Document Number
Tax Type
Individual Income Tax
Long-Term Capital Gain; Taxpayers had not provided evidence that the gain was attributable to an investment in a qualified business
Subtractions and Exclusions
Date Issued

April 3, 2015

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 2011 taxable year.


The Taxpayers filed a Virginia individual income tax return for the 2011 taxable year, claiming a subtraction for long-term capital gain.  Under review, the Department denied the subtraction because the Taxpayers had not provided evidence that the gain was attributable to an investment in a qualified business.  The Taxpayers filed an appeal, contending that the form instructions indicated that any long-term capital gain was eligible for the subtraction.  The Taxpayers also assert that a representative from the Department agreed with their interpretation of the instructions.  They ask that the Department allow the subtraction and abate any assessed penalties.


Long-Term Capital Gain

Virginia Code § 58.1-301 provides that terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required.  For individual income tax purposes, Virginia "conforms" to federal law, in that it starts the computation of Virginia taxable income with federal adjusted gross income (FAGI).  Income included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Va. Code § 58.1-322.

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 Dep't of Taxation, Circuit Court of the City of Roanoke, Law No. 82-0846 (10/27/1983).

Virginia Code § 58.1-322 C 35 provides for 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.]

In this case, the Taxpayers subtracted the long-term capital gain they recognized from the sale of real property.  As such, the income was not attributable to an investment in a qualifying technology business as required by Va. Code § 58.1-322 C 35.  Accordingly, the Department properly denied the subtraction.

Tax Form Instructions

The Taxpayers contend that the wording of the tax return instructions indicated that they could subtract any long-term capital gain.  Tax form instructions merely paraphrase the statute and generally make no reference to the requirements for reporting amounts on a particular line of a return.  The information provided in Virginia's tax return instructions is intended to provide helpful guidance to taxpayers.

The instructions for the 2011 return state that income taxed as long-term capital gain for federal tax purposes may be subtracted "provided the income is attributable to an investment in a 'qualified business' as defined in Va. Code § 58.1-339.4 or in any other technology business approved by the Secretary of Technology."  Virginia Code § 58.1-339.4 provides a tax credit for qualified equity and subordinated debt investments.  The fact that the subtraction is tied to a statute addressing stock and other forms of investment gives the taxpayer notice that the subtraction does not include gains from the sale of real estate.

Written Advice

The Taxpayers also contend that a representative of the Department agreed with their interpretation of the instructions that the long term capital gain should be eligible for the subtraction.  Virginia Code § 58.1-1835 authorizes the Tax Commissioner to abate an assessment or a portion of an assessment that is attributable to erroneous advice furnished to the taxpayer in writing by an employee of the Department acting in his official capacity.  In this case, there is no record of the questions presented to the Department's representative or evidence that the advice was provided in writing.  Accordingly, there is no basis for relief under Va. Code § 58.1-1835.


In addition to requesting that the subtraction be reinstated, the Taxpayers request that no penalties be assessed.  In this case, the assessment included additional taxes due plus interest, but no penalties were assessed.  The Taxpayers should be aware, however, that Va. Code § 58.1-1812 mandates the application of interest to any assessment of tax.  Interest is not assessed as a penalty for noncompliance with the tax laws.  Rather, it represents a fee for the use of money that was properly due the Commonwealth.


The long-term capital gain recognized by the Taxpayers from the sale of real property was not eligible for the qualified technology business subtraction.  The assessment, therefore, is upheld.  An updated bill will be issued shortly.  The Taxpayers should remit payment within 30 days of the date of the bill to avoid the accrual of additional interest

The Code of Virginia sections cited are available on-line at 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 *****.


Craig M. Burns
Tax Commissioner




Rulings of the Tax Commissioner

Last Updated 04/22/2015 13:46