Document Number
Tax Type
Individual Income Tax
Corporation Income Tax
The extent the Taxpayers may have taxable income from the sale of milk base depends on the application of the IRC and other applicable federal law
Federal Conformity
Taxable Income
Subtractions and Exclusions
Date Issued

May 16, 2016

Re:    Request for Ruling:  Individual Income Tax
        Corporate Income Tax

Dear *****:

This will respond to your letter in which the***** (the “Commission”) requests a ruling on behalf of certain Virginia dairy farmers (individually, a “Taxpayer,” and collectively, the “Taxpayers”) concerning the Virginia income tax consequences of selling milk base.


Each Taxpayer has a right to produce and sell a certain quantity of milk annually. Such milk quota, commonly known as milk base, may be sold to other farmers.  Although the Commission reserves the right to adjust the overall amount of milk base allocated to Virginia dairy farmers, it does not sell base itself or regulate the price of base sold between farmers.  The Commission states that in 1975, milk base typically sold for around $0.85 per pound, whereas the current price is around $2.00 per pound.

The Commission requests a ruling concerning the Virginia income tax consequences when the Taxpayers sell milk base at a higher price than it was initially purchased.  The Commission also asks whether any gain on the sale of milk base would qualify for the subtraction for long-term capital gain attributable to investments in qualified businesses.


Federal Conformity

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.

For corporate income tax purposes, Virginia also conforms to federal law in that it starts the computation of Virginia taxable income with federal taxable income (FTI). Virginia Code § 58.1-402 provides that a corporation's Virginia taxable income for any given taxable year is the FTI and any other income taxable to the corporation under federal law for such year, adjusted and modified by certain specified additions, subtractions, and exemptions.  For purposes of this statute, the term “federal taxable income” means all income from whatever source derived and however named on which a federal tax is imposed. See Title 23 of the Virginia Administrative Code (VAC) 10-120-100 A.

The request does not specify whether the Taxpayers report their income on individual or corporate tax returns.  Regardless of which type of return is filed, the extent to which a Taxpayer may have taxable income from the sale of milk base would have to be determined on a case-by-case basis under the IRC and any other applicable federal law, such as regulations promulgated by the United States Department of the Treasury.  To the extent any such income is included in FAGI or FTI, as the case may be, it would be included in the Taxpayer's computation of Virginia income tax.

Long-Term Capital Gain

For individual income tax purposes, Va. 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).  The same subtraction also exists for corporate income tax purposes under Va. Code § 58.1-402 C 24.  In either case, the following restrictions apply:

To qualify for a subtraction . . . , 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 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).

To be a qualified business, a business must meet the requirements of Va. Code § 58.1-339.4.  One of the requirements is that the business must be primarily engaged in, or be primarily organized to be engaged in, technological fields such as advanced computing, advanced materials, advanced manufacturing, agricultural technologies, biotechnology, electronic device technology, energy, environmental technology, nformation technology, medical device technology, or nanotechnology.  Although agricultural technologies is listed as a technology field, in the Department's opinion, it is not sufficient that an agricultural business merely be using technology to be considered a qualified business under Va. Code § 58.1-339.4.  Without more, it is unlikely that the Taxpayers are engaged in an agricultural technologies business.

In addition, 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 and 58.1-402 C 24 both provide 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, even if milk base is considered a capital asset and gain may occur upon its sale, it would not be considered an “investment” for purposes of the subtraction under Va. Code § 58.1-322 C 35.  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.


The extent the Taxpayers may have taxable income from the sale of milk base depends on the application of the IRC and other applicable federal law.  If any such income is included in a Taxpayer's FAGI or FTI, as the case may be, it would be subject to tax by Virginia.  In addition, even if any such income is considered long-term capital gain, such gain would not be eligible for the subtraction under Va. Code § 58.1-322 C 35 or 58.1-402 C 24 because the Taxpayers likely do not qualify as technology businesses and milk base is not an equity or subordinated debt investment in the business.

This ruling is based on the facts presented as summarized above.  Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections and regulation 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 ruling, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.


Craig M. Burns
Tax Commissioner




Last Updated 06/09/2016 10:49