Did a later merger or acquisition eliminate Virginia's long-term capital-gain subtraction when the company qualified at the time of investment?

Plain-English summary

Virginia allowed a long-term capital-gain subtraction for stock in a qualified technology business even though that business later merged with or was acquired by a nonqualified company. The statute focused on whether the company qualified when the investment was made, not when the stock was sold.

The taxpayers showed that the original company met the qualified-business rules at investment and that the remaining statutory conditions were satisfied. The Department therefore abated the assessment.

Common questions

Must the company remain qualified through the sale date? No, according to this ruling.

Could the same investment also receive the qualified-equity credit? The cited subtraction provision barred the subtraction if the taxpayer had claimed that credit for the same business.

Citations and references

• Va. Code §§ 58.1-322.02 24, 58.1-339.4, and 58.1-301
• P.D. 17-108

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-155

Original ruling text

August 8, 2018

Re: § 58.1-1821 Appeal: Individual Income Tax

Dear *:

This will respond to your letter in which you seek correction of the individual income tax assessment issued to * (the “Taxpayers”) for the taxable year ended December 31, 2015.

FACTS

The Taxpayers, a husband and wife, filed a Virginia individual income tax return for the 2015 taxable year, claiming a subtraction for a long-term capital gain. Under review, the Department denied the subtraction on the basis that the capital gain income was not attributable to a qualified business. The Taxpayers appealed, contending they met all the statutory requirements to claim the subtraction.

DETERMINATION

Virginia Code § 58.1-301 provides, with certain exceptions, 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. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia . 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 properly 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 Virginia 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).

For individual income tax purposes, Virginia Code § 58.1-322.02 24 provides a subtraction for any income taxed as a long-term capital gain for federal income tax purposes. The following restrictions apply:

To qualify for a subtraction . . . , such income shall be attributable to an investment in a “qualified business,” as defined in 58.1- 339.4, or in any other technology business approved by the Secretary of Technology, provided that 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 . . . , the investment shall be made between the dates of April 1, 2010, and June 30, 2020. No taxpayer who has claimed a tax credit for an investment in a “qualified business” under 58.1-339.4 shall be eligible for the subtraction under this subdivision for an investment in the same business.

In order to be a qualified business under Virginia Code § 58.1-339.4, an entity must:

Be primarily engaged, or is primarily organized to engage, in the fields of advanced computing, advanced materials, advanced manufacturing, agricultural technologies, biotechnology, electronic device technology, energy, environmental technology, information technology, medical device technology, nanotechnology, or any similar technology-related field,

Have annual gross revenues of no more than $3 million in its most recent fiscal year,

Have its principal office or facility in the Commonwealth,

Be engaged in business primarily in or do substantially all of its production in the Commonwealth, and

Not have obtained during its existence more than $3 million in aggregate gross cash proceeds from the issuance of its equity or debt investments (not including commercial loans from chartered banking or savings and loan institutions).

The Taxpayer has provided evidence that an investment was made in a qualified business within the required time period. Subsequent to the investment, the qualified business (Corporation A) merged or was acquired by a nonqualified business (Corporation B). The Department denied the subtraction, believing the gains were attributable to the sale of assets of Corporation B rather than Corporation A.

The long-term gain subtraction, however, is tied to income attributable to an investment in a qualified business. The statute contains no express requirement that the business be qualified at the time the stock is sold. Thus, for purposes of the long-term gain subtraction, so long as the entity was a qualified business at the time the investment was made, a subsequent merger or acquisition will not disqualify an investor from claiming the long-term gain subtraction when the stock is later sold. See Public Document (P.D) 17-108.

The Taxpayers have provided evidence that Corporation A was a qualified business at the time of investment, and all other factors for the subtraction under Virginia Code § 58.1-322.02 24 have been met. Accordingly, the Taxpayers are entitled to the subtraction and the assessment will be abated.

The Code of Virginia sections, and public documents 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/1635C