Tax Type
Individual Income Tax
Partnerships
Description
Accounting partnership members
Topic
Computation of Income
Date Issued
01-03-1986
January 3, 1986
Re: Ruling Request - Nonresident Partners/Individual Income Tax
Dear ******************
This will reply to your letter of October 3, 1985, concerning the procedures for filing a nonresident partnership return and a unified nonresident individual income tax return for the nonresident partners of (Partnership).
Facts
Partnership is a non-Virginia partnership with offices in 70 locations in 18 states and with more than 400 partners. Partnership first operated locations in Virginia during its fiscal year that ended January 31, 1985. Partnership's accounting system includes a separate general ledger for each location. The profit or loss of each location is determined from this ledger. Firmwide overhead expenses are allocated among the locations based on the net services of each location compared to the total net services for Partnership.
Proposal
You propose that Partnership compute its Virginia source income in the following manner:
1. Income to be allocated to Virginia based on a separate accounting for the Virginia locations. Such separate accounting will include an allocation of firmwide overhead proportionate to the net services from Virginia locations compared to net services from all locations.
2. Income allocated to Virginia will be reduced by guaranteed payments to active Virginia resident partners and by an allocated amount of guaranteed payments to retired partners. The allocation of guaranteed payments to retired partners will be based on net services provided by Virginia locations divided by total net services provided by all locations.
3. Income allocated to Virginia pursuant to 2. above, will be reduced by 80% of income allocated to active Virginia resident partners in excess of guaranteed payments to such Virginia partners. This reduction is intended to treat the partners in a manner comparable to corporate employees with respect to income from personal services.
4. The remaining income allocable to Virginia will be prorated to all partners in proportion to their share of federal taxable income of the partnership.
5. Income as allocated above will be reported on an annual partnership tax return to be filed by May 15 or such extended due date as is approved by the Virginia Department of Taxation.
Furthermore, you request that the nonresident partners be allowed to elect to file a combined nonresident individual income tax return with Virginia. Such return would be filed under the following terms.
1. Partners wishing to do so can elect out of the combined Virginia nonresident tax return. We expect this to occur if the individual has income or expenses reportable in Virginia, other than from the partnership.
2. The combined return will report as adjusted gross income for each nonresident partner, the amount of Virginia nonresident income (net of a proportionate amount of retirement plan deductions), allocated on the Virginia Partnership tax return filed for the fiscal year ending within the calendar year for which the combined individual nonresident income tax return is filed.
3. Each nonresident included in the combined return will be allowed a pro-rata portion of three exemptions. The pro-rata part of the three exemptions will be determined by multiplying the amount of the three exemptions times the partner's Virginia nonresident income and dividing by federal income allocated to the partner on the federal partnership tax return.
4. Each nonresident participating in the combined return will be allocated a pro-rata part of a standard deduction of $2,000. The allocation will be made by multiplying $2,000 times the income allocated to the partner on the Virginia nonresident partnership return and dividing by the federal taxable income allocated to the partner on the federal partnership return.
5. The applicable Virginia tax rates will be applied to each participating nonresident partner's taxable income as computed under the above assumptions. The partnership will remit the total tax due on the combined return.
6. Combined quarterly estimate payments will be made by the partnership and will be claimed as credits on the annual combined nonresident individual income tax return.
Determination
The Virginia Taxation of Partnerships Regulations provide in §630-4-391 that the income attributable to Virginia sources is to be calculated in accordance with the statutory formula set forth in Virginia Code §§58.1-403 through 58.1-421, making such changes as necessary after considering the differences between corporations and partnerships. This statutory method is to be used unless an alternative method is approved by the department. The method that you propose is not consistent with the statutory method, nor is it acceptable as an alternative method.
In order for the department to accept a unified nonresident income tax return and thus relieve the nonresident partners of the responsibility of having to file separate Virginia nonresident returns, the following conditions must be met:
1. A schedule shall be provided containing the total income of the partnership and the amount attributable to Virginia under either the applicable state apportionment formula, as provided in Virginia Code §§58.1-409 through 58.1-421, or by using an approved alternative method.
2. The unified return shall reflect only the income or loss attributable to Virginia nonresident partners who have no income from Virginia sources other than income attributable to the partnership.
3. All nonresident individual partners without other income from Virginia sources must elect to join in the filing of such a return and a statement to such effect will be included in the return.
4. The return shall include each nonresident partner's name, address, social security number and Virginia taxable income attributable to each nonresident partner.
5. The Virginia income tax shall be computed at 5.75 percent of Partnership's income attributable to the nonresident partners without benefit of itemized deductions, standard deductions, personal exemptions or credit for income taxes paid to states of residence.
6. The return shall contain a statement indicating the responsibility of each nonresident partner for his share of the total tax and any statements made on his behalf. The statement must be signed by each nonresident partner.
7. A similar unified return shall be filed and payment made for declaration of estimated tax, if required.
If the above is not acceptable, please note that each nonresident partner having taxable income for a taxable year must file a Virginia return for the taxable year, unless the individual meets the "$3,000.00 filing exception" described in Virginia Code Section 58.1-321. Failure to file an individual nonresident return would subject the nonresident partner to penalty and interest, which could not be mitigated by the fact that a unified filing had been made unless the unified filing was in accordance with the conditions set forth above.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner