Tax Type
Individual Income Tax
Description
Nonresident partners
Topic
Taxpayers
Date Issued
09-09-1985
September 9, 1985
Re: Virginia Code Section 58.1-1821 Application (Section 58-1118 prior to January 1, 1985) Individual Income Tax
Dear ****
This is in reply to your letter of October 21, 1982, in which you applied for correction of the individual income tax assessed against your client, ***** and to the hearing held on January 4, 1983 on this same matter. I would like to apologize for the delay in bringing this matter to a close.
FACTS
***** "Taxpayer"), a resident of South Carolina, was a beneficiary of an undivided interest in some income-producing real property of the ****** ("Estate") located in Virginia. The Estate was operated as a partnership from 1947 until 1971 when the beneficiaries formed the ****** ("Trust") to simplify administration and accounting and to obtain other advantages. Under the Trust agreement, the beneficiaries conveyed their interests in the Estate to the ******** as trustee in exchange for rights in the earnings, avails, and proceeds from Estate in proportion to their interests transferred.
The arrangement had been classified for federal tax purposes as a partnership prior to the Trust agreement. Estate requested from the Internal Revenue Service, on behalf of the beneficiaries, a ruling as to the classification of Trust for federal tax purposes. The IRS ruled by letter of December 3, 1970, that Trust would be treated as a partnership.
The IRS Partnership Form 1065 was filed by Trust for 1979, stating that the "principal business activity" was "rentals," that the "principal product or service" was "real estate" and the "date business started" was "1947". Trust also filed a 1979 Virginia partnership return of income (Form 501), with copies of all the partners' federal Schedules K-l attached. Taxpayer's schedule indicated that he had a share of the ordinary partnership income for 1979. However, the taxpayer did not file a 1979 Virginia individual income return.
The taxpayer was informed of this omission by a letter from the department dated August 27, 1981, with instructions enclosed for preparing the Virginia nonresident return (Form 763). After further correspondence between the department, Taxpayer and yourself, an estimated assessment was issued under the authority granted by Virginia Code Section 58-4O (Section 58.1-111 on and after January 1, 1985).
You protest this assessment contending that the income Taxpayer receives as a beneficiary of Trust is not taxable to him as Virginia source income under Virginia Code Section 58-151.02(g) (Section 58.1-302 on and after January 1, 1985) because: (1) Virginia Code Section 55-17.1 provides that a beneficiary's interest in a land trust is deemed to be personal property, (2) by nature, this interest is intangible personal property, and (3) the property interest is not employed by Taxpayer, but rather by Trust's trustee, in a business in Virginia.
DETERMINATION
Virginia Code Section 55-17.1 provides that:
The purpose of this section must be viewed as a whole, since it is for only a "case under this section" that the interest of the land trust beneficiary is deemed personal property. The fact that the beneficiaries' interests in a land trust are deemed to be personal property for purposes of Section 55-17.1, does not necessarily mean that their interests are deemed personal property for all matters.
Therefore, for taxation purposes, where a land trust is considered a partnership by the Internal Revenue Service and the trust files federal partnership income tax returns, then the beneficiaries are partners, and their interest in the partnership for tax purposes are derived from the partnership's interest, since the partner is taxed on his share of the partnership proceeds.
Virginia Code Section 58-151.014(b) (Section 58.1-391.B on and after January 1, 1985) provides that:
Under this section, the character of the property to the partner is the same as its character to the partnership. In the case of Trust, the character of the income to the partnership is rentals from the business of real estate in Virginia. Therefore, the character of this income to the partner, in this case, Taxpayer is likewise rentals from the business of real estate in Virginia.
Since Taxpayer's income in this case is considered to be from an interest in real property in Virginia, that income is "from Virginia sources" as defined by Virginia Code Section 58-151.O2(g), (Section 58.1-302 on and after January 1, 1985) i.e., "[i]tems of income ... attributable to ... ownership of any interest in real ... property in this state ...." Virginia Code Section 58-151.03 (Section 58.1-325 on and after January 1, 1985) imposes the tax on the Virginia taxable income individuals, estates, trusts, partners, and corporations, and specifically provides at paragraph (b) (Section 58.1-390 on and after January 1, 1985) that partners are liable in their "separate or individual capacities."
Thus, Taxpayer r S income from Trust during 1979 was rental income from Virginia real property and is properly taxable by Virginia. The assessment has been made by the department according to the best information in its possession, the federal partnership form K-l filed with the 1979 Virginia partnership return. This estimated assessment is authorized by Virginia Code Section 58-4O (Section 58.1-111 on and after January 1, 1985) upon failure of a taxpayer "to file 2 correct and proper return." The tax has been legally imposed, and since the taxpayer has failed to file a return upon demand, the estimated assessment is presumptively correct.
This determination is consistent with the ruling previously issued by the department on July 12, 1973 (copy enclosed).
If taxpayer provides the department with a properly completed Virginia Nonresident individual income tax return for taxable year 1979, the department will adjust the assessment, if necessary.
