May 5, 2020
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 “Taxpayer”) for the taxable year ended December 31, 2016.
FACTS
The Taxpayer was a general partner in a partnership. In 2016, the partnership realized a short-term capital gain from the sale of a Historic Rehabilitation Tax Credit (the “Credit”). The Taxpayer reported his partnership share of the short-term capital gain on his 2016 federal individual income tax return. He also reported a long-term capital loss on the same return.
The Taxpayer subtracted his share of the short-term capital gain on his Virginia individual income tax return. The Department reviewed the return and adjusted the subtraction to equal the Taxpayer’s net capital gain. The Taxpayer appealed, contending that he is entitled to claim the entire short-term capital gain as a subtraction since it was included is his 2016 federal taxable income.
DETERMINATION
Virginia Code § 58.1-301 provides, with certain exceptions, that the 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. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia. For individual income tax purposes, Virginia “conforms” to federal law, in that it starts the computation of Virginia taxable income (VTI) with FAGI. Income properly 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 Chapter 3 of Title 58.1 of the Code of Virginia.
Virginia generally conforms to the federal treatment of partnerships. A partnership, as such, is not subject to income tax. Any income tax arising from the income of the partnership is the liability of the partners. Under IRC § 702(b), “The character of any item of income, gain, loss, deduction, or credit included in a partner’s distributive share ... shall be determined as if such item were realized directly from the source from which realized by the partnership or incurred in the same manner as incurred by the partnership.” In addition, each item of pass-through entity income, gain, loss or deduction has the same character for an owner for Virginia income tax purposes as for federal income tax purposes. See Virginia Code § 58.1-391 B.
Pursuant to IRC § 1222(3), a long-term capital gain is defined as gain from the sale or exchange of a capital asset held for more than one year. A short term capital gain is a gain from the sale or exchange of a capital asset held for less than one year. A net capital gain is the excess of a taxpayer’s net long term capital gain for the taxable year over the net short-term capital loss for the same year. Net capital gains are reported as taxable income as part of a taxpayer’s FAGI. See IRC § 61(a)(3). The Department limited the subtraction to the net capital gain reported on Schedule D of the Taxpayer’s federal return.
Virginia Code § 58.1-339.2 F provides that gain or income under federal law from the allocation of the Credit is not taxable gain or income for purposes of Virginia income tax. Therefore, such a gain or income may be subtracted from FAGI when computing Virginia taxable income. See Public Document (P.D.) 13-225 (12/17/2013).
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 subtractions under Virginia Code § 58.1-322.02 are limited to the extent included in FAGI. Virginia Code § 58.1-339.2 F limits the subtraction or deduction to the extent that the gain or deduction is otherwise excluded, deducted or subtracted in computing Virginia individual, trust, estate or corporate income tax. In this case, the taxable gain or income from the allocation of the Credit is not otherwise excluded, deducted or subtracted for individual income tax purposes. As such, the amount of the Credit that may be subtracted from FAGI pursuant to Virginia Code § 58.1-339.2 F is not limited to the net capital gain reported in FAGI.
Therefore, the Taxpayer was entitled to subtract his share of the entire gain realized by the partnership from the sale of the Credit and the amount of the subtraction allowed has been adjusted and the assessment issued for the taxable year ended December 31, 2016 has been abated.
The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov 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 *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/3265.B