A. For purposes of this article, Virginia taxable income for a taxable yearmeans the federal taxable income and any other income taxable to thecorporation under federal law for such year of a corporation adjusted asprovided in subsections B, C, D, and E.
For a regulated investment company and a real estate investment trust, suchterm means the "investment company taxable income" and "real estateinvestment trust taxable income," respectively, to which shall be added ineach case any amount of capital gains and any other income taxable to thecorporation under federal law which shall be further adjusted as provided insubsections B, C, D, and E.
B. There shall be added to the extent excluded from federal taxable income:
1. Interest, less related expenses to the extent not deducted in determiningfederal taxable income, on obligations of any state other than Virginia, orof a political subdivision of any such other state unless created by compactor agreement to which the Commonwealth is a party;
2. Interest or dividends, less related expenses to the extent not deducted indetermining federal taxable income, on obligations or securities of anyauthority, commission or instrumentality of the United States, which the lawsof the United States exempt from federal income tax but not from state incometaxes;
3. [Repealed.]
4. The amount of any net income taxes and other taxes, including franchiseand excise taxes, which are based on, measured by, or computed with referenceto net income, imposed by the Commonwealth or any other taxing jurisdiction,to the extent deducted in determining federal taxable income;
5. Unrelated business taxable income as defined by § 512 of the InternalRevenue Code;
6. The amount of employee stock ownership credit carry-over deducted by thecorporation in computing federal taxable income under § 404(i) of theInternal Revenue Code;
7. The amount required to be included in income for the purpose of computingthe partial tax on an accumulation distribution pursuant to § 667 of theInternal Revenue Code;
8. a. For taxable years beginning on and after January 1, 2004, the amount ofany intangible expenses and costs directly or indirectly paid, accrued, orincurred to, or in connection directly or indirectly with one or more director indirect transactions with one or more related members to the extent suchexpenses and costs were deductible or deducted in computing federal taxableincome for Virginia purposes. This addition shall not be required for anyportion of the intangible expenses and costs if one of the following applies:
(1) The corresponding item of income received by the related member issubject to a tax based on or measured by net income or capital imposed byVirginia, another state, or a foreign government that has entered into acomprehensive tax treaty with the United States government;
(2) The related member derives at least one-third of its gross revenues fromthe licensing of intangible property to parties who are not related members,and the transaction giving rise to the expenses and costs between thecorporation and the related member was made at rates and terms comparable tothe rates and terms of agreements that the related member has entered intowith parties who are not related members for the licensing of intangibleproperty; or
(3) The corporation can establish to the satisfaction of the Tax Commissionerthat the intangible expenses and costs meet both of the following: (i) therelated member during the same taxable year directly or indirectly paid,accrued or incurred such portion to a person who is not a related member, and(ii) the transaction giving rise to the intangible expenses and costs betweenthe corporation and the related member did not have as a principal purposethe avoidance of any portion of the tax due under this chapter.
b. A corporation required to add to its federal taxable income intangibleexpenses and costs pursuant to subdivision a may petition the TaxCommissioner, after filing the related income tax return for the taxable yearand remitting to the Tax Commissioner all taxes, penalties, and interest dueunder this article for such taxable year including tax upon any amount ofintangible expenses and costs required to be added to federal taxable incomepursuant to subdivision a, to consider evidence relating to the transactionor transactions between the corporation and a related member or members thatresulted in the corporation's taxable income being increased, as requiredunder subdivision a, for such intangible expenses and costs.
If the corporation can demonstrate to the Tax Commissioner's solesatisfaction, by clear and convincing evidence, that the transaction ortransactions between the corporation and a related member or membersresulting in such increase in taxable income pursuant to subdivision a had avalid business purpose other than the avoidance or reduction of the tax dueunder this chapter, the Tax Commissioner shall permit the corporation to filean amended return. For purposes of such amended return, the requirements ofsubdivision a shall not apply to any transaction for which the TaxCommissioner is satisfied (and has identified) that the transaction had avalid business purpose other than the avoidance or reduction of the tax dueunder this chapter. Such amended return shall be filed by the corporationwithin one year of the written permission granted by the Tax Commissioner andany refund of the tax imposed under this article shall include interest at arate equal to the rate of interest established under § 58.1-15 and suchinterest shall accrue as provided under § 58.1-1833. However, upon the filingof such amended return, any related member of the corporation that subtractedfrom taxable income amounts received pursuant to subdivision C 21 shall besubject to the tax imposed under this article on that portion of such amountsfor which the corporation has filed an amended return pursuant to thissubdivision. In addition, for such transactions identified by the TaxCommissioner herein by which he has been satisfied by clear and convincingevidence, the Tax Commissioner may permit the corporation in filing incometax returns for subsequent taxable years to deduct the related intangibleexpenses and costs without making the adjustment under subdivision a.
The Tax Commissioner may charge a fee for all direct and indirect costsrelating to the review of any petition pursuant to this subdivision, toinclude costs necessary to secure outside experts in evaluating the petition.The Tax Commissioner may condition the review of any petition pursuant tothis subdivision upon payment of such fee.
No suit for the purpose of contesting any action of the Tax Commissionerunder this subdivision shall be maintained in any court of this Commonwealth.
c. Nothing in subdivision B 8 shall be construed to limit or negate theDepartment's authority under § 58.1-446;
9. a. For taxable years beginning on and after January 1, 2004, the amount ofany interest expenses and costs directly or indirectly paid, accrued, orincurred to, or in connection directly or indirectly with one or more director indirect transactions with one or more related members to the extent suchexpenses and costs were deductible or deducted in computing federal taxableincome for Virginia purposes. This addition shall not be required for anyportion of the interest expenses and costs, if:
(1) The related member has substantial business operations relating tointerest-generating activities, in which the related member pays expenses forat least five full-time employees who maintain, manage, defend or areotherwise responsible for operations or administration relating to theinterest-generating activities; and
(2) The interest expenses and costs are not directly or indirectly for,related to or in connection with the direct or indirect acquisition,maintenance, management, sale, exchange, or disposition of intangibleproperty; and
(3) The transaction giving rise to the expenses and costs between thecorporation and the related member has a valid business purpose other thanthe avoidance or reduction of taxation and payments between the parties aremade at arm's length rates and terms; and
(4) One of the following applies:
(i) The corresponding item of income received by the related member issubject to a tax based on or measured by net income or capital imposed byVirginia, another state, or a foreign government that has entered into acomprehensive tax treaty with the United States government;
(ii) Payments arise pursuant to a pre-existing contract entered into when theparties were not related members provided the payments continue to be made atarm's length rates and terms;
(iii) The related member engages in transactions with parties other thanrelated members that generate revenue in excess of $2 million annually; or
(iv) The transaction giving rise to the interest payments between thecorporation and a related member was done at arm's length rates and terms andmeets any of the following: (a) the related member uses funds that areborrowed from a party other than a related member or that are paid, incurredor passed-through to a person who is not a related member; (b) the debt ispart of a regular and systematic funds management or portfolio investmentactivity conducted by the related member, whereby the funds of two or morerelated members are aggregated for the purpose of achieving economies ofscale, the internal financing of the active business operations of members,or the benefit of centralized management of funds; (c) financing theexpansion of the business operations; or (d) restructuring the debt ofrelated members, or the pass-through of acquisition-related indebtedness torelated members.
b. A corporation required to add to its federal taxable income interestexpenses and costs pursuant to subdivision a may petition the TaxCommissioner, after filing the related income tax return for the taxable yearand remitting to the Tax Commissioner all taxes, penalties, and interest dueunder this article for such taxable year including tax upon any amount ofinterest expenses and costs required to be added to federal taxable incomepursuant to subdivision a, to consider evidence relating to the transactionor transactions between the corporation and a related member or members thatresulted in the corporation's taxable income being increased, as requiredunder subdivision a, for such interest expenses and costs.
