Tax Type
Individual Income Tax
Description
Partnerships; Nonresident partnerships; Credit on unified return
Topic
Credits
Date Issued
06-23-1995
June 23, 1995
Re: Request for Ruling: Unified Return
Dear***************
This will reply to your letter of March 14, 1995, in which you request a ruling concerning the ability of ***********(the "Taxpayer"), a partnership that files a unified nonresident Virginia return, to claim a credit for taxes paid to other states on behalf of those partners who are residents of reciprocity states.
FACTS
Pursuant to Virginia Regulation (VR) 630-4-391 (C)(2), the Taxpayer obtained permission to file a unified return on behalf of its nonresident partners. The Taxpayer's unified return contains individual partners who are residents of reciprocity states. Generally, Virginia nonresidents who reside in reciprocity states are allowed to claim a credit on their Virginia nonresident return for taxes paid to their state of residency (see Code of Virginia §58.1-332 B). You have requested permission to include nonresident partners who reside in reciprocity states in the Taxpayer's unified return, but to claim the credit for taxes paid to their state of residency.
RULING
A unified return is an administrative convenience which allows partners to pay their respective Virginia tax at the entity level. The need for filing a separate Virginia return for each partner is also eliminated. It is a privilege extended by the department to taxpayers, at the taxpayer's election. The unified return does not decrease the tax liability of any partner, nor is it intended to do so. In fact, the tax paid on a unified return may exceed the cumulative tax which would be paid if individual Virginia returns were filed. Each entity must decide if the convenience afforded justifies the potential increase in tax.
Pursuant to VR 630-4-391, " The Tax Commissioner in his sole discretion may grant permission [for the combined return] for good cause and upon such terms as the parties may agree." The department regularly grants permission for partnerships to file a unified return, but only subject to a number of standard conditions, including the following:
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- All nonresident 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.
The Virginia income tax return will be computed at the rates specified under Virginia Code §58.1-320 on 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 (emphasis added).
- All nonresident 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.
In P.D. 94-128, (4/25/94), copy attached, the department rejected a similar request, whereby the individual nonresident partners of reciprocity states sought permission to file nonresident returns individually.
The department permits the filing of unified partnership returns for the convenience of nonresident partners. The convenience to the nonresident partners usually outweighs any benefits which may be lost. The department imposes certain conditions in exchange for such convenience. It is always the department's duty and responsibility to uniformly collect the proper tax due from each taxpayer. Because a unified return may combine the Virginia taxable income for hundreds of nonresident taxpayers, the department has established conditions for unified return filing which ensure the proper determination, administration, and collection of Virginia's tax. These conditions are uniformly required of all unified returns, and are a necessary part of the department's administration of these returns.
The department has granted permission for hundreds of partnerships, representing literally thousands of nonresident partners, to file unified nonresident returns. The nature of these partnerships are generally similar to the Taxpayer, in that they are comprised of highly mobile individuals from nearly all 50 states. These partners tend to move frequently, often between states. The members of such partnerships also change with regularity. Tracking the nonresident returns of such individuals would clearly be complicated if they were allowed to fall in and out of a unified filing at will.
The department must also consider that the status of a reciprocity state is not dependent upon a Virginia law change. For example, in 1992 Maryland changed its laws, resulting in a loss of reciprocity status for Maryland. In order to monitor the status of reciprocity states, the department would be required to track legislative changes in the other 49 states. In addition, the computation of the Virginia credit for taxes paid to other states is not simply a matter of comparing the differential rates. Many states use a different tax base than does Virginia, resulting in the need to convert the other states' tax base to a Virginia equivalent. See P.D. 95-96 (5/1/95), copy attached. The simplified method you suggest would likely yield a preferential treatment to nonresident partners in some situations.
The department must balance the convenience which unified filing provides to nonresident partners against the administrative burden which would be imposed if unified returns allowed such credits, or if all nonresidents were not included in the return. The department finds that the conditions which have been imposed for unified filing are fairly and consistently applied. Alternatively, if the department granted your request, it would be required to overturn long-standing written policy and offer similar relief to all unified return filers, resulting in a very significant administration burden and possibly hundreds of amended returns. The department's ability to monitor the filing of Virginia nonresident returns of such partners would be significantly affected, requiring painstaking calculations and manual tracking of such nonresidents to insure compliance with Virginia laws.
The conditions to which the Taxpayer agreed in filing its unified return required the inclusion of all nonresident partners without other income from Virginia sources, and clearly provided for a loss of certain benefits, including the credits for income taxes paid to states of residence. This was a choice the Taxpayer made at the time of electing a unified return. A departure from this condition would cause the department to incur significantly more administrative burden as a result of the convenience it has extended to unified filers. Accordingly, your request must be respectfully denied.
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- Sincerely,
Danny M. Payne
Tax Commissioner
- Sincerely,
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OTP/9445M
Rulings of the Tax Commissioner