Could a taxpayer use historic rehabilitation credits that accompanied an LLC partnership interest assigned by the prior owner?

Subject

Historic Rehabilitation, Transfer Through Trust

Plain-English summary

Virginia allowed a taxpayer to use historic rehabilitation tax credit carryovers associated with an LLC interest assigned by the prior owner.

The Department emphasized that tax credits generally cannot be transferred unless the General Assembly authorizes it, and Va. Code § 58.1-339.2 does not authorize a stand-alone transfer of this credit. But this transaction transferred the partnership interest itself. Under IRC § 704, a donee's partnership interest receives the donor's distributive share of partnership income, gain, loss, deduction, or credit. Virginia follows that federal terminology unless state law requires a different meaning.

Because the credit accompanied the assigned LLC interest rather than being transferred separately, the taxpayer could apply the carryover against 2012 through 2015 liability. The case was remanded to the auditor for adjustment and any appropriate refund.

What this means for you

The legal form of the transfer matters. Virginia distinguished an unauthorized transfer of a tax credit from a transfer of the underlying partnership interest that carries its distributive tax attributes.

Common questions

Can a Virginia historic rehabilitation credit be sold or assigned by itself? The ruling says Va. Code § 58.1-339.2 does not authorize a separate transfer.

Why was this taxpayer allowed to use the credit? The taxpayer received the LLC partnership interest, and the associated distributive share of credit followed that interest under IRC § 704.

What relief was ordered? The auditor was directed to adjust the credit and issue a refund as appropriate for 2012 through 2015.

Citations and references

• Va. Code § 58.1-339.2 — historic rehabilitation credit and carryover.
• Va. Code § 58.1-301 — Virginia conformity to federal terminology.
• Va. Code §§ 58.1-1821 and 58.1-1824 — appeal and protective refund claim.
• IRC § 704 — distributive tax attributes of a partnership interest.
• P.D. 02-108 and P.D. 01-214, cited by the Commissioner.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-209

Original ruling text

December 18, 2017

Re: § 58.1-1824 Application: Individual Income Tax

Dear *:

This will reply to your letter in which * (the “Taxpayer”) requests a refund of individual income taxes paid for the taxable years December 31, 2012 through 2015. I apologize for the delay in responding to your request.

FACTS

* (VALLC) was formed to rehabilitate a building in Virginia. VALLC reported a Virginia Rehabilitation Historic tax credit (the “Credit”) for the 2008 taxable year that was passed through to VALLC's members. The members of VALLC included two trusts benefiting *** (the “Beneficiary”). One trust matured at age 21 and the other at age 35, giving the Beneficiary full control over the trusts' principal and interest. Both trusts had fully matured prior to the distribution of the Credit.

In 2011, the Beneficiary assigned all of his interest in VALLC to the Taxpayer and her brother, the minor children of the Beneficiary's brother. The Taxpayer filed her 2012 through 2015 Virginia returns carrying over the Credit acquired from the trusts to offset her tax liability.

After review, the Department disallowed the use of the Credit from the trusts on the basis that the Credit is nontransferable, resulting in assessments being issued for the 2012 though 2015 taxable years. The Taxpayer paid the assessments and appealed, contending she was entitled to the Credit when the Beneficiary assigned his interest in VALLC.

DETERMINATION

Protective Claim

Pursuant to the authority granted the Department under Va. Code § 58.1-1824, a protective claim for refund can be held pending the outcome of another case before the courts or the claim may be decided based upon its merits pursuant to Va. Code § 58.1­-1821. As permitted by statute, the Taxpayer's request has been treated as an appeal under Va. Code § 58.1-1821.

Historic Rehabilitation Tax Credit

Under Va. Code § 58.1-339.2, any individual, trust, estate, or corporation is entitled to the Credit equal to 25% of eligible expenses for taxable years after 2000. Credits granted to partnerships are allocated to the partners either in proportion to their ownership interest or as agreed. The credits may be carried over up to 10 taxable years.

The Taxpayer contends that she was entitled to use the Credit that was allocated to the trusts because it was included in the assignment and not challenged by the Internal Revenue Service (IRS).

Generally, a taxpayer does not have a right to any tax credit. In Public Document (P.D.) 02-108 (7/1/2002), the Department opined that credits, deductions or exemptions allowed in the computation of an income tax are privileges accorded as a matter of legislative grace and not as a matter of taxpayer right. See also Deputy v. duPont , 308 U.S. 488, 60 S.Ct. 363 (1940). As such, the Department does not generally permit the transfer of income tax credits unless specifically authorized by the General Assembly. See P.D. 01-214 (12/12/2001). Further, Va. Code § 58.1-339.2 does not provide for the transfer of historic rehabilitation tax credits.

However, a donee's partnership interest would receive the donor's distributive share of partnership income, gain, loss, deduction, or credit as determined by the partnership agreement. See IRC § 704. Because Va. 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, the Taxpayer would have received the Beneficiary's Credit when the partnership interest was transferred.

Based on the information, provided, the Taxpayer was entitled to use the Credit distributed from the partnership interest that was assigned from the Beneficiary to offset her 2012 through 2015 Virginia income tax liability. Accordingly, the case will be remanded to the auditor to adjust the Credit in accordance with this determination and a refund will be issued, as appropriate.

The Code of Virginia sections and public documents 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/731.B