If the corporation can demonstrate to the Tax Commissioner's solesatisfaction, by clear and convincing evidence, that the transaction ortransactions between the corporation and a related member or membersresulting in such increase in taxable income pursuant to subdivision a had avalid business purpose other than the avoidance or reduction of the tax dueunder this chapter and that the related payments between the parties weremade at arm's length rates and terms, the Tax Commissioner shall permit thecorporation to file an amended return. For purposes of such amended return,the requirements of subdivision a shall not apply to any transaction forwhich the Tax Commissioner is satisfied (and has identified) that thetransaction had a valid business purpose other than the avoidance orreduction of the tax due under this chapter and that the related paymentsbetween the parties were made at arm's length rates and terms. Such amendedreturn shall be filed by the corporation within one year of the writtenpermission granted by the Tax Commissioner and any refund of the tax imposedunder this article shall include interest at a rate equal to the rate ofinterest established under § 58.1-15 and such interest shall accrue asprovided under § 58.1-1833. However, upon the filing of such amended return,any related member of the corporation that subtracted from taxable incomeamounts received pursuant to subdivision C 21 shall be subject to the taximposed under this article on that portion of such amounts for which thecorporation has filed an amended return pursuant to this subdivision. Inaddition, for such transactions identified by the Tax Commissioner herein bywhich he has been satisfied by clear and convincing evidence, the TaxCommissioner may permit the corporation in filing income tax returns forsubsequent taxable years to deduct the related interest expenses and costswithout making the adjustment under subdivision a.
The Tax Commissioner may charge a fee for all direct and indirect costsrelating to the review of any petition pursuant to this subdivision, toinclude costs necessary to secure outside experts in evaluating the petition.The Tax Commissioner may condition the review of any petition pursuant tothis subdivision upon payment of such fee.
No suit for the purpose of contesting any action of the Tax Commissionerunder this subdivision shall be maintained in any court of this Commonwealth.
c. Nothing in subdivision B 9 shall be construed to limit or negate theDepartment's authority under § 58.1-446.
d. For purposes of subdivision B 9:
"Arm's-length rates and terms" means that (i) two or more related membersenter into a written agreement for the transaction, (ii) such agreement is ofa duration and contains payment terms substantially similar to those that therelated member would be able to obtain from an unrelated entity, (iii) theinterest is at or below the applicable federal rate compounded annually fordebt instruments under § 1274(d) of the Internal Revenue Code that was ineffect at the time of the agreement, and (iv) the borrower or payor adheresto the payment terms of the agreement governing the transaction or anyamendments thereto.
"Valid business purpose" means one or more business purposes that alone orin combination constitute the motivation for some business activity ortransaction, which activity or transaction improves, apart from tax effects,the economic position of the taxpayer, as further defined by regulation.
10. a. (See Editor's note) For taxable years beginning on and after January1, 2009, the amount of dividends deductible under §§ 561 and 857 of theInternal Revenue Code by a Captive Real Estate Investment Trust (REIT). Forpurposes of this subdivision, a REIT is a Captive REIT if:
(1) It is not regularly traded on an established securities market;
(2) More than 50 percent of the voting power or value of beneficial interestsor shares of which, at any time during the last half of the taxable year, isowned or controlled, directly or indirectly, by a single entity that is (i) acorporation or an association taxable as a corporation under the InternalRevenue Code; and (ii) not exempt from federal income tax pursuant to §501(a) of the Internal Revenue Code; and
(3) More than 25% of its income consists of rents from real property asdefined in § 856(d) of the Internal Revenue Code.
b. For purposes of applying the ownership test of subdivision 10 a (2), thefollowing entities shall not be considered a corporation or an associationtaxable as a corporation:
(1) Any REIT that is not treated as a Captive REIT;
(2) Any REIT subsidiary under § 856 of the Internal Revenue Code other than aqualified REIT subsidiary of a Captive REIT;
(3) Any Listed Australian Property Trust, or an entity organized as a trust,provided that a Listed Australian Property Trust owns or controls, directlyor indirectly, 75 percent or more of the voting or value of the beneficialinterests or shares of such trust; and
(4) Any Qualified Foreign Entity.
c. For purposes of subdivision B 10, the constructive ownership rulesprescribed under § 318(a) of the Internal Revenue Code, as modified by §856(d) (5) of the Internal Revenue Code, shall apply in determining theownership of stock, assets, or net profits of any person.
d. For purposes of subdivision B 10:
"Listed Australian Property Trust" means an Australian unit trustregistered as a Management Investment Scheme, pursuant to the AustralianCorporations Act, in which the principal class of units is listed on arecognized stock exchange in Australia and is regularly traded on anestablished securities market.
"Qualified Foreign Entity" means a corporation, trust, association orpartnership organized outside the laws of the United States and thatsatisfies all of the following criteria:
(1) At least 75 percent of the entity's total asset value at the close of itstaxable year is represented by real estate assets, as defined in § 856(c) (5)(B) of the Internal Revenue Code, thereby including shares or certificates ofbeneficial interest in any REIT, cash and cash equivalents, and U.S.Government securities;
(2) The entity is not subject to a tax on amounts distributed to itsbeneficial owners, or is exempt from entity level tax;
(3) The entity distributes, on an annual basis, at least 85 percent of itstaxable income, as computed in the jurisdiction in which it is organized, tothe holders of its shares or certificates of beneficial interest;
(4) The shares or certificates of beneficial interest of such entity areregularly traded on an established securities market or, if not so traded,not more than 10 percent of the voting power or value in such entity is helddirectly, indirectly, or constructively by a single entity or individual; and
(5) The entity is organized in a country that has a tax treaty with theUnited States.
C. There shall be subtracted to the extent included in and not otherwisesubtracted from federal taxable income:
1. Income derived from obligations, or on the sale or exchange ofobligations, of the United States and on obligations or securities of anyauthority, commission or instrumentality of the United States to the extentexempt from state income taxes under the laws of the United States including,but not limited to, stocks, bonds, treasury bills, and treasury notes, butnot including interest on refunds of federal taxes, interest on equipmentpurchase contracts, or interest on other normal business transactions.
2. Income derived from obligations, or on the sale or exchange of obligationsof this Commonwealth or of any political subdivision or instrumentality ofthis Commonwealth.
3. Dividends upon stock in any domestic international sales corporation, asdefined by § 992 of the Internal Revenue Code, 50 percent or more of theincome of which was assessable for the preceding year, or the last year inwhich such corporation has income, under the provisions of the income taxlaws of the Commonwealth.
4. The amount of any refund or credit for overpayment of income taxes imposedby this Commonwealth or any other taxing jurisdiction.
5. Any amount included therein by the operation of the provisions of § 78 ofthe Internal Revenue Code (foreign dividend gross-up).
6. The amount of wages or salaries eligible for the federal Targeted JobsCredit which was not deducted for federal purposes on account of theprovisions of § 280C(a) of the Internal Revenue Code.
7. Any amount included therein by the operation of § 951 of the InternalRevenue Code (subpart F income).
8. Any amount included therein which is foreign source income as defined in §58.1-302.
9. [Repealed.]
10. The amount of any dividends received from corporations in which thetaxpaying corporation owns 50 percent or more of the voting stock.
11. [Repealed.]
12, 13. [Expired.]
14. For taxable years beginning on or after January 1, 1995, the amount for"qualified research expenses" or "basic research expenses" eligible fordeduction for federal purposes, but which were not deducted, on account ofthe provisions of § 280C(c) of the Internal Revenue Code.
15. For taxable years beginning on or after January 1, 2000, the total amountactually contributed in funds to the Virginia Public School ConstructionGrants Program and Fund established in Chapter 11.1 (§ 22.1-175.1 et seq.) ofTitle 22.1.
16. For taxable years beginning on or after January 1, 2000, the gain derivedfrom the sale or exchange of real property or the sale or exchange of aneasement to real property which results in the real property or the easementthereto being devoted to open-space use, as that term is defined in §58.1-3230, for a period of time not less than 30 years. To the extent asubtraction is taken in accordance with this subdivision, no tax credit underthis chapter for donating land for its preservation shall be allowed forthree years following the year in which the subtraction is taken.
17. For taxable years beginning on and after January 1, 2001, any amountincluded therein with respect to § 58.1-440.1.
18. For taxable years beginning on and after January 1, 1999, income receivedas a result of (i) the "Master Settlement Agreement," as defined in §3.2-3100; (ii) the National Tobacco Grower Settlement Trust dated July 19,1999; and (iii) the Tobacco Loss Assistance Program, pursuant to 7 C.F.R.Part 1464 (Subpart C, §§ 1464.201 through 1464.205), by (a) tobacco farmingbusinesses; (b) any business holding a tobacco marketing quota, or tobaccofarm acreage allotment, under the Agricultural Adjustment Act of 1938; or (c)any business having the right to grow tobacco pursuant to such a quotaallotment.
