Tax Type
Individual Income Tax
Description
Denial of the Qualified Equity and Subordinated Debt Investments Tax Credit
Topic
Credits
Date Issued
11-04-2004
November 4, 2004
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This letter will reply to your letter contesting the denial of the Qualified Equity and Subordinated Debt Investments Tax Credit (the "Credit") requested by your client, ***** (the "Taxpayer"), for the taxable year ended December 31, 2003.
FACTS
The Taxpayer filed an application for the Credit, dated April 7, 2004, and postmarked April 14, 2004, with respect to an investment in a qualified business during the 2003 taxable year. The Department rejected the application because it was not filed by the April 1, 2004, deadline for the 2003 taxable year. You request that the Department reconsider its denial of the Taxpayer's Credit request and allow the Taxpayer's investment to be included in the computation of the Credit allowable to qualifying investors.
DETERMINATION
Virginia Code § 58.1-339.4 provides a credit for individual and fiduciary income tax equal to 50% of a qualified equity and subordinated debt investment made during the taxable year in a qualified business venture. Under the statute, when the aggregate amount of requests for the Credit for a calendar year exceeds $5 million, the Department allocates the available Credit pro rata among the approved applicants. For 2003, the $5 million annual limitation was reduced to $3 million by the Commonwealth's budget enacted by the General Assembly.
You contend that the filing deadline was set by regulation rather than by the enacting legislation. As is so often the case in tax legislation, the Virginia General Assembly created the framework for the Credit by statute, but expressly left to the Department the responsibility for issuing regulations to fill in the details to make the Credit a workable program yielding results conforming to and consistent with legislative intent for the Credit. Accordingly, Va. Code § 58.1-339.4 provides for the promulgation of regulations "(i) establishing procedures for claiming the tax credit provided by this section and (ii) providing for the allocation of tax credits among taxpayers requesting credits in the event the amount of credits for which requests are made exceeds the available amount of credits in any one calendar year." To that end, the Department issued Title 23 of the Virginia Administrative Code ("VAC") 10-110-225 through 229, which set forth the procedures for allocating and claiming the Credit.
Title 23 VAC 10-110-228 provides that for any taxable year that ends after January 1 and on or before December 31 of a calendar year, application for the tax credit must be submitted no later than April 1 of the subsequent taxable year. The deadline established by the regulation allows the Department to review all applications for claiming the Credit, allocate the available Credit pro rata among the approved applicants and issue approvals to claim the Credit within a reasonable amount of time.
As stated previously, the annual amount of Credits that can be granted for the 2003 taxable year is limited to $3 million. Requests for Credits from timely filed applications totaled nearly $5.2 million, resulting in each applicant receiving approximately 57.7% of Credits requested.
Title 23 VAC 10-110-227 E provides that, upon issuance of equity or subordinated debt, the qualified business shall provide to the investor a copy of the qualified business certification granted by the Department. That certificate includes information concerning the investor's requirements for claiming the Credit. In the Taxpayer's case, he made a qualifying investment in June 2003 at which time he should have received from the qualifying business, a copy of the Certification of Qualification stating that Form EDC must be filed by April 1, 2004.
In January 2004, the qualified business sent a reminder letter advising the Taxpayer of the need to file Form EDC by April 1, 2004. As you will recall from the attachment you provided, that letter used a bold font for the April 1, 2004 date emphasizing its criticality. The Taxpayer reports that the letter, which arrived while he was out of Virginia, was filed with other tax information without being read and was not provided to his CPA until April 5, 2004. Upon discovery that the application for credit was delinquent, the CPA contacted the Department to request a filing exception, which was subsequently denied. While I empathize with your client's situation, there is no statutory or regulatory authority to grant the Credit requested.
You have also asserted that, while granting this exception would reduce the Credit available to the pool of qualified investors, such dilution would be "relatively minor." I believe, however, that approval of the Taxpayer's late application would be grossly unfair to the numerous taxpayers who timely filed applications, received approvals, and have filed individual income tax returns based on those approvals. At the very least, such a reversal of position would be highly disruptive to over 175 taxpayers who would have to file amended returns and return an amount of tax due, with interest, to the Department. If any of those taxpayers balked at the Department's change of position, the Department would be required to initiate collection action against those taxpayers. I am sure you can appreciate the consternation that would be generated by these circumstances, if an exception were made for the taxpayer in this case. For the 2003 taxable year, eleven applications for the Credit were received late and all have been denied. Accordingly, I regret that I cannot approve the Taxpayer's application to claim the Credit.
The Code of Virginia section and regulations cited in this letter, along with other reference documents, are available online in the Tax Policy Library section of the Department's web site located at www.tax.state.va.us. If you have any questions about this determination, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
Kenneth W. Thorson
Tax Commissioner
- Sincerely,
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AR/52064E
Rulings of the Tax Commissioner