Tax Type
Individual Income Tax
Description
Nonresident partners; Unified return
Topic
Partnerships
Date Issued
05-22-1989
May 22, 1989
Re: Ruling Request Unified Return
Dear*****************
This is in reply to your letter dated December 8, 1988, in which you request permission to file a unified return on behalf of the nonresident partners of a soon to be organized limited partnership.
FACTS
The partnership will be organized as a limited partnership under the Delaware Revised Limited Partnership Act with the principal place of business in Los Angeles, California. The partnership will invest in real property either by purchasing a fee interest in the property or by acquiring some other interest in real property. The partnership may make investments in loans secured by mortgages on real property. The partnership may also invest in other partnerships which similarly invest in real property. Interests in the partnership are being offered to banks which act in a fiduciary capacity for a personal trust, common trust fund, agency account or other similar fund over which the bank exercises or shares investment discretion.
You request permission for the partnership to file a unified nonresident return on behalf of the ultimate recipients of the Virginia source income earned by the partnership.
DISCUSSION
Partnership filing requirements:
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 The 1988 Session of the Virginia General Assembly enacted legislation (Chapter 249, 1988 Acts of Assembly) which repealed the partnership return filing requirements set forth in Virginia Code §58.1-392.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.
Computation of Virginia Income:
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 -42 1(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. In this case, the partnership would apportion income using a three factor formula based on the property, payroll and sales within Virginia.
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.) There is no limitation imposed under either federal law or Virginia law regarding the number of tiers of partnerships that may exist. Therefore, the pass through of Virginia source income will continue to occur from partnership to partner until the income is passed through to a taxable entity.
RULING
Section 630-4-391(C)(2) of the Virginia Taxation of Partnerships Regulations provides that the Tax Commissioner may grant permission to nonresident partnerships to file a statement of combined partnership income attributable to nonresident partners. This relieves the nonresident partners of the responsibility of having to file nonresident individual income tax returns.
It appears that many of the partnership's partners may not be entities subject to Virginia income tax. For example, a common trust fund established pursuant to §584 of the Internal Revenue Code is not subject to Virginia taxation. In most cases, the investor in the entity which is a partner of the partnership will be the entity subject to Virginia taxation as a nonresident. You estimate that these underlying individual beneficiaries of the income earned by the partnership will number in the thousands .
The department has developed certain standard requirements that are imposed on nonresidents who would like to file such a return. In order to accept such a unified filing, the department requires that the return include a schedule containing the name, address, federal employer identification number or social security number and Virginia taxable income attributable to each entity receiving Virginia source income. The return must also contain a statement indicating the responsibility of each nonresident entity for his share of the total tax and any statements made on his behalf. The statement must be signed by each such entity.
Under federal income tax law, the partnership is not required to provide information regarding income earned by the partnership to anyone other than its partners. It has no reporting responsibility to the investors of its partners. If the partnership elects to file a unified return on behalf of these thousands of individuals ultimately receiving a share of the partnership's income from Virginia sources, the partnership will be required to determine who these investors are and to obtain the required information from each investor. Because of the large number of investors and because of the difficulty that the partnership may encounter in obtaining the required information, it may be more appropriate for each of the partners that are nontaxable entities to file a unified return on behalf of their investors .
If the partnership determines it can comply the following conditions, it may file a unified return on behalf of the thousands of individuals ultimately receiving a share of the partnership's income from Virginia sources.
l. A schedule must 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 §§58.1-408 through 58.1-421, or by using an approved alternative method.
2. The unified return must reflect only the income or loss attributable to Virginia nonresident investors who have no income from Virginia sources other than income attributable to the partnership.
3. All nonresident investors 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 will include each nonresident investor's name, address, social security number and Virginia taxable income attributable to each nonresident investor.
5. The Virginia income tax will be computed at the rates specified under Virginia Code §58.1-320 on the partnership's income attributable to the nonresident investors without benefit of itemized deductions, standard deductions, personal exemptions or credit for income taxes paid to states of residence.
6. The return will contain a statement indicating the responsibility of each nonresident investor for his share of the total tax and any statements made on his behalf. The statement will be signed by each nonresident investor.
7. A similar unified return will be filed and payment made for the declaration of estimated tax, if required.
If the partnership determines that it will not be able to comply with the above reporting requirements necessary for the filing of the unified return, it may want to suggest that its partners request permission to file a unified return on behalf of their nonresident individual investors. If any of the nontaxable partners of the partnership wishes to file a unified return on behalf of its nonresident individual investors, they should apply separately to the department for permission.
If you have any further questions, please do not hesitate to contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner