March 12, 2024
Re: Ruling Request: Pass-Through Entity Tax
Dear. *****:
This will respond to your letter, in which you request a ruling regarding the application of the pass-through entity tax (PTET) provisions of Virginia Code § 58.1-390.1 and § 58.1-390.3 to business trust beneficiaries.
FACTS
The ***** Irrevocable Trust (the “Trust”) is a business trust subject to tax under Virginia Code § 58.1-360. The Trust owns interests in other pass-through entities (PTEs). The Trust may have distributable net income and tax credits from such entities which are passed through to its beneficiaries. The PTEs in which the Trust owns an interest may make an election under Virginia Code § 58.1-390.3 to be taxed at the entity level. The Trust requests a ruling that it may pass credits for such taxes through to its beneficiaries.
RULING
An “eligible owner” of an electing PTE is entitled to a credit for their pro rata share of the tax paid if all other requirements are met. See Virginia Code § 58.1-390.3 E. Virginia Code § 58.1-390.1 defines an “eligible owner” as “a direct owner of a pass-through entity who is a natural person subject to the tax imposed by Article 2 (§ 58.1-320 et seq.) or an estate or trust subject to the tax imposed by Article 6 (§ 58.1-360 et seq.)” [emphasis added]. Thus, the Trust is an “eligible owner” of any PTEs in which it owns a direct interest and, if the other requirements are met, would be entitled to a credit against its tax liability for its share of any tax paid by such entities under Virginia Code § 58.1-390.3. The Trust’s beneficiaries, however, are not eligible owners of such PTEs because they are not “direct owners” of the PTEs. The credit allowed by Virginia Code § 58.1-390.3 E is available only to direct owners and may not be passed through to indirect owners. Accordingly, beneficiaries of the Trust are not entitled to any tax credits attributable to the Trust’s ownership of PTEs that elect to pay PTET at the entity level under Virginia Code § 58.1-390.3.
The Code of Virginia sections cited are available online at www.tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this ruling, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at (804) *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/4528.X