Tax Type
Individual Income Tax
Description
Payments made to the Taxpayers are "guaranteed payments."
Topic
Assessment
Date Issued
03-16-2005
March 16, 2005
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 assessments issued to numerous nonresident partners (collectively, the "Taxpayers") of ***** (the "Company") for the taxable year ended December 31, 2001.
FACTS
The Company is a multistate entity that is located in Virginia, with members that are residents and nonresidents of Virginia. Nonresident members perform work on behalf of the Company from home offices within their state of residence. The Company reported the payments made to the Taxpayers as "guaranteed payments."
Under audit, the Department determined that the payments to the Taxpayers were distributions by the Company that constituted Virginia source income. The Taxpayers contest the assessments, asserting that the payments from the Company are "guaranteed payments," as described in Internal Revenue Code ("IRC") § 707(c), and are not Virginia source income.
DETERMINATION
Virginia Code § 58.1-301 provides that terminology and references used in Title 58.1 of the Virginia Code will have the same meanings as provided in the IRC unless a different meaning is clearly required. Virginia "conforms" to federal law because it starts the computation of Virginia taxable income with federal adjusted gross income ("FAGI").
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Virginia Code § 58.1-325 A states:
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- The Virginia taxable income of a nonresident individual, partner or beneficiary shall be an amount bearing the same proportion to his Virginia taxable income, computed as though he were a resident, as the net amount of his income, gain, loss and deductions from Virginia sources bears to the net amount of his income, gain, loss and deductions from all sources.
Under Treasury Reg. § 1.707-1 c, payments made by a partnership to partners for services or the use of capital are not treated as paid to a person who is not a partner if such payments are determined without regard to the income of the partnership. Such payments are treated as ordinary income by the individual receiving the payment. Therefore, guaranteed payments are treated as ordinary income for Virginia income tax purposes. The same is true for members of the Company when the Company is treated as a partnership for tax purposes.
In this case, the payments made to the Taxpayers were for services without regard to the income of the Company. The payments are properly characterized as "guaranteed payments," and were reported as such on each Taxpayer's Form K-1. Under Treasury Reg. § 1.707-1 c, the guaranteed payments are ordinary income to the Taxpayers and are attributed to the place where the services are performed. The Taxpayers performed all of their income generating services in their state of residence. Accordingly, the guaranteed payments made to the Taxpayers are not considered to be Virginia source income.
Based on this determination, the assessments issued to the Taxpayers for the taxable year ended December 31, 2003, will be abated. The Code of Virginia and regulation sections cited are available on-line in the Tax Policy Library section of the Department's web site, located at www.policylibrary.tax.virginia.gov. If you have any questions regarding this determination, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
Kenneth W. Thorson
Tax Commissioner
- Sincerely,
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Rulings of the Tax Commissioner