Tax Type
Individual Income Tax
Description
Substitute Wage and Tax Statement
Topic
Returns/Payments/Records
Withholding of Tax
Date Issued
12-23-1987
December 23, 1987
Re: §58.1-1821 Application; Estate Tax
§58.1-903 Tax on Transfer of Taxable Estate of Residents
Dear ******************
This is in response to your letter of August 4, 1987, in which you applied for correction of an assessment of Virginia Estate Tax as shown on the Virginia estate tax return filed.
Facts
The decedent was a resident of Virginia who owned a 99% general partnership interest in two North Carolina partnerships. The other 1% interests in both partnerships were owned by a corporation in which the decedent owned all of the stock. Both partnerships owned real estate located in North Carolina.
On the federal estate tax return the partnership interests and the stock in the corporation were reported on the appropriate schedules. Schedule A (Real Estate) did not report ownership of any real estate located in North Carolina or any state other than Virginia.
Since the Virginia estate tax return did not show that the decedent owned any tangible or real property located in another state, the Virginia estate tax was equal to the entire federal credit allowable for state death taxes, which was timely paid with the return.
North Carolina has assessed an inheritance tax on the property located in North Carolina. You now request that Virginia refund a portion of the Virginia estate tax to the extent that it is based on property taxed by North Carolina.
Discussion
For purposes of the Virginia estate tax, a partner's interest in real estate owned by the partnership is considered to be an intangible partnership interest, not a real property interest. See Virginia Regulation VR 630-7-900 B.3. Therefore the partnership interests were properly reported on the federal and Virginia returns.
A member of my staff contacted the North Carolina Department of Revenue. As we understand it, North Carolina does not claim that the partnerships were void or did not exist, only that under the circumstances the property had tax situs in North Carolina and the decedent's relationship to the property was sufficient for assessment of the inheritance tax.
Because the North Carolina partnerships are valid under North Carolina law, they are characterized as partnerships for federal estate tax purposes. Since Virginia conforms to federal estate tax law, they are also characterized as partnerships for Virginia estate tax purposes.
Virginia law permits a credit against the Virginia estate tax for death taxes paid to other states as follows:
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- B. If the real and tangible personal property of a resident is located outside of the Commonwealth and is subject to a death tax imposed by another state for which a credit is allowed under Section 2011 of the Internal Revenue Code of 1954, as amended or renumbered, or the successor provision of the laws of the United States relating to federal estate taxes, the amount of tax due under this section shall be credited with the lesser of:
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- 1. The amount of the death tax paid the other state and credited against the federal estate tax; or
2. An amount computed by multiplying the federal credit by a fraction, the numerator of which is the value of that part of the gross estate over which another state or states have jurisdiction to the same extent to which Virginia would exert jurisdiction under this chapter with respect to the residents of such other state or states and the denominator of which is the value of the decedent's gross estate. (§58.1-903 B, emphasis supplied.)
- 1. The amount of the death tax paid the other state and credited against the federal estate tax; or
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- B. If the real and tangible personal property of a resident is located outside of the Commonwealth and is subject to a death tax imposed by another state for which a credit is allowed under Section 2011 of the Internal Revenue Code of 1954, as amended or renumbered, or the successor provision of the laws of the United States relating to federal estate taxes, the amount of tax due under this section shall be credited with the lesser of:
As previous stated, a partnership interest is not real or tangible personal property for Virginia estate tax purposes. Therefore, no credit against Virginia estate tax is allowable for the North Carolina inheritance tax.
Additionally, the formula for determining the credit is based on the extent to which Virginia would exert jurisdiction over similar property of a North Carolina resident. Virginia would not impose its estate tax on Virginia partnership property of a North Carolina resident partner. Therefore, the formula would produce an allowable credit of zero.
There are several situations in which federal and state tax authorities may ignore a purported partnership, as North Carolina appears to be doing. However, similar authority does not exist for a taxpayer to deny the existence of a partnership which he created merely because of the discovery of some adverse tax consequences. We express no opinion as to the validity of the assessment of North Carolina inheritance tax, only that it does not affect the existence of the partnerships for purposes of the federal and Virginia estate taxes.
Determination
Accordingly, the Virginia estate tax shown on the return is correct and your request for a refund is denied.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner