Tax Type
Individual Income Tax
Description
Extent of federal conformity
Topic
Taxable Income
Date Issued
10-20-1998
October 20, 1998
Dear***********:
This will reply to your letter of regarding the assessment of additional individual income tax against ***** (the ``Taxpayer').
FACTS
The Taxpayer purchased an interest in a limited partnership in 1984. The sole asset of the limited partnership was an apartment complex. In 1994 the partnership failed to make payments under its loan agreements and the lender foreclosed. As a result of this involuntary liquidation, the Taxpayer recognized a capital gain of *****. The Taxpayer recorded this capital gain on its federal return and offset it with a loss. The Taxpayer subtracted the net gain on its Virginia tax return. The department disallowed this deduction as it is not specifically enumerated by the Code of Virginia. The Taxpayer contends that this amount represents depreciation recapture resulting from deductions taken on its 1985 through 1989 income tax returns when the Taxpayer was a resident of another state. As such, the Taxpayer claims the recapture cannot be taxed in Virginia because the original deductions did not reduce Virginia income.
DETERMINATION
Virginia's conformity to federal law is set forth in Code of Virginia Sec. 58.1-301, which provides the terms used in the Virginia income tax statutes will have the same meaning as used in the Internal Revenue Code (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.
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. For any given tax year, Virginia taxable income is FAGI modified by specific additions, subtractions, deductions and exemptions set forth in Code of Virginia Sec. 58.1-322. There is no provision in this code section to allow a subtraction for deprecation recapture related to the gain on the sale of property. See Public Document (P.D.) 95-109 (5/9/95) and P.D. 95-254 (9/22/95) (copies enclosed).
The Taxpayer contends that FAGI recorded on its federal tax return was correct for federal purposes but does not reflect the actual FAGI applicable for Virginia purposes. The Taxpayer argues that the amount recorded on the federal return includes depreciation recapture on losses it was not able to deduct in Virginia during 1985 through 1989 since it was not a Virginia resident during those years.
The Taxpayer made depreciation deductions on the federal returns for the 1985 through 1989 taxable years. Presumably, it benefitted from these deductions on its income tax returns for its state of residence during 1985 through 1989. Certainly, the Taxpayer would have benefitted from the deductions on its state income tax returns if it had been a resident of Virginia.
In 1994, the Taxpayer recognized the depreciation recapture in FAGI as a resident of Virginia. Because the depreciation recapture was included in the Taxpayer's 1994 FAGI, the computation of Virginia taxable income starts with a taxpayer's FAGI as defined by the IRC, and Virginia statutes do not provide a subtraction for the recapture of depreciation. The income recognized as a result of the recapture should properly be included in income taxable to Virginia. A deduction provided under the tax benefit rule under IRC Sec. 111 is applicable on the Virginia return only to the extent that it impacts the determination of FAGI. Thus, the Taxpayer may not take a lump sum subtraction of deprecation recapture simply because he was not able to deduct these amounts in Virginia during prior years.
Accordingly, the department properly included the depreciation recapture on the Taxpayer's 1994 return. Please send the balance due of ***** tax, ***** penalty, and interest) to *****, Virginia Department of Taxation, Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23218-1880 within 30 days to avoid the accrual of additional interest. If you have any questions about this determination, you may contact ***** at *****.
Dear***********:
This will reply to your letter of regarding the assessment of additional individual income tax against ***** (the ``Taxpayer').
FACTS
The Taxpayer purchased an interest in a limited partnership in 1984. The sole asset of the limited partnership was an apartment complex. In 1994 the partnership failed to make payments under its loan agreements and the lender foreclosed. As a result of this involuntary liquidation, the Taxpayer recognized a capital gain of *****. The Taxpayer recorded this capital gain on its federal return and offset it with a loss. The Taxpayer subtracted the net gain on its Virginia tax return. The department disallowed this deduction as it is not specifically enumerated by the Code of Virginia. The Taxpayer contends that this amount represents depreciation recapture resulting from deductions taken on its 1985 through 1989 income tax returns when the Taxpayer was a resident of another state. As such, the Taxpayer claims the recapture cannot be taxed in Virginia because the original deductions did not reduce Virginia income.
DETERMINATION
Virginia's conformity to federal law is set forth in Code of Virginia Sec. 58.1-301, which provides the terms used in the Virginia income tax statutes will have the same meaning as used in the Internal Revenue Code (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.
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. For any given tax year, Virginia taxable income is FAGI modified by specific additions, subtractions, deductions and exemptions set forth in Code of Virginia Sec. 58.1-322. There is no provision in this code section to allow a subtraction for deprecation recapture related to the gain on the sale of property. See Public Document (P.D.) 95-109 (5/9/95) and P.D. 95-254 (9/22/95) (copies enclosed).
The Taxpayer contends that FAGI recorded on its federal tax return was correct for federal purposes but does not reflect the actual FAGI applicable for Virginia purposes. The Taxpayer argues that the amount recorded on the federal return includes depreciation recapture on losses it was not able to deduct in Virginia during 1985 through 1989 since it was not a Virginia resident during those years.
The Taxpayer made depreciation deductions on the federal returns for the 1985 through 1989 taxable years. Presumably, it benefitted from these deductions on its income tax returns for its state of residence during 1985 through 1989. Certainly, the Taxpayer would have benefitted from the deductions on its state income tax returns if it had been a resident of Virginia.
In 1994, the Taxpayer recognized the depreciation recapture in FAGI as a resident of Virginia. Because the depreciation recapture was included in the Taxpayer's 1994 FAGI, the computation of Virginia taxable income starts with a taxpayer's FAGI as defined by the IRC, and Virginia statutes do not provide a subtraction for the recapture of depreciation. The income recognized as a result of the recapture should properly be included in income taxable to Virginia. A deduction provided under the tax benefit rule under IRC Sec. 111 is applicable on the Virginia return only to the extent that it impacts the determination of FAGI. Thus, the Taxpayer may not take a lump sum subtraction of deprecation recapture simply because he was not able to deduct these amounts in Virginia during prior years.
Accordingly, the department properly included the depreciation recapture on the Taxpayer's 1994 return. Please send the balance due of ***** tax, ***** penalty, and interest) to *****, Virginia Department of Taxation, Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23218-1880 within 30 days to avoid the accrual of additional interest. If you have any questions about this determination, you may contact ***** at *****.
Rulings of the Tax Commissioner