December 28, 2018
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, 2015.
FACTS
A subchapter S corporation (the “Company”) performed financial planning and investment management services. On their 2015 Virginia resident income tax return, the Taxpayers claimed a subtraction for long-term capital gain from an installment sale of the Company. Upon review, the Department denied the subtraction and issued an assessment. The Taxpayers appealed, contending the Company was a technology business, investments in which qualified for the long-term capital gain 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 § 58.1-322.01 through § 58.1-322.04.
For individual income tax purposes, Virginia Code § 58.1-322.02 24 provides for 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.
To be a qualified business, a business must meet the requirements of Virginia Code § 58.1-339.4. One of the requirements is that the business must be primarily engaged in, or be primarily organized to be engaged in, technological fields such as advanced computing, advanced materials, advanced manufacturing, agricultural technologies, biotechnology, electronic device technology, energy, environmental technology, information technology, medical device technology, or nanotechnology.
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).
The Company performed financial planning and investment management services. When the Company was sold, certain proprietary computer programs that were used in the business were included in the sale. Such programs included custom spreadsheets, forms, charts and graphs. The Taxpayers argue that these proprietary programs qualified the Company as an advanced computing business eligible for the subtraction.
The mere fact that computer programs or other intellectual property are included in a sale of business assets does not mean that the business was primarily engaged in, or was primarily organized to be engaged in, a technological field. Because the use of technology has become so pervasive in the modern business world, virtually any business could claim that it was a technology business using the Taxpayers’ reasoning. The Company, however, was a financial planning and investment management company that happened to use technology just as most modern businesses do. As such, it did not satisfy the statutory definition of a qualified business under Virginia Code § 58.1-339.4.
Even if the Company was a qualified business, the information provided does not indicate that the investment that created the long-term capital gain was made between April 2010 and June 2010. The Taxpayers believe this element is satisfied because the sale of the business was commenced in December 2013 with payments received in both 2014 and 2015. The test, however, is not when the capital gain accrued, it is when the investment that eventually resulted in the capital gain was made. Further, the Department has ruled that the investment must be in the form of equity or subordinated debt to qualify for the subtraction. See Public Document (P.D.) 16-83 (5/16/2016). The Taxpayers have provided no evidence that they made such an investment within the specified time period.
Accordingly, the assessment is upheld. The Taxpayers will receive an updated bill which will include accrued interest to date. The Taxpayers should remit the balance due within 30 days of the bill date to avoid the accrual of additional interest.
If the assessment creates a financial hardship, the Taxpayers may pursue an offer in compromise based on doubtful collectibility. To begin that process, the Taxpayers should complete the enclosed Offer in Compromise Form and Financial Information Statement. The completed form and statement will allow the Department to review and analyze the Taxpayers’ financial situation. Upon completion of that review, a response will be issued to the Taxpayers. The Taxpayers also have the option to request a payment agreement with the Department’s Collections Unit. The Collections Unit may be contacted at (804) 367-8045.
The Code of Virginia sections 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/1860.M