Tax Type
Individual Income Tax
Description
Qualified Equity and Subordinated Debt Investments Tax Credit
Topic
Credits
Date Issued
11-12-2002
November 12, 2002
Re: Request for Ruling: Individual Income Tax
Dear *****:
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This will reply to your letter in which you request a ruling on behalf of your client,
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- FACTS
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Certain investors have purchased the Taxpayer's membership interests, an equity investment. Pursuant to the operating agreement, each of these investors is entitled to receive a 10% guaranteed distribution from the Taxpayer each year for ten years, plus interest. You request a ruling as to whether the membership interests would qualify as an investment eligible for the credit.
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- RULING
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Code of Virginia § 58.1-339.4 allows a taxpayer to claim the Credit for qualified equity or subordinated debt investments. A qualified equity is defined as common stock or preferred stock, regardless of class or series, of a corporation; a partnership interest in a limited partnership; or membership interest in a limited liability company, which is not required or subject to an option on the part of the taxpayer to be redeemed by the issuer within five years from the date of issuance.
The statute clearly indicates that the General Assembly intended the Credit to ensure that Virginia small business would, at least for the limited time periods after issuance of a qualified investment, be able to have unfettered use of infused capital for the early period of business development.
You state that the amounts payable to the investors represent distributions rather than a return of capital. You assert that the statutory five-year redemption prohibition would not apply to the distributions because the prohibition essentially requires redemption within five years of the date of issuance.
Under the amended operating agreement provided, each minority member is entitled to a guaranteed distribution for ten years, or until repayment of the minority member's "Unrecovered Equity." The agreement defines "Unrecovered Equity" as "the Minority Members' Initial Capital Contribution plus interest thereon at eight percent (8%) per year less any distributions received by each respective Minority Member from the Company, but not reduced by each Minority Member's share of the Company's losses, if any." This language indicates that the guaranteed distributions are intended to repay the initial capital contribution within ten years. As such, these membership interests do not qualify as equity investments under Code of Virginia § 58.1-339.4.
In the alternative, you argue that even if these payments are viewed as a return of capital, the investors would still be entitled to claim the Credit, computed on the portion of their membership interest investments that cannot be returned within five years after date of issuance.
Code of Virginia § 58.1-339.4(F) sets forth the conditions under which an equity investment may be transferred before the expiration of the required holding period without triggering a recapture of the Credit. These conditions express the intent of the General Assembly that qualified businesses should benefit from these sources of capital for the duration of the required holding period. As such, the department would view any instrument providing for the repayment of capital with regard to an equity investment within five years from the date of issuance as contrary to legislative intent. The fact that a portion of a distribution may not constitute a return of capital would not qualify that portion for purposes of the Credit. Accordingly, the entire amount of the membership investments, considered as a class, would not qualify for this Credit.
This ruling has been made subject to the facts presented, as summarized above. The Code of Virginia section cited and other reference documents are available online in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have any questions regarding this ruling, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
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- Janie E. Bowen
Executive Commissioner
Office of Policy and Administration
- Janie E. Bowen
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AR/37138E
TO WHOM IT MAY CONCERN
Under the authority of Section 58.1-1 of the Code of Virginia, I hereby delegate to Janie E. Bowen, Assistant Tax Commissioner, the authority to sign for me any and all documents, including, but not limited to, affidavits, warrants, rulings, appeals, offers in compromise and sales tax revocations.
This authority shall not extend to matters or documents related to my service on any statutorily created board or commission, including, but not limited to, the. Compensation Board and the Treasury Board.
This authority will continue until revoked. The delegation of authority dated June 3, 1994, is hereby revoked and replaced.
Done at Richmond, Virginia this tenth day of September, 1999.
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner