Tax Type
Individual Income Tax
Partnerships
Description
Liability of nonresident partners; Partnership
Topic
Partnerships
Persons Subject to Tax
Date Issued
07-29-1988
July 29, 1988
Re: Ruling Request
Individual Income Tax
Partnership Income
Dear*****************
This is in reply to your letter dated May 12, 1988 in which you request a ruling regarding the applicability of the Virginia individual income tax to the individual partners of the partnership that you represent.
FACTS
The partnership was formed under the laws of Delaware and has its principal office in the state of New York. The general partner and most of the limited partners are residents of New York. The partnership is engaged in the trading of securities and commodities on the organized exchanges through brokers who are located in New York and Illinois.
The partnership will have one employee, who is a Virginia resident and maintains an office in Virginia. This employee will initiate trades of securities and commodities on behalf of the partnership with the brokers in New York and Illinois. In some instances this Virginia employee will initiate the trades on direction from the general partner and in some instances this employee will exercise discretion and initiate trades on behalf of the partnership without direction from any other person.
You request a ruling regarding the applicability of the Virginia individual income tax to the individual partners of this partnership.
RULING
Virginia generally conforms to the federal treatment of partnerships. A partnership as such, is not subject to income tax. Any income tax arising from the income of the partnership is the liability of the partners. The 1988 Session of the Virginia General Assembly enacted legislation (Chapter 249, 1988 Acts of Assembly) which repealed the partnership return filing requirements set forth in Virginia Code §58.1-392. This change is effective for taxable years beginning on or after January 1, 1987. The repeal of the partnership return filing requirement does not relieve resident or nonresident partners with partnership income from Virginia sources from the filing of Virginia income tax returns.
The Virginia Taxation of Partnerships Regulations (copy enclosed) require that partnerships which have income from business both within and without Virginia compute their Virginia source income in accordance with the corporate statutory formula set forth in Virginia Code §§58.1-408 through 58.1-421 (copies enclosed), making such changes as necessary after considering the differences between corporations and partnerships. Therefore, such partnerships generally must allocate dividends to the state of commercial domicile and apportion all other income. Income is apportioned using a three-factor formula based on the property, payroll and sales within Virginia. Each factor is a fraction based on activity within Virginia divided by similar business everywhere.
Based upon the information that you have provided, this partnership will have both payroll and sales in Virginia. The wages paid to the Virginia employee and the sales initiated in the Virginia office will be included in the numerator of the respective fractions to compute the payroll and sales factor. In addition, it is possible based upon the circumstances of the ownership of the office in Virginia, the partnership may also have property in Virginia. Regardless of the property factor, the fact that the partnership has a positive Virginia numerator in its sales and payroll factors will result in the partnership having income from Virginia sources.
Under federal law, "[t]he character of any item of income, gain, loss, deduction, or credit included in a partner's distributive share.... shall be determined as if such item were realized directly from the source from which realized by the partnership or incurred in the same manner as incurred by the partnership." [IRC §702(b).] In addition, each item of partnership income, gain, loss or deduction has the same character for a partner for Virginia income tax purposes as for federal income tax purposes. (Virginia Code §58.1-391 B.)
Therefore, since the partnership has Virginia source income based upon the activity of its employee in Virginia, the nonresident partners will similarly have income from Virginia sources.
The Virginia individual income tax is imposed (see the exceptions under Virginia Code §58.1-321, copy enclosed) upon individuals based upon their Virginia taxable income. The Virginia taxable income of a resident individual is defined under Virginia Code §58.1- 322 as his federal adjusted gross income with certain statutory modifications. The Virginia taxable income of a nonresident of Virginia is defined under Virginia Code §58.1-325 as:
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- an amount bearing the same proportion to his Virginia taxable income, computed as though he were a resident, as the net amount of his income, gain, loss and deductions from Virginia sources bears to the net amount of his income, gain, loss and deductions from all sources.
- an amount bearing the same proportion to his Virginia taxable income, computed as though he were a resident, as the net amount of his income, gain, loss and deductions from Virginia sources bears to the net amount of his income, gain, loss and deductions from all sources.
If you have any further questions, please feel free to contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner