Document Number
17-108
Tax Type
Individual Income Tax
Description
Taxpayer claimed a subtraction for a long-term capital gain resulting from an investment in a qualified technology business without proper documentation.
Topic
Subtractions and Exclusions
Date Issued
06-21-2017

June 21, 2017

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 assessments issued to ***** (the “Taxpayer”) for the 2013 taxable year.

FACTS

The Taxpayer was an officer in a Virginia corporation (Corporation A).  He acquired stock in Corporation A in August 2010.  Corporation A was purchased in May 2011 by another Corporation (Corporation B) which was located in ***** (State A).  As a result of the purchase, the Taxpayer's shares of Corporation A were converted into shares of Corporation B.  In 2013, the Taxpayer sold shares of Corporation B realizing a capital gain.  Pursuant to Va. Code § 58.1-322 C 35, the Taxpayer claimed a subtraction for a long-term capital gain on his 2013 Virginia income tax return.

Under review, the Department denied the subtraction because the Taxpayer had not shown that the gains were attributable to investments in a qualified business.  The Taxpayer filed an appeal, contending that the long-term capital gain was eligible for the subtraction because it met the statutory requirements.

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 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.

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).

Virginia Code § 58.1-322 C 35 provides 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) resulting from an investment in a “qualified business.”  Pursuant to Va. Code § 58.1-322 C 35, the investment must be made between April 1, 2010, and June 30, 2020, in a “qualified business” as defined under Va. Code § 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 order to be a qualified business under Va. Code § 58.1-339.4, an entity must:

  1. 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
  2. have annual gross revenues of no more than $3 million in its most recent fiscal year,
  3. have its principal office or facility in the Commonwealth,
  4. be engaged in business primarily in or do substantially all of its production in the Commonwealth, and
  5. 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).

Under circumstances indicated by the Taxpayer, 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 A).  As a result, the Taxpayer's investment in Corporation A was converted to shares of Corporation B stock, which were later sold resulting in the gain.

The long-term gain subtraction 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.

By letter dated February 17, 2017, the Department requested evidence showing that Corporation A was either a qualified business pursuant to Va. Code § 58.1-339.4 or had been approved by the Secretary of Technology.  To date, the Taxpayer has failed to provide the requested documentation.

Virginia Code § 58.1-205 provides that in any proceeding relating to the interpretation of the tax laws of Virginia, an “assessment of a tax by the Department shall be deemed prima facie correct”.  As such, the burden of proof is on the Taxpayer to show he was not subject to income tax in Virginia.  Without evidence that Corporation A was either a qualified business pursuant to Va. Code § 58.1-339.4 or had been approved by the Secretary of Technology, the assessment must be upheld.

The Taxpayer, however, will be granted one last opportunity to provide adequate documentation with regard to whether Corporation A was a qualified business or a technology business approved by the Secretary of Technology.  The documentation should be submitted within 30 days from the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23161-7203, Attention: *****.  Upon receipt, the documentation will be reviewed and assessment will be adjusted, as appropriate.  If the documentation is not received within the allotted time, the assessment will be considered to be correct as issued and collection actions may result.

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/856.B

Rulings of the Tax Commissioner

Last Updated 10/02/2017 07:28