdivision, the investment shall be made between the dates of April 1, 2010, and June 30, 2020 . [Insert and Emphasis added.]

The Taxpayer acquired the stock in 2006, but it did not vest until 2011. The stock was non-transferable until it vested. The Taxpayer contends that the stock did not become an investment until it vested.

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 (10127/1983).

Black's Law Dictionary 844 (8th ed. 2004) defines an investment as “an expenditure to acquire property or assets to produce revenue; a capital outlay.” In this case, even though the stock was not transferable at the time of purchase, it was acquired with the intent to produce a gain at some future time. Therefore, the stock was an investment at the time of its acquisition in 2006 even though it did not vest until a future date. The investment was not made within the dates specified in the statute, and the income does meet all the criteria for subtraction relating 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. An updated bill will then be issued. The Taxpayer should remit payment within 30 days of the bill date 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/840.B