Tax Type
Individual Income Tax
Description
Qualified Equity and Subordinated Debt Investments Tax Credit
Topic
Credits
Date Issued
07-01-2002
July 1, 2002
Re: Request for Ruling: Individual Income Tax
Dear *****
This will respond to your letter concerning the eligibility of ***** ("the Taxpayer") to be designated as a qualified business for purposes of the Qualified Equity and Subordinated Debt Investments Tax Credit ("the Credit".)
FACTS
In 1999, the Taxpayer commenced business operations providing intermediary and exchange services for like-kind exchanges of real or personal property under Internal Revenue Code ("IRC") § 1031. These operations have been conducted primarily in Virginia. The Taxpayer is an S corporation commercially domiciled in Virginia with annual gross revenues of less than $5 million in its most recently completed taxable year. You request a ruling as to whether the Taxpayer would be eligible as a qualified business for the issuing investment instruments that would qualify for the Credit.
RULING
Code of Virginia § 58.1-339.4 provides a credit for individual and fiduciary income tax equal to 50% of a qualified equity and subordinated debt investment made during the taxable year in a qualified business venture. A "qualified business" is a corporation, general or limited partnership or limited liability company that (i) has its headquarters and principal business operations within Virginia; (ii) engages in its business activities primarily within Virginia; and (iii) has annual gross receipts of $5 million or less based on the most recently completed fiscal year. However, the statute specifically excludes the following trades or businesses from eligibility as a qualified business:
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- 1. Banks;
2. Savings and loan institutions;
3. Credit or finance;
4. Financial, broker or investment;
5. Professional services including pharmacists, optometrists, practitioners of the healing arts, nurse practitioners, practitioners of the behavioral science professions, veterinarians, surgeons, dentists, architects, professional engineers, land surveyors, certified landscape architects, certified interior designers, public accountants, attorneys-at-law, insurance consultants, audiologists or speech pathologists, and clinical nurse specialists;
6. Accounting;
7. Government, charitable, religious or trade institutions or organizations;
8. Conventional coal, oil and gas, and mineral exploration;
9. Insurance;
10. Real estate design or engineering;
11. Construction or construction contracting;
12. Business consulting or business brokering; or
13. Residential housing, real estate brokerage, sale or leasing businesses, or real estate development.
- 1. Banks;
In addition, the department is authorized to exclude any other business that it determines by regulation to be against the public interest, the purposes of the Credit or in violation of the law. Under Title 23 of the Virginia Administrative Code ("VAC") 10-110-225, a qualified business cannot be primarily organized to engage in a business that is in violation of the law. Further, the regulation provides that the department may designate other types of prohibited trades or businesses.
A credit against a state income tax is, in effect, an exemption from an already determined income tax liability. Credits, deductions or exemptions allowed in the computation of an income tax are privileges accorded as a matter of legislative grace and not as a matter of taxpayer right. By reason of their character as legislative grants, statutes relating to deductions 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%27/83).
In this case, the Taxpayer is a qualified intermediary pursuant to Treas. Reg.
§ 1.1031 (k)-1. Under IRC § 1031, an owner can defer a gain or loss on an exchange of real or personal property held for productive use in a business or for investment if property of alike kind is received as part of the transaction and is held either for productive use in a business or for investment. Because the direct or simultaneous exchange of property between taxpayers is not always feasible, like-kind exchange rules permit an exchange to qualify for like-kind treatment even if the replacement property is received before or after the relinquished property has been transferred, provided that specific identification and receipt requirements are satisfied. In other words, if certain conditions are met, an owner may sell property to one party and purchase property from another party and still qualify for a tax deferral of any gain under like-kind exchange rules.
Typically, these multiparty exchanges are consummated through a qualified intermediary. Under such circumstances, a qualified intermediary would be assigned property from the seller and receive cash from the buyer, purchase replacement property and assign it back to the seller, and finally transfer the seller's relinquished property to the buyer.
According to your description and the information provided, the Taxpayer is a qualified intermediary in the business of facilitating like-kind exchanges. Based on my understanding of its business activities, the Taxpayer's activities are essentially the same as those classified in the Code as financial, broker, investment, business brokering, real estate brokerage or real estate sale businesses. These businesses are among the prohibited types of businesses contained in Code of Virginia § 58.1-339.4. Consequently, the Taxpayer is not eligible for approval as a qualified business for purposes of the Credit.
As with any guidance provided by the department, this ruling is limited to the years and the facts and circumstances identified in your letter. Any material changes in the facts could alter the results.
I trust this will answer the question posed in your letter. Copies of the Code of Virginia and regulation cited, as well as other reference documents, are available online in the Tax Policy Library section of the department's web site located at www.tax.state.va.us. Should you have any questions with respect to this ruling, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Kenneth W. Thorson
Tax Commissioner
AR/38226O
Rulings of the Tax Commissioner