Did federal gain from a deemed sale of Virginia land-preservation tax credits remain taxable for Virginia income tax?

Subject

Land preservation tax credit

Plain-English summary

A partnership contributed capital to an LLC in exchange for a membership interest connected with Virginia land-preservation tax credits. The IRS treated the transaction as a disguised sale, increasing the taxpayer's federal adjusted gross income and reducing a charitable-contribution carryover.

Virginia starts with federal adjusted gross income, but Va. Code § 58.1-513 E provides that transferring the credit does not create Virginia gain or loss. The statute therefore allowed a Virginia subtraction for the federal gain. Conversely, a federal loss from a credit transfer would require a Virginia addition.

Virginia sent the taxpayer's amended 2005 and 2006 returns for processing under that treatment.

Citations and references

• Va. Code §§ 58.1-301, 58.1-322, and 58.1-513 E.
• P.D. 13-225.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-46

Original ruling text

P. D. 17-46

April 3, 2017

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek a refund of income tax paid by * (the “Taxpayer”) for the taxable year ended December 31, 2005. You also contest the assessment issued to the Taxpayer for the taxable year ended December 31, 2006.

FACTS

The Taxpayer and a partner formed * (VALLC) in 2005. VALLC purchased two parcels of land and placed a conservation easement on the properties. Virginia Conservation Tax Credit FD LLLP (VALP), a limited partnership, provided capital to VALLC in exchange for a membership interest. A Virginia land preservation tax credit (the “Credit”) was issued to VALP and the Taxpayer.

On audit, the Internal Revenue Service (IRS) treated VALP's contribution of capital as a “disguised sale” of the Credit resulting in an increase in federal adjusted gross income (FAGI) and a decrease in the amount of the Taxpayer's deductible charitable contributions for 2005, resulting in the reduction of charitable contribution available to carryover for 2006. As such, additional Virginia income tax and interest was assessed for the 2006 taxable year.

The Taxpayer has paid the assessment and filed amended Virginia income tax returns for both the 2005 and 2006 taxable years. He requests a refund of Virginia income tax paid for the 2005 taxable year, contending that the transfer of the Credit should not have created gain for Virginia income tax purposes.

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 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.

The contribution of capital by VALP was treated as a deemed sale includable as FAGI. Virginia Code § 58.1-513 E, however, provides that the transfer of the Credit shall not create gain or loss for the transferor or the transferee of the Credit. Thus, when a transfer of a Credit is treated as a gain for federal income tax purposes, Virginia permits a subtraction of the income resulting from the gain. Conversely, the statute also requires an addition when a Credit transfer results in a loss under the Internal Revenue Code. As a result, Va. Code § 58.1-513 E effectively neutralizes the impact of deemed sales of the Credit when computing Virginia taxable income. See Public Document (P.D.) 13-225 (12/17/2013).

Because Va. Code § 58.1-513 E allows the subtraction of federal income and the addition of federal losses created by VALP's deemed sale of the Credit, the Taxpayer may subtract such income from his federal adjusted gross income when computing its Virginia taxable income. As such, the amended returns will be forwarded for processing in accordance with this determination.

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/795.B