19. Effective for all taxable years beginning on and after January 1, 2002,but before January 1, 2005, the indemnification payments received by contractpoultry growers and table egg producers from the U.S. Department ofAgriculture as a result of the depopulation of poultry flocks because of lowpathogenic avian influenza in 2002. In no event shall indemnificationpayments made to owners of poultry who contract with poultry growers qualifyfor this subtraction.
20. For taxable years beginning on and after January 1, 2002, any gainrecognized as a result of the Peanut Quota Buyout Program of the FarmSecurity and Rural Investment Act of 2002 pursuant to 7 C.F.R. Part 1412(Subpart H, §§ 1412.801 through 1412.811) as follows:
a. If the payment is received in installment payments pursuant to 7 C.F.R. §1412.807(a) (2), then the entire gain recognized may be subtracted.
b. If the payment is received in a single payment pursuant to 7 C.F.R. §1412.807(a) (3), then 20 percent of the recognized gain may be subtracted.The taxpayer may then deduct an equal amount in each of the four succeedingtaxable years.
21. For taxable years beginning on and after January 1, 2004, any amount ofintangible expenses and costs or interest expenses and costs added to thefederal taxable income of a corporation pursuant to subdivision B 8 or B 9shall be subtracted from the federal taxable income of the related memberthat received such amount if such related member is subject to Virginiaincome tax on the same amount.
22. For taxable years beginning on and after January 1, 2009, any gainrecognized from the sale of launch services to space flight participants, asdefined in 49 U.S.C. § 70102, or launch services intended to provideindividuals the training or experience of a launch, without performing anactual launch. To qualify for a deduction under this subdivision, launchservices must be performed in Virginia or originate from an airport orspaceport in Virginia.
23. For taxable years beginning on and after January 1, 2009, any gainrecognized as a result of resupply services contracts for delivering payload,as defined in 49 U.S.C. § 70102, entered into with the Commercial OrbitalTransportation Services division of the National Aeronautics and SpaceAdministration or other space flight entity, as defined in § 8.01-227.8, andlaunched from an airport or spaceport in Virginia.
24. (See Editor's note) For taxable years beginning on or after January 1,2011, any income taxed as a long-term capital gain for federal income taxpurposes, or any income taxed as investment services partnership interestincome (otherwise known as investment partnership carried interest income)for federal income tax purposes. To qualify for a subtraction under thissubdivision, such income must be attributable to an investment in a"qualified business," as defined in § 58.1-339.4, or in any othertechnology business approved by the Secretary of Technology, provided thebusiness has its principal office or facility in the Commonwealth and lessthan $3 million in annual revenues in the fiscal year prior to theinvestment. To qualify for a subtraction under this subdivision, theinvestment must be made between the dates of April 1, 2010, and June 30,2013. No taxpayer who has claimed a tax credit for an investment in a"qualified business" under § 58.1-339.4 shall be eligible for thesubtraction under this subdivision for an investment in the same business.
D. For taxable years beginning on and after January 1, 2006, there shall besubtracted from federal taxable income contract payments to a producer ofquota tobacco or a tobacco quota holder as provided under the American JobsCreation Act of 2004 (P.L. 108-357) as follows:
1. If the payment is received in installment payments, then the recognizedgain, including any gain recognized in taxable year 2005, may be subtractedin the taxable year immediately following the year in which the installmentpayment is received.
2. If the payment is received in a single payment, then 10% of the recognizedgain may be subtracted in the taxable year immediately following the year inwhich the single payment is received. The taxpayer may then deduct an equalamount in each of the nine succeeding taxable years.
E. Adjustments to federal taxable income shall be made to reflect thetransitional modifications provided in § 58.1-315.
F. Notwithstanding any other provision of law, the income from anydisposition of real property which is held by the taxpayer for sale tocustomers in the ordinary course of the taxpayer's trade or business, asdefined in § 453(l) (1) (B) of the Internal Revenue Code, of property made onor after January 1, 2009, may, at the election of the taxpayer, be recognizedunder the installment method described under § 453 of the Internal RevenueCode, provided that (i) the election relating to the dealer disposition ofthe property has been made on or before the due date prescribed by law(including extensions) for filing the taxpayer's return of the tax imposedunder this chapter for the taxable year in which the disposition occurs, and(ii) the dealer disposition is in accordance with restrictions or conditionsestablished by the Department, which shall be set forth in guidelinesdeveloped by the Department. Along with such restrictions or conditions, theguidelines shall also address the recapture of such income under certaincircumstances. The development of the guidelines shall be exempt from theAdministrative Process Act (§ 2.2-4000 et seq.).
(Code 1950, §§ 58-151.013, 58-151.032; 1971, Ex. Sess., c. 171; 1972, cc.310, 827; 1973, cc. 198, 345, 458; 1974, cc. 320, 682; 1975, cc. 46, 50;1976, cc. 528, 694, 781; 1977, cc. 297, 612; 1978, cc. 67, 158, 783, 785;1979, cc. 226, 371, 596; 1981, cc. 402, 414; 1982, c. 633; 1983, cc. 452,472; 1984, cc. 153, 162, 636, 672, 674, 675, 729; 1985, cc. 221, 465; 1987,c. 484; 1989, cc. 39, 639; 1992, c. 678; 1994, c. 590; 1997, c. 106; 1998, c.874; 1999, cc. 339, 971; 2000, cc. 419, 1021, 1039; 2003, cc. 3, 58, 209;2004, Sp. Sess. I, c. 3; 2006, c. 214; 2008, cc. 149, 211; 2009, cc. 426,508, 558; 2010, cc. 802, 830.)
A. For purposes of this article, Virginia taxable income for a taxable yearmeans the federal taxable income and any other income taxable to thecorporation under federal law for such year of a corporation adjusted asprovided in subsections B, C, D, and E.
For a regulated investment company and a real estate investment trust, suchterm means the "investment company taxable income" and "real estateinvestment trust taxable income," respectively, to which shall be added ineach case any amount of capital gains and any other income taxable to thecorporation under federal law which shall be further adjusted as provided insubsections B, C, D, and E.
B. There shall be added to the extent excluded from federal taxable income:
1. Interest, less related expenses to the extent not deducted in determiningfederal taxable income, on obligations of any state other than Virginia, orof a political subdivision of any such other state unless created by compactor agreement to which the Commonwealth is a party;
2. Interest or dividends, less related expenses to the extent not deducted indetermining federal taxable income, on obligations or securities of anyauthority, commission or instrumentality of the United States, which the lawsof the United States exempt from federal income tax but not from state incometaxes;
3. [Repealed.]
4. The amount of any net income taxes and other taxes, including franchiseand excise taxes, which are based on, measured by, or computed with referenceto net income, imposed by the Commonwealth or any other taxing jurisdiction,to the extent deducted in determining federal taxable income;
5. Unrelated business taxable income as defined by § 512 of the InternalRevenue Code;
6. The amount of employee stock ownership credit carry-over deducted by thecorporation in computing federal taxable income under § 404(i) of theInternal Revenue Code;
7. The amount required to be included in income for the purpose of computingthe partial tax on an accumulation distribution pursuant to § 667 of theInternal Revenue Code;
8. a. For taxable years beginning on and after January 1, 2004, the amount ofany intangible expenses and costs directly or indirectly paid, accrued, orincurred to, or in connection directly or indirectly with one or more director indirect transactions with one or more related members to the extent suchexpenses and costs were deductible or deducted in computing federal taxableincome for Virginia purposes. This addition shall not be required for anyportion of the intangible expenses and costs if one of the following applies:
(1) The corresponding item of income received by the related member issubject to a tax based on or measured by net income or capital imposed byVirginia, another state, or a foreign government that has entered into acomprehensive tax treaty with the United States government;
(2) The related member derives at least one-third of its gross revenues fromthe licensing of intangible property to parties who are not related members,and the transaction giving rise to the expenses and costs between thecorporation and the related member was made at rates and terms comparable tothe rates and terms of agreements that the related member has entered intowith parties who are not related members for the licensing of intangibleproperty; or
(3) The corporation can establish to the satisfaction of the Tax Commissionerthat the intangible expenses and costs meet both of the following: (i) therelated member during the same taxable year directly or indirectly paid,accrued or incurred such portion to a person who is not a related member, and(ii) the transaction giving rise to the intangible expenses and costs betweenthe corporation and the related member did not have as a principal purposethe avoidance of any portion of the tax due under this chapter.
b. A corporation required to add to its federal taxable income intangibleexpenses and costs pursuant to subdivision a may petition the TaxCommissioner, after filing the related income tax return for the taxable yearand remitting to the Tax Commissioner all taxes, penalties, and interest dueunder this article for such taxable year including tax upon any amount ofintangible expenses and costs required to be added to federal taxable incomepursuant to subdivision a, to consider evidence relating to the transactionor transactions between the corporation and a related member or members thatresulted in the corporation's taxable income being increased, as requiredunder subdivision a, for such intangible expenses and costs.
If the corporation can demonstrate to the Tax Commissioner's solesatisfaction, by clear and convincing evidence, that the transaction ortransactions between the corporation and a related member or membersresulting in such increase in taxable income pursuant to subdivision a had avalid business purpose other than the avoidance or reduction of the tax dueunder this chapter, the Tax Commissioner shall permit the corporation to filean amended return. For purposes of such amended return, the requirements ofsubdivision a shall not apply to any transaction for which the TaxCommissioner is satisfied (and has identified) that the transaction had avalid business purpose other than the avoidance or reduction of the tax dueunder this chapter. Such amended return shall be filed by the corporationwithin one year of the written permission granted by the Tax Commissioner andany refund of the tax imposed under this article shall include interest at arate equal to the rate of interest established under § 58.1-15 and suchinterest shall accrue as provided under § 58.1-1833. However, upon the filingof such amended return, any related member of the corporation that subtractedfrom taxable income amounts received pursuant to subdivision C 21 shall besubject to the tax imposed under this article on that portion of such amountsfor which the corporation has filed an amended return pursuant to thissubdivision. In addition, for such transactions identified by the TaxCommissioner herein by which he has been satisfied by clear and convincingevidence, the Tax Commissioner may permit the corporation in filing incometax returns for subsequent taxable years to deduct the related intangibleexpenses and costs without making the adjustment under subdivision a.
The Tax Commissioner may charge a fee for all direct and indirect costsrelating to the review of any petition pursuant to this subdivision, toinclude costs necessary to secure outside experts in evaluating the petition.The Tax Commissioner may condition the review of any petition pursuant tothis subdivision upon payment of such fee.
No suit for the purpose of contesting any action of the Tax Commissionerunder this subdivision shall be maintained in any court of this Commonwealth.
c. Nothing in subdivision B 8 shall be construed to limit or negate theDepartment's authority under § 58.1-446;
9. a. For taxable years beginning on and after January 1, 2004, the amount ofany interest expenses and costs directly or indirectly paid, accrued, orincurred to, or in connection directly or indirectly with one or more director indirect transactions with one or more related members to the extent suchexpenses and costs were deductible or deducted in computing federal taxableincome for Virginia purposes. This addition shall not be required for anyportion of the interest expenses and costs, if:
(1) The related member has substantial business operations relating tointerest-generating activities, in which the related member pays expenses forat least five full-time employees who maintain, manage, defend or areotherwise responsible for operations or administration relating to theinterest-generating activities; and
(2) The interest expenses and costs are not directly or indirectly for,related to or in connection with the direct or indirect acquisition,maintenance, management, sale, exchange, or disposition of intangibleproperty; and
(3) The transaction giving rise to the expenses and costs between thecorporation and the related member has a valid business purpose other thanthe avoidance or reduction of taxation and payments between the parties aremade at arm's length rates and terms; and
(4) One of the following applies:
(i) The corresponding item of income received by the related member issubject to a tax based on or measured by net income or capital imposed byVirginia, another state, or a foreign government that has entered into acomprehensive tax treaty with the United States government;
(ii) Payments arise pursuant to a pre-existing contract entered into when theparties were not related members provided the payments continue to be made atarm's length rates and terms;
(iii) The related member engages in transactions with parties other thanrelated members that generate revenue in excess of $2 million annually; or
(iv) The transaction giving rise to the interest payments between thecorporation and a related member was done at arm's length rates and terms andmeets any of the following: (a) the related member uses funds that areborrowed from a party other than a related member or that are paid, incurredor passed-through to a person who is not a related member; (b) the debt ispart of a regular and systematic funds management or portfolio investmentactivity conducted by the related member, whereby the funds of two or morerelated members are aggregated for the purpose of achieving economies ofscale, the internal financing of the active business operations of members,or the benefit of centralized management of funds; (c) financing theexpansion of the business operations; or (d) restructuring the debt ofrelated members, or the pass-through of acquisition-related indebtedness torelated members.
b. A corporation required to add to its federal taxable income interestexpenses and costs pursuant to subdivision a may petition the TaxCommissioner, after filing the related income tax return for the taxable yearand remitting to the Tax Commissioner all taxes, penalties, and interest dueunder this article for such taxable year including tax upon any amount ofinterest expenses and costs required to be added to federal taxable incomepursuant to subdivision a, to consider evidence relating to the transactionor transactions between the corporation and a related member or members thatresulted in the corporation's taxable income being increased, as requiredunder subdivision a, for such interest expenses and costs.
If the corporation can demonstrate to the Tax Commissioner's solesatisfaction, by clear and convincing evidence, that the transaction ortransactions between the corporation and a related member or membersresulting in such increase in taxable income pursuant to subdivision a had avalid business purpose other than the avoidance or reduction of the tax dueunder this chapter and that the related payments between the parties weremade at arm's length rates and terms, the Tax Commissioner shall permit thecorporation to file an amended return. For purposes of such amended return,the requirements of subdivision a shall not apply to any transaction forwhich the Tax Commissioner is satisfied (and has identified) that thetransaction had a valid business purpose other than the avoidance orreduction of the tax due under this chapter and that the related paymentsbetween the parties were made at arm's length rates and terms. Such amendedreturn shall be filed by the corporation within one year of the writtenpermission granted by the Tax Commissioner and any refund of the tax imposedunder this article shall include interest at a rate equal to the rate ofinterest established under § 58.1-15 and such interest shall accrue asprovided under § 58.1-1833. However, upon the filing of such amended return,any related member of the corporation that subtracted from taxable incomeamounts received pursuant to subdivision C 21 shall be subject to the taximposed under this article on that portion of such amounts for which thecorporation has filed an amended return pursuant to this subdivision. Inaddition, for such transactions identified by the Tax Commissioner herein bywhich he has been satisfied by clear and convincing evidence, the TaxCommissioner may permit the corporation in filing income tax returns forsubsequent taxable years to deduct the related interest expenses and costswithout making the adjustment under subdivision a.
The Tax Commissioner may charge a fee for all direct and indirect costsrelating to the review of any petition pursuant to this subdivision, toinclude costs necessary to secure outside experts in evaluating the petition.The Tax Commissioner may condition the review of any petition pursuant tothis subdivision upon payment of such fee.
No suit for the purpose of contesting any action of the Tax Commissionerunder this subdivision shall be maintained in any court of this Commonwealth.
c. Nothing in subdivision B 9 shall be construed to limit or negate theDepartment's authority under § 58.1-446.
d. For purposes of subdivision B 9:
"Arm's-length rates and terms" means that (i) two or more related membersenter into a written agreement for the transaction, (ii) such agreement is ofa duration and contains payment terms substantially similar to those that therelated member would be able to obtain from an unrelated entity, (iii) theinterest is at or below the applicable federal rate compounded annually fordebt instruments under § 1274(d) of the Internal Revenue Code that was ineffect at the time of the agreement, and (iv) the borrower or payor adheresto the payment terms of the agreement governing the transaction or anyamendments thereto.
"Valid business purpose" means one or more business purposes that alone orin combination constitute the motivation for some business activity ortransaction, which activity or transaction improves, apart from tax effects,the economic position of the taxpayer, as further defined by regulation.
10. a. (See Editor's note) For taxable years beginning on and after January1, 2009, the amount of dividends deductible under §§ 561 and 857 of theInternal Revenue Code by a Captive Real Estate Investment Trust (REIT). Forpurposes of this subdivision, a REIT is a Captive REIT if:
(1) It is not regularly traded on an established securities market;
(2) More than 50 percent of the voting power or value of beneficial interestsor shares of which, at any time during the last half of the taxable year, isowned or controlled, directly or indirectly, by a single entity that is (i) acorporation or an association taxable as a corporation under the InternalRevenue Code; and (ii) not exempt from federal income tax pursuant to §501(a) of the Internal Revenue Code; and
(3) More than 25% of its income consists of rents from real property asdefined in § 856(d) of the Internal Revenue Code.
b. For purposes of applying the ownership test of subdivision 10 a (2), thefollowing entities shall not be considered a corporation or an associationtaxable as a corporation:
(1) Any REIT that is not treated as a Captive REIT;
(2) Any REIT subsidiary under § 856 of the Internal Revenue Code other than aqualified REIT subsidiary of a Captive REIT;
(3) Any Listed Australian Property Trust, or an entity organized as a trust,provided that a Listed Australian Property Trust owns or controls, directlyor indirectly, 75 percent or more of the voting or value of the beneficialinterests or shares of such trust; and
(4) Any Qualified Foreign Entity.
c. For purposes of subdivision B 10, the constructive ownership rulesprescribed under § 318(a) of the Internal Revenue Code, as modified by §856(d) (5) of the Internal Revenue Code, shall apply in determining theownership of stock, assets, or net profits of any person.
d. For purposes of subdivision B 10:
"Listed Australian Property Trust" means an Australian unit trustregistered as a Management Investment Scheme, pursuant to the AustralianCorporations Act, in which the principal class of units is listed on arecognized stock exchange in Australia and is regularly traded on anestablished securities market.
"Qualified Foreign Entity" means a corporation, trust, association orpartnership organized outside the laws of the United States and thatsatisfies all of the following criteria:
(1) At least 75 percent of the entity's total asset value at the close of itstaxable year is represented by real estate assets, as defined in § 856(c) (5)(B) of the Internal Revenue Code, thereby including shares or certificates ofbeneficial interest in any REIT, cash and cash equivalents, and U.S.Government securities;
(2) The entity is not subject to a tax on amounts distributed to itsbeneficial owners, or is exempt from entity level tax;
(3) The entity distributes, on an annual basis, at least 85 percent of itstaxable income, as computed in the jurisdiction in which it is organized, tothe holders of its shares or certificates of beneficial interest;
(4) The shares or certificates of beneficial interest of such entity areregularly traded on an established securities market or, if not so traded,not more than 10 percent of the voting power or value in such entity is helddirectly, indirectly, or constructively by a single entity or individual; and
(5) The entity is organized in a country that has a tax treaty with theUnited States.
C. There shall be subtracted to the extent included in and not otherwisesubtracted from federal taxable income:
1. Income derived from obligations, or on the sale or exchange ofobligations, of the United States and on obligations or securities of anyauthority, commission or instrumentality of the United States to the extentexempt from state income taxes under the laws of the United States including,but not limited to, stocks, bonds, treasury bills, and treasury notes, butnot including interest on refunds of federal taxes, interest on equipmentpurchase contracts, or interest on other normal business transactions.
2. Income derived from obligations, or on the sale or exchange of obligationsof this Commonwealth or of any political subdivision or instrumentality ofthis Commonwealth.
3. Dividends upon stock in any domestic international sales corporation, asdefined by § 992 of the Internal Revenue Code, 50 percent or more of theincome of which was assessable for the preceding year, or the last year inwhich such corporation has income, under the provisions of the income taxlaws of the Commonwealth.
4. The amount of any refund or credit for overpayment of income taxes imposedby this Commonwealth or any other taxing jurisdiction.
5. Any amount included therein by the operation of the provisions of § 78 ofthe Internal Revenue Code (foreign dividend gross-up).
6. The amount of wages or salaries eligible for the federal Targeted JobsCredit which was not deducted for federal purposes on account of theprovisions of § 280C(a) of the Internal Revenue Code.
7. Any amount included therein by the operation of § 951 of the InternalRevenue Code (subpart F income).
8. Any amount included therein which is foreign source income as defined in §58.1-302.
9. [Repealed.]
10. The amount of any dividends received from corporations in which thetaxpaying corporation owns 50 percent or more of the voting stock.
11. [Repealed.]
12, 13. [Expired.]
14. For taxable years beginning on or after January 1, 1995, the amount for"qualified research expenses" or "basic research expenses" eligible fordeduction for federal purposes, but which were not deducted, on account ofthe provisions of § 280C(c) of the Internal Revenue Code.
15. For taxable years beginning on or after January 1, 2000, the total amountactually contributed in funds to the Virginia Public School ConstructionGrants Program and Fund established in Chapter 11.1 (§ 22.1-175.1 et seq.) ofTitle 22.1.
16. For taxable years beginning on or after January 1, 2000, the gain derivedfrom the sale or exchange of real property or the sale or exchange of aneasement to real property which results in the real property or the easementthereto being devoted to open-space use, as that term is defined in §58.1-3230, for a period of time not less than 30 years. To the extent asubtraction is taken in accordance with this subdivision, no tax credit underthis chapter for donating land for its preservation shall be allowed forthree years following the year in which the subtraction is taken.
17. For taxable years beginning on and after January 1, 2001, any amountincluded therein with respect to § 58.1-440.1.
18. For taxable years beginning on and after January 1, 1999, income receivedas a result of (i) the "Master Settlement Agreement," as defined in §3.2-3100; (ii) the National Tobacco Grower Settlement Trust dated July 19,1999; and (iii) the Tobacco Loss Assistance Program, pursuant to 7 C.F.R.Part 1464 (Subpart C, §§ 1464.201 through 1464.205), by (a) tobacco farmingbusinesses; (b) any business holding a tobacco marketing quota, or tobaccofarm acreage allotment, under the Agricultural Adjustment Act of 1938; or (c)any business having the right to grow tobacco pursuant to such a quotaallotment.
19. Effective for all taxable years beginning on and after January 1, 2002,but before January 1, 2005, the indemnification payments received by contractpoultry growers and table egg producers from the U.S. Department ofAgriculture as a result of the depopulation of poultry flocks because of lowpathogenic avian influenza in 2002. In no event shall indemnificationpayments made to owners of poultry who contract with poultry growers qualifyfor this subtraction.
20. For taxable years beginning on and after January 1, 2002, any gainrecognized as a result of the Peanut Quota Buyout Program of the FarmSecurity and Rural Investment Act of 2002 pursuant to 7 C.F.R. Part 1412(Subpart H, §§ 1412.801 through 1412.811) as follows:
a. If the payment is received in installment payments pursuant to 7 C.F.R. §1412.807(a) (2), then the entire gain recognized may be subtracted.
b. If the payment is received in a single payment pursuant to 7 C.F.R. §1412.807(a) (3), then 20 percent of the recognized gain may be subtracted.The taxpayer may then deduct an equal amount in each of the four succeedingtaxable years.
21. For taxable years beginning on and after January 1, 2004, any amount ofintangible expenses and costs or interest expenses and costs added to thefederal taxable income of a corporation pursuant to subdivision B 8 or B 9shall be subtracted from the federal taxable income of the related memberthat received such amount if such related member is subject to Virginiaincome tax on the same amount.
22. For taxable years beginning on and after January 1, 2009, any gainrecognized from the sale of launch services to space flight participants, asdefined in 49 U.S.C. § 70102, or launch services intended to provideindividuals the training or experience of a launch, without performing anactual launch. To qualify for a deduction under this subdivision, launchservices must be performed in Virginia or originate from an airport orspaceport in Virginia.
23. For taxable years beginning on and after January 1, 2009, any gainrecognized as a result of resupply services contracts for delivering payload,as defined in 49 U.S.C. § 70102, entered into with the Commercial OrbitalTransportation Services division of the National Aeronautics and SpaceAdministration or other space flight entity, as defined in § 8.01-227.8, andlaunched from an airport or spaceport in Virginia.
24. (See Editor's note) For taxable years beginning on or after January 1,2011, any income taxed as a long-term capital gain for federal income taxpurposes, or any income taxed as investment services partnership interestincome (otherwise known as investment partnership carried interest income)for federal income tax purposes. To qualify for a subtraction under thissubdivision, such income must be attributable to an investment in a"qualified business," as defined in § 58.1-339.4, or in any othertechnology business approved by the Secretary of Technology, provided thebusiness has its principal office or facility in the Commonwealth and lessthan $3 million in annual revenues in the fiscal year prior to theinvestment. To qualify for a subtraction under this subdivision, theinvestment must be made between the dates of April 1, 2010, and June 30,2013. No taxpayer who has claimed a tax credit for an investment in a"qualified business" under § 58.1-339.4 shall be eligible for thesubtraction under this subdivision for an investment in the same business.
D. For taxable years beginning on and after January 1, 2006, there shall besubtracted from federal taxable income contract payments to a producer ofquota tobacco or a tobacco quota holder as provided under the American JobsCreation Act of 2004 (P.L. 108-357) as follows:
1. If the payment is received in installment payments, then the recognizedgain, including any gain recognized in taxable year 2005, may be subtractedin the taxable year immediately following the year in which the installmentpayment is received.
2. If the payment is received in a single payment, then 10% of the recognizedgain may be subtracted in the taxable year immediately following the year inwhich the single payment is received. The taxpayer may then deduct an equalamount in each of the nine succeeding taxable years.
E. Adjustments to federal taxable income shall be made to reflect thetransitional modifications provided in § 58.1-315.
F. Notwithstanding any other provision of law, the income from anydisposition of real property which is held by the taxpayer for sale tocustomers in the ordinary course of the taxpayer's trade or business, asdefined in § 453(l) (1) (B) of the Internal Revenue Code, of property made onor after January 1, 2009, may, at the election of the taxpayer, be recognizedunder the installment method described under § 453 of the Internal RevenueCode, provided that (i) the election relating to the dealer disposition ofthe property has been made on or before the due date prescribed by law(including extensions) for filing the taxpayer's return of the tax imposedunder this chapter for the taxable year in which the disposition occurs, and(ii) the dealer disposition is in accordance with restrictions or conditionsestablished by the Department, which shall be set forth in guidelinesdeveloped by the Department. Along with such restrictions or conditions, theguidelines shall also address the recapture of such income under certaincircumstances. The development of the guidelines shall be exempt from theAdministrative Process Act (§ 2.2-4000 et seq.).
(Code 1950, §§ 58-151.013, 58-151.032; 1971, Ex. Sess., c. 171; 1972, cc.310, 827; 1973, cc. 198, 345, 458; 1974, cc. 320, 682; 1975, cc. 46, 50;1976, cc. 528, 694, 781; 1977, cc. 297, 612; 1978, cc. 67, 158, 783, 785;1979, cc. 226, 371, 596; 1981, cc. 402, 414; 1982, c. 633; 1983, cc. 452,472; 1984, cc. 153, 162, 636, 672, 674, 675, 729; 1985, cc. 221, 465; 1987,c. 484; 1989, cc. 39, 639; 1992, c. 678; 1994, c. 590; 1997, c. 106; 1998, c.874; 1999, cc. 339, 971; 2000, cc. 419, 1021, 1039; 2003, cc. 3, 58, 209;2004, Sp. Sess. I, c. 3; 2006, c. 214; 2008, cc. 149, 211; 2009, cc. 426,508, 558; 2010, cc. 802, 830.)
A. For purposes of this article, Virginia taxable income for a taxable yearmeans the federal taxable income and any other income taxable to thecorporation under federal law for such year of a corporation adjusted asprovided in subsections B, C, D, and E.
For a regulated investment company and a real estate investment trust, suchterm means the "investment company taxable income" and "real estateinvestment trust taxable income," respectively, to which shall be added ineach case any amount of capital gains and any other income taxable to thecorporation under federal law which shall be further adjusted as provided insubsections B, C, D, and E.
B. There shall be added to the extent excluded from federal taxable income:
1. Interest, less related expenses to the extent not deducted in determiningfederal taxable income, on obligations of any state other than Virginia, orof a political subdivision of any such other state unless created by compactor agreement to which the Commonwealth is a party;
2. Interest or dividends, less related expenses to the extent not deducted indetermining federal taxable income, on obligations or securities of anyauthority, commission or instrumentality of the United States, which the lawsof the United States exempt from federal income tax but not from state incometaxes;
3. [Repealed.]
4. The amount of any net income taxes and other taxes, including franchiseand excise taxes, which are based on, measured by, or computed with referenceto net income, imposed by the Commonwealth or any other taxing jurisdiction,to the extent deducted in determining federal taxable income;
5. Unrelated business taxable income as defined by § 512 of the InternalRevenue Code;
6. The amount of employee stock ownership credit carry-over deducted by thecorporation in computing federal taxable income under § 404(i) of theInternal Revenue Code;
7. The amount required to be included in income for the purpose of computingthe partial tax on an accumulation distribution pursuant to § 667 of theInternal Revenue Code;
8. a. For taxable years beginning on and after January 1, 2004, the amount ofany intangible expenses and costs directly or indirectly paid, accrued, orincurred to, or in connection directly or indirectly with one or more director indirect transactions with one or more related members to the extent suchexpenses and costs were deductible or deducted in computing federal taxableincome for Virginia purposes. This addition shall not be required for anyportion of the intangible expenses and costs if one of the following applies:
(1) The corresponding item of income received by the related member issubject to a tax based on or measured by net income or capital imposed byVirginia, another state, or a foreign government that has entered into acomprehensive tax treaty with the United States government;
(2) The related member derives at least one-third of its gross revenues fromthe licensing of intangible property to parties who are not related members,and the transaction giving rise to the expenses and costs between thecorporation and the related member was made at rates and terms comparable tothe rates and terms of agreements that the related member has entered intowith parties who are not related members for the licensing of intangibleproperty; or
(3) The corporation can establish to the satisfaction of the Tax Commissionerthat the intangible expenses and costs meet both of the following: (i) therelated member during the same taxable year directly or indirectly paid,accrued or incurred such portion to a person who is not a related member, and(ii) the transaction giving rise to the intangible expenses and costs betweenthe corporation and the related member did not have as a principal purposethe avoidance of any portion of the tax due under this chapter.
b. A corporation required to add to its federal taxable income intangibleexpenses and costs pursuant to subdivision a may petition the TaxCommissioner, after filing the related income tax return for the taxable yearand remitting to the Tax Commissioner all taxes, penalties, and interest dueunder this article for such taxable year including tax upon any amount ofintangible expenses and costs required to be added to federal taxable incomepursuant to subdivision a, to consider evidence relating to the transactionor transactions between the corporation and a related member or members thatresulted in the corporation's taxable income being increased, as requiredunder subdivision a, for such intangible expenses and costs.
If the corporation can demonstrate to the Tax Commissioner's solesatisfaction, by clear and convincing evidence, that the transaction ortransactions between the corporation and a related member or membersresulting in such increase in taxable income pursuant to subdivision a had avalid business purpose other than the avoidance or reduction of the tax dueunder this chapter, the Tax Commissioner shall permit the corporation to filean amended return. For purposes of such amended return, the requirements ofsubdivision a shall not apply to any transaction for which the TaxCommissioner is satisfied (and has identified) that the transaction had avalid business purpose other than the avoidance or reduction of the tax dueunder this chapter. Such amended return shall be filed by the corporationwithin one year of the written permission granted by the Tax Commissioner andany refund of the tax imposed under this article shall include interest at arate equal to the rate of interest established under § 58.1-15 and suchinterest shall accrue as provided under § 58.1-1833. However, upon the filingof such amended return, any related member of the corporation that subtractedfrom taxable income amounts received pursuant to subdivision C 21 shall besubject to the tax imposed under this article on that portion of such amountsfor which the corporation has filed an amended return pursuant to thissubdivision. In addition, for such transactions identified by the TaxCommissioner herein by which he has been satisfied by clear and convincingevidence, the Tax Commissioner may permit the corporation in filing incometax returns for subsequent taxable years to deduct the related intangibleexpenses and costs without making the adjustment under subdivision a.
The Tax Commissioner may charge a fee for all direct and indirect costsrelating to the review of any petition pursuant to this subdivision, toinclude costs necessary to secure outside experts in evaluating the petition.The Tax Commissioner may condition the review of any petition pursuant tothis subdivision upon payment of such fee.
