Document Number
Tax Type
Individual Income Tax
Qualified Equity and Subordinated Debt Tax Credit
Subtractions and Exclusions
Taxable Income
Date Issued

September 6, 2016

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 taxable year ended December 31, 2013.


The Taxpayers, a husband and a wife, filed a Virginia resident income tax return for the 2013 taxable year and claimed a subtraction for gain from the sale of internet domain names owned by a Virginia limited liability company (the “Company”) of which the husband was the sole member.  Under review, the Department denied the subtraction and issued an assessment.  The Taxpayers appealed, contending they were eligible to claim the subtraction because the Company was a qualified business and the gain was considered 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.]

By using the term “investment” and referring to the eligibility criteria found in Va. Code § 58.1-339.4, it appears that the General Assembly only intended equity and subordinated debt investments to be eligible for the subtraction.  That is because Va. Code § 58.1-339.4 pertains to the Qualified Equity and Subordinated Debt Tax Credit, for which only equity and subordinated debt investments in technology businesses are eligible. Virginia Code § 58.1-322 C 35 provides that if a taxpayer has already claimed the credit, he is not eligible to claim the subtraction.  Thus, the overall statutory scheme involves the same type of investments, either equity or subordinated debt.  Accordingly, the subtraction relates only to long-term capital gain on the sale of equity and subordinated debt investments in such business, not the sale of business assets generally.  See Public Document (P.D.) 16-83 (5/16/2016).  Therefore, gain from the sale of the Company's internet domain names did not qualify for the subtraction.

Accordingly, the Department's assessment is upheld.  The Taxpayers will receive an updated bill with accrued interest to date.  The Taxpayers should remit payment of the balance within 30 days from the bill date to avoid the accrual of additional interest.

The Code of Virginia sections and public document 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




Last Updated 10/06/2016 07:29