June 27, 2018
Re: Request for Ruling: Fiduciary Income Tax
Dear *****:
This will respond to your letter in which you ask whether a trust (the “Trust”) is a Virginia resident trust that is subject to Virginia fiduciary income tax. I apologize for the delay in responding to your request.
FACTS
The Trust was established in 1992 under the laws of the ***** (Country A) by a resident of Country A. The Trust owns a bank account in ***** (State A), all of the stock of a corporation (Corporation A) that operates in ***** (Country B), a loan to Corporation A, and a minority interest in a company (Corporation B) that operates in ***** (Country C).
The Trust is managed by a sole trustee located in Virginia. The Trust has several protectors, none of which is Untied States citizens. No beneficiaries are United States citizens or residents.
The Trust receives interest income from its State A bank account, dividend income from Corporation A and Corporation B, and interest income from the loan to Corporation A. The Trust is not required to file a federal fiduciary income tax return.
Corporation A owns brokerage accounts that include marketable securities, consisting of stocks and bonds of American companies, and United States bonds. It also owns a minority interest in Corporation B. The brokerage accounts are managed by the European offices of investment firms that have offices in Virginia.
The trustee requests a ruling concerning whether the Trust is a Virginia resident trust that is required to file a Virginia fiduciary income tax return. If the Trust is required to file a Virginia fiduciary income tax return, the Trustee also asks whether the dividend and interest income from Corporation A and Corporation B, as well as the interest income from the State A bank account, is subject to fiduciary income tax.
RULING
Resident Trusts
Virginia Code § 58.1-381 provides that all resident trusts which are required to file a federal income tax return or that have any Virginia taxable income must file an income tax return in Virginia. A “resident trust” is defined in Virginia Code § 58.1-302 and includes:
- An estate of a decedent who was domiciled in Virginia at the time of their death;
- A trust created by will of a decedent who was domiciled in Virginia at the time of their death;
- A trust created by or consisting of property of a person domiciled in Virginia; or
- A trust or estate that is administered in Virginia.
A trust is considered to be administered in Virginia if its assets are located in Virginia, its fiduciary is a resident of Virginia, or it is under the supervision of a Virginia court. See Title 23 of the Virginia Administrative Code (VAC) 10-115-10. Because the Trust is being administered by an entity located in Virginia, it is a resident trust.
Fiduciary Income Tax
Virginia Code § 58.1-360 imposes an income tax on the Virginia taxable income of all estate and trusts at the rates for individuals prescribed in Virginia Code § 58.1-320. Virginia Code § 58.1-361 A states, in pertinent part, that the Virginia taxable income of a resident estate or trust means its federal taxable income for the taxable year to which there shall be added or subtracted, as the case may be, the share of the estate or trust in the Virginia fiduciary adjustment.
Virginia Code § 58.1-301 provides that the 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 estates and trusts, Virginia “conforms” to federal law, in that it starts the computation of Virginia taxable income with federal taxable income (FTI). Income properly included in the FTI of a Virginia resident estate or trust is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Virginia Code § 58.1-361.
The Trust receives dividend income from Corporation A and Corporation B. It also earns interest income from a loan to Corporation A. The Trust asserts that this foreign dividend and interest income is not Virginia taxable income because it is excluded from FTI under the IRC. In the context of a ruling, the Department will defer to the appropriate federal authority as to whether a particular item of income should be included in FTI. However, if the income at issue is excluded from FTI, it would not be Virginia taxable income unless it is required to be added back as a Virginia modification.
According to the trustee, the interest earned from the State A bank account may be included in FTI, but would be exempt from federal income tax. Citing Public Document (P.D.) 99-166 (6/22/1999), the trustee argues the Department has already recognized the difference between income exempt from federal income tax and income excluded from federal gross income. P.D. 99-166, however, addressed the issue of compensation earned by a resident of a foreign country employed by or on behalf of a foreign government. Under IRC § 893(a), such compensation would not be included in federal gross income. Further, a close reading of P.D. 99-166 indicates the Department was addressing income it considered to be excluded from the computation of federal adjusted gross income. Pursuant to Virginia Code § 58.1-301, if the interest is included in FTI, it would be included in the Virginia taxable income of the Trust.
Virginia Modifications
Title 23 VAC 10-115-50 A 2, specifies that the modifications allowable to an estate or trust, set forth in Virginia Code § 58.1-322, do not include those in § 58.1-322 D. While this regulation specifically addresses nonresident trusts, resident trusts are also afforded the same modifications.
One modification that may apply to the Trust is the addition for interest under Virginia Code § 58.1-322 B 1. This subsection requires an addition for interest less its related expenses on obligations of any state other than Virginia, or a political subdivision of any other such state. Title 23 VAC 10-110-30 defines “state” for purposes of the credit for tax paid to other states as “any state of the United States and the District of Columbia.” As such, the modification under Virginia Code § 58.1-322 B 1 would be limited to interest earned from states, or their political subdivisions, within the United States, the District of Columbia, and United States territories and possessions. Thus, even if the interest from the State A bank is not included in FTI of the Trust, it may be required to be added to FTI and included in Virginia taxable income.
Out-of-State Tax Credit
Virginia Code § 58.1-371 allows resident trusts and estates a credit on their Virginia return for income taxes paid to another state provided the income is either earned or business income or gain from the sale of a capital asset. Virginia law does not necessarily allow a trust to claim a credit for the total amount of tax paid to another state. Rather, the credit is limited to the lesser of the amount of tax actually paid to the other state or the amount of Virginia income tax actually imposed on the taxpayer on the income earned or derived in the other state. See P.D. 97-301 (7/7/1997). The limitation is computed by multiplying the trust's Virginia tax liability by a fraction, the numerator of which is the income upon which the other state's tax is imposed, and the denominator of which is Virginia taxable income. Further, the credit is available only to the entity that actually paid the tax. See Title 23 VAC 10-115-80. Thus, to the extent the Trust is liable for income tax in State A, if may be eligible for a credit for any Virginia tax to which it may be subject.
This ruling is based on the facts presented as summarized above. Any change in facts or the introduction of new facts may lead to a different result.
The Code of Virginia sections, regulations, and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. If you have any questions regarding this ruling, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/819.B