No suit for the purpose of contesting any action of the Tax Commissionerunder this subdivision shall be maintained in any court of this Commonwealth.
c. Nothing in subdivision B 8 shall be construed to limit or negate theDepartment's authority under § 58.1-446;
9. a. For taxable years beginning on and after January 1, 2004, the amount ofany interest expenses and costs directly or indirectly paid, accrued, orincurred to, or in connection directly or indirectly with one or more director indirect transactions with one or more related members to the extent suchexpenses and costs were deductible or deducted in computing federal taxableincome for Virginia purposes. This addition shall not be required for anyportion of the interest expenses and costs, if:
(1) The related member has substantial business operations relating tointerest-generating activities, in which the related member pays expenses forat least five full-time employees who maintain, manage, defend or areotherwise responsible for operations or administration relating to theinterest-generating activities; and
(2) The interest expenses and costs are not directly or indirectly for,related to or in connection with the direct or indirect acquisition,maintenance, management, sale, exchange, or disposition of intangibleproperty; and
(3) The transaction giving rise to the expenses and costs between thecorporation and the related member has a valid business purpose other thanthe avoidance or reduction of taxation and payments between the parties aremade at arm's length rates and terms; and
(4) One of the following applies:
(i) The corresponding item of income received by the related member issubject to a tax based on or measured by net income or capital imposed byVirginia, another state, or a foreign government that has entered into acomprehensive tax treaty with the United States government;
(ii) Payments arise pursuant to a pre-existing contract entered into when theparties were not related members provided the payments continue to be made atarm's length rates and terms;
(iii) The related member engages in transactions with parties other thanrelated members that generate revenue in excess of $2 million annually; or
(iv) The transaction giving rise to the interest payments between thecorporation and a related member was done at arm's length rates and terms andmeets any of the following: (a) the related member uses funds that areborrowed from a party other than a related member or that are paid, incurredor passed-through to a person who is not a related member; (b) the debt ispart of a regular and systematic funds management or portfolio investmentactivity conducted by the related member, whereby the funds of two or morerelated members are aggregated for the purpose of achieving economies ofscale, the internal financing of the active business operations of members,or the benefit of centralized management of funds; (c) financing theexpansion of the business operations; or (d) restructuring the debt ofrelated members, or the pass-through of acquisition-related indebtedness torelated members.
b. A corporation required to add to its federal taxable income interestexpenses and costs pursuant to subdivision a may petition the TaxCommissioner, after filing the related income tax return for the taxable yearand remitting to the Tax Commissioner all taxes, penalties, and interest dueunder this article for such taxable year including tax upon any amount ofinterest expenses and costs required to be added to federal taxable incomepursuant to subdivision a, to consider evidence relating to the transactionor transactions between the corporation and a related member or members thatresulted in the corporation's taxable income being increased, as requiredunder subdivision a, for such interest expenses and costs.
If the corporation can demonstrate to the Tax Commissioner's solesatisfaction, by clear and convincing evidence, that the transaction ortransactions between the corporation and a related member or membersresulting in such increase in taxable income pursuant to subdivision a had avalid business purpose other than the avoidance or reduction of the tax dueunder this chapter and that the related payments between the parties weremade at arm's length rates and terms, the Tax Commissioner shall permit thecorporation to file an amended return. For purposes of such amended return,the requirements of subdivision a shall not apply to any transaction forwhich the Tax Commissioner is satisfied (and has identified) that thetransaction had a valid business purpose other than the avoidance orreduction of the tax due under this chapter and that the related paymentsbetween the parties were made at arm's length rates and terms. Such amendedreturn shall be filed by the corporation within one year of the writtenpermission granted by the Tax Commissioner and any refund of the tax imposedunder this article shall include interest at a rate equal to the rate ofinterest established under § 58.1-15 and such interest shall accrue asprovided under § 58.1-1833. However, upon the filing of such amended return,any related member of the corporation that subtracted from taxable incomeamounts received pursuant to subdivision C 21 shall be subject to the taximposed under this article on that portion of such amounts for which thecorporation has filed an amended return pursuant to this subdivision. Inaddition, for such transactions identified by the Tax Commissioner herein bywhich he has been satisfied by clear and convincing evidence, the TaxCommissioner may permit the corporation in filing income tax returns forsubsequent taxable years to deduct the related interest expenses and costswithout making the adjustment under subdivision a.
The Tax Commissioner may charge a fee for all direct and indirect costsrelating to the review of any petition pursuant to this subdivision, toinclude costs necessary to secure outside experts in evaluating the petition.The Tax Commissioner may condition the review of any petition pursuant tothis subdivision upon payment of such fee.
No suit for the purpose of contesting any action of the Tax Commissionerunder this subdivision shall be maintained in any court of this Commonwealth.
c. Nothing in subdivision B 9 shall be construed to limit or negate theDepartment's authority under § 58.1-446.
d. For purposes of subdivision B 9:
"Arm's-length rates and terms" means that (i) two or more related membersenter into a written agreement for the transaction, (ii) such agreement is ofa duration and contains payment terms substantially similar to those that therelated member would be able to obtain from an unrelated entity, (iii) theinterest is at or below the applicable federal rate compounded annually fordebt instruments under § 1274(d) of the Internal Revenue Code that was ineffect at the time of the agreement, and (iv) the borrower or payor adheresto the payment terms of the agreement governing the transaction or anyamendments thereto.
"Valid business purpose" means one or more business purposes that alone orin combination constitute the motivation for some business activity ortransaction, which activity or transaction improves, apart from tax effects,the economic position of the taxpayer, as further defined by regulation.
10. a. (See Editor's note) For taxable years beginning on and after January1, 2009, the amount of dividends deductible under §§ 561 and 857 of theInternal Revenue Code by a Captive Real Estate Investment Trust (REIT). Forpurposes of this subdivision, a REIT is a Captive REIT if:
(1) It is not regularly traded on an established securities market;
(2) More than 50 percent of the voting power or value of beneficial interestsor shares of which, at any time during the last half of the taxable year, isowned or controlled, directly or indirectly, by a single entity that is (i) acorporation or an association taxable as a corporation under the InternalRevenue Code; and (ii) not exempt from federal income tax pursuant to §501(a) of the Internal Revenue Code; and
(3) More than 25% of its income consists of rents from real property asdefined in § 856(d) of the Internal Revenue Code.
b. For purposes of applying the ownership test of subdivision 10 a (2), thefollowing entities shall not be considered a corporation or an associationtaxable as a corporation:
(1) Any REIT that is not treated as a Captive REIT;
(2) Any REIT subsidiary under § 856 of the Internal Revenue Code other than aqualified REIT subsidiary of a Captive REIT;
(3) Any Listed Australian Property Trust, or an entity organized as a trust,provided that a Listed Australian Property Trust owns or controls, directlyor indirectly, 75 percent or more of the voting or value of the beneficialinterests or shares of such trust; and
(4) Any Qualified Foreign Entity.
c. For purposes of subdivision B 10, the constructive ownership rulesprescribed under § 318(a) of the Internal Revenue Code, as modified by §856(d) (5) of the Internal Revenue Code, shall apply in determining theownership of stock, assets, or net profits of any person.
d. For purposes of subdivision B 10:
"Listed Australian Property Trust" means an Australian unit trustregistered as a Management Investment Scheme, pursuant to the AustralianCorporations Act, in which the principal class of units is listed on arecognized stock exchange in Australia and is regularly traded on anestablished securities market.
"Qualified Foreign Entity" means a corporation, trust, association orpartnership organized outside the laws of the United States and thatsatisfies all of the following criteria:
(1) At least 75 percent of the entity's total asset value at the close of itstaxable year is represented by real estate assets, as defined in § 856(c) (5)(B) of the Internal Revenue Code, thereby including shares or certificates ofbeneficial interest in any REIT, cash and cash equivalents, and U.S.Government securities;
(2) The entity is not subject to a tax on amounts distributed to itsbeneficial owners, or is exempt from entity level tax;
(3) The entity distributes, on an annual basis, at least 85 percent of itstaxable income, as computed in the jurisdiction in which it is organized, tothe holders of its shares or certificates of beneficial interest;
(4) The shares or certificates of beneficial interest of such entity areregularly traded on an established securities market or, if not so traded,not more than 10 percent of the voting power or value in such entity is helddirectly, indirectly, or constructively by a single entity or individual; and
(5) The entity is organized in a country that has a tax treaty with theUnited States.
C. There shall be subtracted to the extent included in and not otherwisesubtracted from federal taxable income:
1. Income derived from obligations, or on the sale or exchange ofobligations, of the United States and on obligations or securities of anyauthority, commission or instrumentality of the United States to the extentexempt from state income taxes under the laws of the United States including,but not limited to, stocks, bonds, treasury bills, and treasury notes, butnot including interest on refunds of federal taxes, interest on equipmentpurchase contracts, or interest on other normal business transactions.
