Tax Type
Individual Income Tax
Description
Subtractions from federal adjusted gross income
Topic
Taxable Income
Date Issued
09-30-1996
September 30, 1996
Re: § 58.1-1821 Application: Individual Income Taxes
Dear*****************
This will respond to your letter in which you seek correction of an assessment of additional individual income tax for the 1994 taxable year. I apologize for the delay in responding to you.
FACTS
You are now a Virginia resident who acquired a partnership interest prior to becoming a resident of Virginia. This partnership generated losses which you were able to deduct on your federal and state income tax returns. As a result of these losses, your partnership capital account exhibited a negative balance.
In 1994, the partnership was terminated as the result of a foreclosure. Consequently, you recognized the amount of your negative capital balance as capital gain income on your 1994 federal return. On your 1994 Virginia individual income tax return, however, you claimed a subtraction from federal adjusted gross income for that portion of the capital gain income which was attributable to the losses incurred in years prior to when you became a Virginia resident. This subtraction was disallowed upon examination, and an assessment for additional tax was issued. You protest this assessment, claiming that since you were not a Virginia resident for the entire period you held your partnership interest your negative capital account balance and corresponding capital gain income is different for Virginia tax purposes from that used for federal tax purposes.
DETERMINATION
Code of Virginia § 58.1-301, copy enclosed, provides that the terms used in Virginia law as it relates to Virginia individual income taxation shall have the same meaning as terms used in the Internal Revenue Code. The computation of Virginia taxable income begins with federal adjusted gross income, which means, pursuant to this Code section, any and all income reported as federal adjusted gross income on your federal income tax return. Federal adjusted gross income is then modified by specific additions, subtractions, deductions and exemptions as set forth in Code of Virginia § 58.1-322, copy enclosed. There is no provision in this Code section to allow a subtraction of income created by a negative capital balance upon termination of a partnership interest when a portion of the partnership losses which created the negative capital balance were incurred in years when the taxpayer was not a resident of Virginia.
In the instant case, although you deducted a portion of the partnership losses before you became a resident of Virginia, all of the income recognized upon termination of your partnership interest was included in federal adjusted gross income while you were a Virginia resident. Pursuant to Code of Virginia §§ 58.1-301 and 58.1-322, therefore, such income is included in Virginia taxable income and subject to taxation by Virginia.
You state that your basis for determining gain or loss upon disposition of a partnership interest is different for federal and Virginia income tax purposes. The Code of Virginia, however, makes no such distinction. Since Virginia law utilizes federal adjusted gross income as the starting point in computing Virginia taxable income, the tax basis used in determining gain or loss for federal purposes is also used for Virginia purposes.
The subtraction you claimed essentially uses prior year losses not recognized for Virginia purposes to offset current year gains. There is no express authority in the Code of Virginia for a Virginia net operating loss. Consequently, there can be no carryforward of a loss to any year in which there is no carryforward for federal purposes.
Based on the facts presented and the determination herein, there is no basis to allow a subtraction from federal adjusted gross income for gain on termination of a partnership interest; accordingly, the assessment is correct. Please remit the balance due,*****within sixty days. Please send your payment to****** Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23218-1880. If you have any questions regarding this determination, you may contact******directly at ********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10659G
Enclosures (2)
Rulings of the Tax Commissioner