February 2, 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 “Taxpayers”) for the taxable year ended December 31, 2013.
FACTS
The Taxpayers filed a 2013 Virginia individual income tax return and claimed a subtraction for a long-term capital gain. Under review, the Department disallowed the subtraction and issued an assessment. The Taxpayers filed an appeal, contending they relied on erroneous written advice provided by a Virginia tax official.
DETERMINATION
Long-Term Capital Gain Subtraction
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). 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.]
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 Department of Taxation, Circuit Court of the City of Roanoke, Law No. 82-0846 (10/27/1983).
In this case, the gain resulted from the sale of stock in a Fortune 500 insurance company originally purchased in 2004. The statute clearly limits the long-term capital gain subtraction to investments made between April 1, 2010, and June 30, 2020. The statute further limits the subtraction to income from certain qualified businesses. According to the information provided, the investment was in an insurance company that earned far in excess of $3 million in annual revenues during the taxable years at issue. Thus, the gains were not attributable to an investment in a qualifying technology business as required by Va. Code § 58.1-322 C 35.
Tax Form Instructions
The Taxpayers contend that the instructions for individual income tax returns were not clear and incomplete. The Department has addressed this issue in P.D. 13-149 (7/31/2013).
The information provided in Virginia's tax return instructions is intended to provide helpful guidance to taxpayers. It is not intended to provide a detailed explanation of every provision of or nuance of Virginia's tax law. Further, because subtractions are strictly construed against the taxpayer, it is incumbent upon the taxpayer to investigate whether he is eligible for such subtraction. A taxpayer must consult Virginia's statutes, ruling letters, regulations, court decisions, the Internal Revenue Code, and other sources of tax jurisprudence in order to compute his Virginia tax liability correctly. The guidance provided in the Department's tax form instructions is not a substitute for these sources of Virginia's tax law and may not be relied upon as authoritative when a taxpayer is computing his Virginia taxable income.
In this case, the instructions clearly indicate that the subtraction is only available for certain investments in technology businesses located principally in Virginia with annual revenue of less than $3 million. Specifically, the instructions indicate a qualified business is limited to certain small business in the technology industry as defined under Va. Code § 58.1-339.4 and those approved by Virginia's Department of Technology. In order to assist taxpayers and qualified businesses, the Department of Technology has established a certification process for approving technology companies. More information concerning the approval process can be obtained from the Virginia Department of Technology's website.
The Taxpayers do not contend that they were entitled to the subtraction. Rather, they assert that the assessment should be abated because they relied on oral advice from the Department that was written down by an employee of their local commissioner of the revenue.
Virginia Code § 58.1-1835 provides that the Tax Commissioner shall abate any portion of tax, interest and penalty attributable to erroneous written advice by the Department under the following conditions:
- The written advice was reasonably relied upon by the taxpayer and was in response to a specific written request by the taxpayer;
- The portion of the penalty or tax did not result from a failure by the taxpayer to provide adequate or accurate information; and
- The facts of the case described in the written advice and the request thereof are the same, and the taxpayer's business or personal operations have not changed since the advice was rendered.
Furthermore,Va. Code § 58.1-1845 sets out the Virginia Taxpayer Bill of Rights. Under subsection 4, one of the guaranteed rights is:
The right to abatement of tax, interest and penalties in accordance with § 58.1-1835, attributable to any taxes administered by the Department, when the taxpayer reasonably relies upon binding written advice furnished to the taxpayer by the Department through authorized representatives in response to the taxpayer's specific written request which provided adequate and accurate information.
Based on the above statutory provisions, the erroneous advice must be reasonably relied upon by the taxpayer, and such advice must be in writing. In addition, such written advice must be provided based on a specific written request by a taxpayer who has provided sufficient and accurate facts so that the Department may issue a correct decision. In this case, the Taxpayers did not make a written request as to whether they could claim the subtraction. Further, no written advice was provided by a Department tax official. As such, the Taxpayers are not entitled to the abatement of assessment issued for the 2013 taxable year based on the reliance of erroneous advice.
CONCLUSION
Based on this review, the Department properly disallowed the Taxpayers' subtraction for a long-term capital gain. Accordingly, the assessment is upheld. An updated bill will be issued, and the Taxpayers should remit payment for the outstanding balance as shown on the bill within 30 days from the date of the bill to avoid the accrual of additional interest.
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