May 11, 2016
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 sold real property to a Virginia public university in 2012 and claimed a subtraction for the long-term capital gain attributable to the sale on her 2012 Virginia individual income tax return. Under review, the Department denied the subtraction and issued an assessment. The Taxpayer filed an appeal, contending that the gain was exempt from Virginia income tax because the property was purchased by the Commonwealth under the right of eminent domain and was designated for future use as a park or green space.
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 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.
Technology Long-Term Capital Gain Subtraction
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. [Insert added.]
In Public Document (P.D.) 15-53 (4/2/2015), the Department ruled that the gain on the sale of real property did not qualify for the technology long-term capital gain subtraction. In this case, the Taxpayer subtracted the long-term capital gain she recognized from the sale of real property.
Open-Space Use Subtraction
Because the Taxpayer asserts that the property was intended to be used as a park or green space, the Department has considered whether the gain qualified for the subtraction under Va. Code § 58.1-322 C 22, which was in effect for the 2000 through 2015 taxable years for sales of property devoted to open-space use, as defined under Va. Code § 58.1-3230. That section provides that:
"Real estate devoted to open-space use" shall mean real estate used as, or preserved for, (i) park or recreational purposes, (ii) conservation of land or other natural resources, (iii) floodways, (iv) wetlands as defined in § 58.13666, (v) riparian buffers as defined in § 58.1-3666, (vi) historic or scenic purposes, or (vii) assisting in the shaping of the character, direction, and timing of community development or for the public interest and consistent with the local land-use plan under uniform standards prescribed by the Director of the Department of Conservation and Recreation pursuant to the authority set out in § 58.1-3240, and in accordance with the Administrative Process Act (§ 2.2-4000 et seq.) and the local ordinance.
Title 4 of the Virginia Administrative Code (VAC) 5-20-10 and 5-20-20 set forth general and specific standards that must be satisfied in order for real property to qualify as an open-space use. Under Title 4 VAC 5-20-10 B 1, the property generally must be at least 5 acres. Even if one of the acreage exceptions described in Title 4 VAC 5-20-10 B 2 is satisfied, the real property must still be at least two acres. In this case, the information
provided indicates the site area was approximately 5,000 square feet, far less than one acre (43,560 square feet). In addition, the property may not have satisfied other requirements to qualify for open-space use, such as having to be located in an agricultural, forestal or agricultural and forestal district. See Title 4 VAC 5-20-10 C 1. As such, the property does not appear to have qualified for open-space use under the standards set forth by the Department of Conservation and Recreation.
CONCLUSION
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).
As stated above, 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. In this case, the Taxpayer was not eligible to take a subtraction for long-term capital gain under Va. Code § 58.1-322 C 35 because the property was not an investment in a qualified business. In addition, it does not appear that the Taxpayer was eligible to claim a subtraction under Va. Code § 58.1-322 C 22 for gain on the sale of property to be devoted to open-space use because the property did not meet one or more of the open-space use standards promulgated by the Department of Conservation and Recreation.
Accordingly, the assessment is upheld. The Taxpayer will receive an updated bill with accrued interest to date. The Taxpayer should remit payment within 30 days of the bill date to avoid the accrual of additional interest.
The Code of Virginia sections, regulations 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/1-6245121330.M