Sincerely,
W. H. Forst
Tax Commissioner
Re: Virginia Code Section 58.1-1821 Application (Section 58-1118 prior to January 1, 1985) Individual Income Tax
Dear ****
This is in reply to your letter of October 21, 1982, in which you applied for correction of the individual income tax assessed against your client, ***** and to the hearing held on January 4, 1983 on this same matter. I would like to apologize for the delay in bringing this matter to a close.
FACTS
***** "Taxpayer"), a resident of South Carolina, was a beneficiary of an undivided interest in some income-producing real property of the ****** ("Estate") located in Virginia. The Estate was operated as a partnership from 1947 until 1971 when the beneficiaries formed the ****** ("Trust") to simplify administration and accounting and to obtain other advantages. Under the Trust agreement, the beneficiaries conveyed their interests in the Estate to the ******** as trustee in exchange for rights in the earnings, avails, and proceeds from Estate in proportion to their interests transferred.
The arrangement had been classified for federal tax purposes as a partnership prior to the Trust agreement. Estate requested from the Internal Revenue Service, on behalf of the beneficiaries, a ruling as to the classification of Trust for federal tax purposes. The IRS ruled by letter of December 3, 1970, that Trust would be treated as a partnership.
The IRS Partnership Form 1065 was filed by Trust for 1979, stating that the "principal business activity" was "rentals," that the "principal product or service" was "real estate" and the "date business started" was "1947". Trust also filed a 1979 Virginia partnership return of income (Form 501), with copies of all the partners' federal Schedules K-l attached. Taxpayer's schedule indicated that he had a share of the ordinary partnership income for 1979. However, the taxpayer did not file a 1979 Virginia individual income return.
The taxpayer was informed of this omission by a letter from the department dated August 27, 1981, with instructions enclosed for preparing the Virginia nonresident return (Form 763). After further correspondence between the department, Taxpayer and yourself, an estimated assessment was issued under the authority granted by Virginia Code Section 58-4O (Section 58.1-111 on and after January 1, 1985).
You protest this assessment contending that the income Taxpayer receives as a beneficiary of Trust is not taxable to him as Virginia source income under Virginia Code Section 58-151.02(g) (Section 58.1-302 on and after January 1, 1985) because: (1) Virginia Code Section 55-17.1 provides that a beneficiary's interest in a land trust is deemed to be personal property, (2) by nature, this interest is intangible personal property, and (3) the property interest is not employed by Taxpayer, but rather by Trust's trustee, in a business in Virginia.
DETERMINATION
Virginia Code Section 55-17.1 provides that:
-
- In any case under this section, where there is a recorded deed of conveyance to a trustee, the interest of the beneficiaries thereunder shall be deemed to be personal property. [Emphasis added.]
The purpose of this section must be viewed as a whole, since it is for only a "case under this section" that the interest of the land trust beneficiary is deemed personal property. The fact that the beneficiaries' interests in a land trust are deemed to be personal property for purposes of Section 55-17.1, does not necessarily mean that their interests are deemed personal property for all matters.
Therefore, for taxation purposes, where a land trust is considered a partnership by the Internal Revenue Service and the trust files federal partnership income tax returns, then the beneficiaries are partners, and their interest in the partnership for tax purposes are derived from the partnership's interest, since the partner is taxed on his share of the partnership proceeds.
Virginia Code Section 58-151.014(b) (Section 58.1-391.B on and after January 1, 1985) provides that:
-
- Each item of partnership income gain, loss or deduction shall have the same character for a partner under this chapter as for federal income tax purposes. Where an item is not characterized for federal income tax purposes, it shall have the same character for a partner as if realized directly from the source from which realized by the partnership or incurred in the same manner by the partnership.
Under this section, the character of the property to the partner is the same as its character to the partnership. In the case of Trust, the character of the income to the partnership is rentals from the business of real estate in Virginia. Therefore, the character of this income to the partner, in this case, Taxpayer is likewise rentals from the business of real estate in Virginia.
Since Taxpayer's income in this case is considered to be from an interest in real property in Virginia, that income is "from Virginia sources" as defined by Virginia Code Section 58-151.O2(g), (Section 58.1-302 on and after January 1, 1985) i.e., "[i]tems of income ... attributable to ... ownership of any interest in real ... property in this state ...." Virginia Code Section 58-151.03 (Section 58.1-325 on and after January 1, 1985) imposes the tax on the Virginia taxable income individuals, estates, trusts, partners, and corporations, and specifically provides at paragraph (b) (Section 58.1-390 on and after January 1, 1985) that partners are liable in their "separate or individual capacities."
Thus, Taxpayer r S income from Trust during 1979 was rental income from Virginia real property and is properly taxable by Virginia. The assessment has been made by the department according to the best information in its possession, the federal partnership form K-l filed with the 1979 Virginia partnership return. This estimated assessment is authorized by Virginia Code Section 58-4O (Section 58.1-111 on and after January 1, 1985) upon failure of a taxpayer "to file 2 correct and proper return." The tax has been legally imposed, and since the taxpayer has failed to file a return upon demand, the estimated assessment is presumptively correct.
This determination is consistent with the ruling previously issued by the department on July 12, 1973 (copy enclosed).
If taxpayer provides the department with a properly completed Virginia Nonresident individual income tax return for taxable year 1979, the department will adjust the assessment, if necessary.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner