Tax Type
Individual Income Tax
Description
Qualified Equity and Subordinated Debt Investments Tax Credit
Topic
Computation of Income
Taxable Income
Date Issued
04-16-2002
April 16, 2002
Re: Request for Ruling: Individual Income Tax
Dear *****:
This is in reply to your letter in which you request a ruling concerning provisions of the Qualified Equity and Subordinated Debt Investments Tax Credit (the "Credit").
FACTS
During calendar year 2000, you made an equity investment in a qualified business that qualified for the Credit. You applied a portion of the Credit to your 2000 Virginia income tax, and carried forward the unused balance of the Credit.
You are now considering a transaction with the qualified business whereby you would exchange your equity investment for a subordinated debt instrument. You request a ruling as to whether such an exchange would trigger recapture of the Credit earned in 2000.
RULING
Code of Virginia § 58.1-339.4 sets forth the conditions under which an equity investment may be redeemed before the expiration of the required five-year holding period without triggering a recapture of the Credit, and the resulting penalty and interest liability. Under the statute, an equity investment may not be redeemed unless (i) the qualified business issuing such equity is liquidated, (ii) such business is subject to a merger, consolidation or other acquisition with or by a party not affiliated with such business, or (iii) the taxpayer holding a qualified equity dies.
You indicate that the exchange would not reduce your overall investment in the qualified business but would allow greater flexibility for the qualified business. Unfortunately, the statute does not provide for the exchange, replacement or other redemption of an equity investment under the circumstances you describe. As such, the department would view an exchange or replacement or other transfer of your equity investment for a subordinated debt investment in the qualified business within the five full calendar years following your equity investment as a trigger for recapture of the Credit.
Further, the subordinated debt instrument that would replace the equity investment would not qualify for the Credit. Code of Virginia § 58.1-339.4 defines a "qualified investment" in part as a cash investment. Under Title 23 of the Virginia Administrative Code ("VAC") 10-110-225, an investment that would otherwise qualify for the Credit will be disqualified if 50% or more of the capital resulting from the investment is used within one year to retire or reduce existing debt or equity of a qualified business. Because the subordinated debt would not provide any new capital to the qualified business, the subordinated debt instrument would not qualify for the Credit.
I trust that this reply answers your ruling request. Copies of the Code of Virginia and regulations cited are included for reference purposes. These and other reference documents are also 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 should have any questions regarding this ruling, you may contact *****, Office of Policy and Administration, Appeals and Rulings, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
AR/37606
Rulings of the Tax Commissioner