2. Income derived from obligations, or on the sale or exchange of obligationsof this Commonwealth or of any political subdivision or instrumentality ofthis Commonwealth.
3. Dividends upon stock in any domestic international sales corporation, asdefined by § 992 of the Internal Revenue Code, 50 percent or more of theincome of which was assessable for the preceding year, or the last year inwhich such corporation has income, under the provisions of the income taxlaws of the Commonwealth.
4. The amount of any refund or credit for overpayment of income taxes imposedby this Commonwealth or any other taxing jurisdiction.
5. Any amount included therein by the operation of the provisions of § 78 ofthe Internal Revenue Code (foreign dividend gross-up).
6. The amount of wages or salaries eligible for the federal Targeted JobsCredit which was not deducted for federal purposes on account of theprovisions of § 280C(a) of the Internal Revenue Code.
7. Any amount included therein by the operation of § 951 of the InternalRevenue Code (subpart F income).
8. Any amount included therein which is foreign source income as defined in §58.1-302.
9. [Repealed.]
10. The amount of any dividends received from corporations in which thetaxpaying corporation owns 50 percent or more of the voting stock.
11. [Repealed.]
12, 13. [Expired.]
14. For taxable years beginning on or after January 1, 1995, the amount for"qualified research expenses" or "basic research expenses" eligible fordeduction for federal purposes, but which were not deducted, on account ofthe provisions of § 280C(c) of the Internal Revenue Code.
15. For taxable years beginning on or after January 1, 2000, the total amountactually contributed in funds to the Virginia Public School ConstructionGrants Program and Fund established in Chapter 11.1 (§ 22.1-175.1 et seq.) ofTitle 22.1.
16. For taxable years beginning on or after January 1, 2000, the gain derivedfrom the sale or exchange of real property or the sale or exchange of aneasement to real property which results in the real property or the easementthereto being devoted to open-space use, as that term is defined in §58.1-3230, for a period of time not less than 30 years. To the extent asubtraction is taken in accordance with this subdivision, no tax credit underthis chapter for donating land for its preservation shall be allowed forthree years following the year in which the subtraction is taken.
17. For taxable years beginning on and after January 1, 2001, any amountincluded therein with respect to § 58.1-440.1.
18. For taxable years beginning on and after January 1, 1999, income receivedas a result of (i) the "Master Settlement Agreement," as defined in §3.2-3100; (ii) the National Tobacco Grower Settlement Trust dated July 19,1999; and (iii) the Tobacco Loss Assistance Program, pursuant to 7 C.F.R.Part 1464 (Subpart C, §§ 1464.201 through 1464.205), by (a) tobacco farmingbusinesses; (b) any business holding a tobacco marketing quota, or tobaccofarm acreage allotment, under the Agricultural Adjustment Act of 1938; or (c)any business having the right to grow tobacco pursuant to such a quotaallotment.
19. Effective for all taxable years beginning on and after January 1, 2002,but before January 1, 2005, the indemnification payments received by contractpoultry growers and table egg producers from the U.S. Department ofAgriculture as a result of the depopulation of poultry flocks because of lowpathogenic avian influenza in 2002. In no event shall indemnificationpayments made to owners of poultry who contract with poultry growers qualifyfor this subtraction.
20. For taxable years beginning on and after January 1, 2002, any gainrecognized as a result of the Peanut Quota Buyout Program of the FarmSecurity and Rural Investment Act of 2002 pursuant to 7 C.F.R. Part 1412(Subpart H, §§ 1412.801 through 1412.811) as follows:
a. If the payment is received in installment payments pursuant to 7 C.F.R. §1412.807(a) (2), then the entire gain recognized may be subtracted.
b. If the payment is received in a single payment pursuant to 7 C.F.R. §1412.807(a) (3), then 20 percent of the recognized gain may be subtracted.The taxpayer may then deduct an equal amount in each of the four succeedingtaxable years.
21. For taxable years beginning on and after January 1, 2004, any amount ofintangible expenses and costs or interest expenses and costs added to thefederal taxable income of a corporation pursuant to subdivision B 8 or B 9shall be subtracted from the federal taxable income of the related memberthat received such amount if such related member is subject to Virginiaincome tax on the same amount.
22. For taxable years beginning on and after January 1, 2009, any gainrecognized from the sale of launch services to space flight participants, asdefined in 49 U.S.C. § 70102, or launch services intended to provideindividuals the training or experience of a launch, without performing anactual launch. To qualify for a deduction under this subdivision, launchservices must be performed in Virginia or originate from an airport orspaceport in Virginia.
23. For taxable years beginning on and after January 1, 2009, any gainrecognized as a result of resupply services contracts for delivering payload,as defined in 49 U.S.C. § 70102, entered into with the Commercial OrbitalTransportation Services division of the National Aeronautics and SpaceAdministration or other space flight entity, as defined in § 8.01-227.8, andlaunched from an airport or spaceport in Virginia.
24. (See Editor's note) For taxable years beginning on or after January 1,2011, any income taxed as a long-term capital gain for federal income taxpurposes, or any income taxed as investment services partnership interestincome (otherwise known as investment partnership carried interest income)for federal income tax purposes. To qualify for a subtraction under thissubdivision, such income must be attributable to an investment in a"qualified business," as defined in § 58.1-339.4, or in any othertechnology business approved by the Secretary of Technology, provided thebusiness has its principal office or facility in the Commonwealth and lessthan $3 million in annual revenues in the fiscal year prior to theinvestment. To qualify for a subtraction under this subdivision, theinvestment must be made between the dates of April 1, 2010, and June 30,2013. No taxpayer who has claimed a tax credit for an investment in a"qualified business" under § 58.1-339.4 shall be eligible for thesubtraction under this subdivision for an investment in the same business.
D. For taxable years beginning on and after January 1, 2006, there shall besubtracted from federal taxable income contract payments to a producer ofquota tobacco or a tobacco quota holder as provided under the American JobsCreation Act of 2004 (P.L. 108-357) as follows:
1. If the payment is received in installment payments, then the recognizedgain, including any gain recognized in taxable year 2005, may be subtractedin the taxable year immediately following the year in which the installmentpayment is received.
2. If the payment is received in a single payment, then 10% of the recognizedgain may be subtracted in the taxable year immediately following the year inwhich the single payment is received. The taxpayer may then deduct an equalamount in each of the nine succeeding taxable years.
E. Adjustments to federal taxable income shall be made to reflect thetransitional modifications provided in § 58.1-315.
F. Notwithstanding any other provision of law, the income from anydisposition of real property which is held by the taxpayer for sale tocustomers in the ordinary course of the taxpayer's trade or business, asdefined in § 453(l) (1) (B) of the Internal Revenue Code, of property made onor after January 1, 2009, may, at the election of the taxpayer, be recognizedunder the installment method described under § 453 of the Internal RevenueCode, provided that (i) the election relating to the dealer disposition ofthe property has been made on or before the due date prescribed by law(including extensions) for filing the taxpayer's return of the tax imposedunder this chapter for the taxable year in which the disposition occurs, and(ii) the dealer disposition is in accordance with restrictions or conditionsestablished by the Department, which shall be set forth in guidelinesdeveloped by the Department. Along with such restrictions or conditions, theguidelines shall also address the recapture of such income under certaincircumstances. The development of the guidelines shall be exempt from theAdministrative Process Act (§ 2.2-4000 et seq.).
(Code 1950, §§ 58-151.013, 58-151.032; 1971, Ex. Sess., c. 171; 1972, cc.310, 827; 1973, cc. 198, 345, 458; 1974, cc. 320, 682; 1975, cc. 46, 50;1976, cc. 528, 694, 781; 1977, cc. 297, 612; 1978, cc. 67, 158, 783, 785;1979, cc. 226, 371, 596; 1981, cc. 402, 414; 1982, c. 633; 1983, cc. 452,472; 1984, cc. 153, 162, 636, 672, 674, 675, 729; 1985, cc. 221, 465; 1987,c. 484; 1989, cc. 39, 639; 1992, c. 678; 1994, c. 590; 1997, c. 106; 1998, c.874; 1999, cc. 339, 971; 2000, cc. 419, 1021, 1039; 2003, cc. 3, 58, 209;2004, Sp. Sess. I, c. 3; 2006, c. 214; 2008, cc. 149, 211; 2009, cc. 426,508, 558; 2010, cc. 802, 830.)
