Tax Type
Individual Income Tax
Description
Depreciation recapture; IRC section 111
Topic
Taxable Income
Date Issued
09-22-1995
September 22, 1995
Re: § 58.1-1821 Application: Individual Income Tax
Dear****************:
This will reply to your letter of May 17, 1995, in which you ask the department to reconsider its previous determination P.D. 95-109 (5/9/95) issued to ************* (the "Taxpayers").
FACTS
The Taxpayers, who were nonresidents of Virginia, owned rental property in Virginia that operated at a loss in prior years. The losses would have occurred even if no depreciation had been claimed. The property was sold at a gain and reported on federal and Virginia returns. The Taxpayers filed a 1993 amended Virginia return and claimed a subtraction for depreciation recapture pursuant to the federal tax benefit rule provided by § 111 of the Internal Revenue Code (IRC). The department has disallowed the subtraction as it is not specifically enumerated by the Code of Virginia. You contend that Virginia, as a conformity state, should not ignore the tax benefit rule provided under § 111 of the IRC.
DETERMINATION
Although Virginia is a conformity state, it does not conform with every area of the IRC. Virginia's conformity to federal law is set forth in Code of Virginia § 58.1-301, which provides that the terms used in the Virginia income tax statutes will have the same meaning as used in the IRC. Therefore, federal adjusted gross income (FAGI), the starting point for determining Virginia adjusted gross income, is identical to that as defined by the IRC.
Further, to the extent that financial transactions impact the determination of FAGI on the federal return for a given taxable year, the impact will be reflected on the Virginia return for such taxable year. However, Virginia's conformity to federal law is limited to the actual use of a specific term in a Virginia statute. It does not extend to terms, concepts, or laws not specifically provided in the Code of Virginia.
Federal adjusted gross income is modified by the specific additions, subtractions, deductions, and exemptions set forth in Code of Virginia § 58.1-322. In addition, if FAGI is adjusted for federal purposes, a Virginia amended return must be filed to reflect the adjustment as provided in Code of Virginia § 58.1-311. The deduction provided under the federal tax benefit rule is applicable on the Virginia return only to the extent that it impacts the determination of FAGI. Where the federal tax benefit rule is not applicable, Virginia statutes do not provide a separate Virginia tax benefit rule.
Although we understand and sympathize with your situation, the department believes that the law is very clear with respect to this type of adjustment. Accordingly, the department's previous ruling must be upheld.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9752N
Rulings of the Tax Commissioner