Document Number
95-109
Tax Type
Individual Income Tax
Description
Subtractions from federal adjusted gross income; Recapture of depreciation
Topic
Taxable Income
Date Issued
05-09-1995
May 9, 1995



Re: §58.1-1821 Application: Individual Income Tax


Dear********************

This is in reply to your letter of September 8, 1994, and the 1993 amended Virginia nonresident individual income tax return for your clients,*************** (the "Taxpayers").
FACTS

The Taxpayers, nonresidents of Virginia, owned rental property in Virginia that incurred operating losses in prior years. The Taxpayers state that the property would have generated a loss for income tax purposes even if no depreciation had been claimed. In 1993, the Virginia rental property was sold and a gain was reported on federal and Virginia returns. The gain included depreciation recaptured from prior years. A 1993 amended return requesting a refund was subsequently filed claiming a subtraction for depreciation recapture since the depreciation taken in prior years added to the rental loss and resulted in no tax benefit. The department disallowed the subtraction. The Taxpayers contend that because Virginia does not have a statute regarding this situation, it should conform with §111 of the Internal Revenue Code (IRC), which allows an exclusion for the recovery of tax benefit items. Therefore, Virginia should process the amended return and issue the refund.
DETERMINATION

Virginia "conforms" to federal law in that the computation of Virginia taxable income begins with federal adjusted gross income (FAGI). Therefore, net operating loss deductions, basis computations, the tax benefit rule, and other federal rules affect Virginia taxable income only to the extent that these rules actually affect FAGI. The federal tax benefit rule allows an adjustment to FAGI (and also for Virginia taxable income because of conformity) if no federal tax benefit was received for an item. IRC 111 does not allow FAGI to be adjusted merely because no Virginia tax benefit was received. There is no authority in Virginia law for a separate tax benefit rule allowing adjustments to FAGI because a Virginia tax benefit was not received for a particular component of FAGI.

When computing a gain on the sale of rental property, depreciation that is allowed or allowable on the property for federal purposes must be recaptured in the year of the sale to compute the adjusted basis. Certain modifications that reduce FAGI on a Virginia nonresident income tax return are provided in Code of Virginia §58.1-322. However, there is no provision in this code section to allow a subtraction for depreciation recapture related to the gain on the sale of rental property. Therefore, the department properly disallowed the subtraction claimed on the 1993 amended Virginia nonresident income tax return for this item.

Based on this information, there is no authority by which the department may issue a refund pursuant to the amended 1993 Virginia nonresident individual income tax return. If further assistance is needed, please contact***************.
                        • Sincerely,




                          Danny M. Payne
                          Tax Commissioner


OTP/8456N

Rulings of the Tax Commissioner

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