February 15, 2022
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, 2017. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer filed a Virginia resident income tax return for the 2017 taxable year claiming a subtraction for long-term capital gain derived from his investment in ***** (the “Company”). Under review, the Department denied the subtraction because the Taxpayer had not provided evidence that the gain from the sale of stock was attributable to an investment in a qualified business. The Taxpayer appealed, contending he was eligible to claim the subtraction because the gain met all the statutory requirements.
DETERMINATION
Virginia Code § 58.1-301 provides, with certain exceptions, 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. 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 with federal adjusted gross income (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 Code § 58.1-322.02 24 provides for a subtraction for any income taxed as a long-term capital gain for federal income tax purposes. The following restrictions apply:
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 Administration, provided that 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 and Emphasis added.]
The Department disallowed the subtraction partly because the Taxpayer was unable to provide documentation proving that the Company satisfied the statutory revenue requirement. The Taxpayer asserted that because the Company was a private company, he did not have access to the Company’s revenue figures. He argued that because the Department could neither prove nor disprove that the Company satisfied the statutory revenue requirement, the subtraction should be allowed because the Company was nevertheless in a business area approved by the Secretary of Technology.
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). Under this legal standard, it is incumbent upon the taxpayer to show that he is eligible for a deduction, subtraction or credit.
Further, Virginia Code § 58.1-205 provides that in any proceeding relating to the interpretation of the tax laws of Virginia, an “assessment of a tax by the Department shall be deemed prima facie correct.” As such, the burden of proof was on the Taxpayer to show he was entitled to the subtraction and, because he failed to do so, the assessment must be upheld.
The Code of Virginia sections 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/3640.X