December 23, 2015
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 "Taxpayers") for the taxable year ended December 31, 2012.
FACTS
The Taxpayers filed a joint Virginia resident individual income tax return for the 2012 taxable year. Under review, the Department adjusted the Taxpayers' itemized deductions to reflect the amount accepted by the Internal Revenue Service (IRS) on their federal income tax return. The adjustment resulted in an increase in Virginia income tax due, and the Department issued an assessment. The Taxpayers appealed, contending they were entitled to a charitable contribution deduction for a qualified conservation contribution equal to their federal adjusted gross income (FAGI).
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.
Under Va. Code § 58.1-322 D 1, a taxpayer may deduct from his Virginia adjusted gross income the amount allowed for itemized deductions for federal income tax purposes. Under IRC § 170(a), taxpayers may deduct charitable contributions of cash, tangible and intangible personal property, and services made during the taxable year.
Taxpayers are permitted to deduct qualified conservation contributions to the extent they do not exceed 50% of FAGI, less other allowable charitable contributions. See IRC § 170(b)(1)(E)(i). Any such excess contributions may be carried forward for 15 years. See IRC § 170(b)(1)(E)(ii). If the taxpayer is a farmer or rancher, however, such contributions are allowed to the extent of the taxpayers entire FAGI, less other allowable charitable contributions, provided that the property conveyed is used or available for agricultural or livestock production. See IRC § 170(b)(1)(E)(iv).
The Taxpayers assert that the federal information they provided indicates that the deduction was allowed for 100% of their FAGI. Although the information indicates that the Taxpayers claimed the deduction for 100% of their FAGI, it shows that the IRS adjusted it to 50%. There was no corresponding increase to the Taxpayers' federal income tax, however, because their federal taxable income (FTI), which was computed by subtracting all allowable deductions and exemptions from FAGI, consisted solely of capital gains and did not meet the threshold for federal income tax to be imposed on capital gains in the 2012 taxable year. See IRC § 1(h).
Unlike the federal system, Virginia does not differentiate between ordinary income and capital gains for purposes of applying tax rates. Instead, Virginia's rates are imposed on a taxpayer’s total Virginia taxable income (VTI). While the computation of VTI begins with FAGI, the rate is tied solely to the amount of such income regardless of type. See Va. Code § 58.1-320.
In this case, the IRS adjustment increased the Taxpayers’ FTI from their claimed amount of zero. Even after the adjustment, however, the Taxpayers FTI consisted solely of capital gains and the amount of such income did not meet the threshold for income tax to be imposed. The adjustment, however, also caused a corresponding increase to the Taxpayers VTI and was subject to Virginia income tax under Virginia's rate structure, which has no provision to exempt a certain amount of capital gains from income taxation.
The Department adjusted the Taxpayers’ 2012 return based on federal information as permitted under Va. Code § 58.1-311. As such, the 2012 assessment remains due and payable.
The Taxpayers will receive an updated bill with accrued interest to date. The bill should be paid within 30 days of the bill date to avoid the accrual of additional interest. Further, if the IRS adjusts the deduction, the Taxpayer will be permitted to file an amended return to correct their liability pursuant to Va. Code § 58.1-311 and Va. Code § 58.1-1823 A(ii).
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/1-6146468888.M