I sold stock in a private tech company and claimed Virginia's long-term capital gain subtraction, but the company won't share its revenue figures with me -- can the Department still deny my subtraction just because I can't prove it met the $3 million revenue cap?

Plain-English summary

This ruling is a clear taxpayer loss that turns entirely on WHO has to prove what -- a good illustration of how strictly Virginia construes tax subtractions and credits against the person claiming them.

Virginia lets a taxpayer subtract a long-term capital gain from Virginia taxable income if the gain is attributable to an investment in a "qualified business" -- generally a technology business, with its principal office or facility in Virginia, that had under $3 million in annual revenue in the year before the investment. A taxpayer claimed this subtraction on his 2017 return for a gain from selling stock in a private technology company. The Department denied the subtraction because he couldn't provide any evidence that the company actually met the $3 million revenue cap.

The taxpayer's appeal argument was that because the company was privately held, he had no access to its revenue figures -- and since the Department itself couldn't prove the company failed the revenue test either, the subtraction should be allowed anyway (essentially, that the uncertainty should be resolved in his favor). The Department rejected that reasoning outright. Deductions, subtractions, and credits are legislative grants that must be strictly construed against the taxpayer and in favor of the state, and a Department assessment is presumed correct until the taxpayer proves otherwise. The burden was on the taxpayer to affirmatively show the company qualified -- not on the Department to disprove it -- and because he couldn't meet that burden, the assessment was upheld.

What this means for you

Investors claiming Virginia's qualified-technology-business subtraction

Line up your documentation of the company's revenue BEFORE you invest or, at the latest, before you claim the subtraction on your return. If the company is privately held and won't share its financials, get that information in writing as a condition of the investment, or in some other verifiable form -- "the company won't tell me" is not a defense if the Department later asks for proof.

Anyone claiming any Virginia deduction, subtraction, or credit

Remember the default legal posture: these benefits are strictly construed against you, the assessment is presumed correct, and you carry the burden of proof. An argument that the Department "can't prove I'm wrong" doesn't flip that burden -- you still have to affirmatively prove you're right.

Accountants and tax professionals

This is a clean, short citation for the general strict-construction/burden-of-proof rule (citing Howell's Motor Freight, Inc. v. Virginia Dep't of Taxation) as applied specifically to the qualified-technology-business capital gain subtraction under Va. Code § 58.1-322.02 24.

Common questions

Q: I can't get financial records from a private company I invested in -- can I still claim a subtraction that depends on its revenue?
A: Only if you can otherwise document that it met the requirement. The taxpayer, not the Department, bears the burden of proving eligibility for a subtraction, and an inability to obtain the company's records doesn't shift that burden.

Q: If the Department can't prove I'm wrong, doesn't that mean I win?
A: No. Virginia tax subtractions, deductions, and credits are strictly construed against the taxpayer, and a Department assessment is presumed correct. You must affirmatively prove your eligibility; uncertainty is resolved against the person claiming the tax benefit.

Q: What does a business have to meet to be a "qualified business" for this subtraction?
A: Generally a technology business (or one otherwise approved by the Secretary of Administration) with its principal office or facility in Virginia and under $3 million in annual revenue in the fiscal year before the investment.

Citations and references

• Va. Code § 58.1-322.02 24 (subtraction for long-term capital gain from investment in a qualified business; principal office in Virginia and under $3 million in prior-year revenue required)
• Va. Code § 58.1-339.4 (qualified business defined for this purpose)
• Va. Code § 58.1-205 (a Department tax assessment is deemed prima facie correct)
• 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) (deductions, subtractions, and credits are legislative grants strictly construed against the taxpayer)

Subject

Subtractions : Qualified Technology Business - Revenue Requirement

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-33

Original ruling text

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