03-76 | Virginia Tax

Tax Type

Corporation Income Tax

Individual Income Tax

Description

Limited partnership located outside Virginia, Virginia source income

Topic

Partnerships

Property Subject to Tax

Taxability of Persons and Transactions

Date Issued

10-30-2003

October 30, 2003

Re: Ruling Request: Corporate and Individual Income Tax

Dear *******************:

This will reply to your letter in which you request a ruling concerning the tax treatment of certain income received by your client, **************************** (the "Taxpayer"), for the taxable year ended December 31, 1996. I apologize for the delay in the Department's response.

FACTS

The Taxpayer is a limited partnership located outside Virginia that owns 40% of another limited partnership (LP2). The 40% ownership is comprised predominantly of a general partner interest and a small limited partner interest. LP2 is a 99% general partner in another limited partnership (LP3). The remaining 1% limited partner interest is split between an unrelated limited partnership and the Taxpayer. LP3 owns and operates a business that operated exclusively within the Commonwealth of Virginia. The Taxpayer receives additional income from investments located in other states.

LP3 sold the Virginia business. The Taxpayer's proportionate share of the ordinary income from the operations and sale of the Virginia business was treated as nonbusiness income and directly allocated to Virginia for state income tax purposes. The Internal Revenue Code ("IRC") § 1231 gain from the sale was also allocated to Virginia for state income tax purposes.

Based on a review and additional analysis of the sales transaction, the Taxpayer believes that the ordinary income and gain from the operations and sale of the Virginia business should have been apportioned rather than allocated to Virginia. You are requesting a ruling as to the proper treatment of the ordinary income and gain in question for Virginia income tax filing purposes.

RULING

Pursuant to Title 23 of the Virginia Administrative Code ("VAC") 10-130-20, each item of partnership income, gain, loss or deduction will generally retain the same character for Virginia income tax purposes as for federal income tax purposes. Accordingly, the Taxpayer's proportionate share of the ordinary income and gain from the operations and sale of Virginia business by LP3 would retain the same character as reported on the federal income tax return.

Further, 23 VAC 10-130-20 requires that partnerships that have income from business both within and without Virginia compute their Virginia source income in accordance with the corporate statutory formula set forth in Va. Code § 58.1-408 through § 58.1-421, making such changes as necessary after considering the differences between corporations and partnerships. As such, partnerships will generally allocate dividends to the state of commercial domicile and apportion all other income using a three-factor formula based on the property, payroll and sales within Virginia.

In this case, LP3 sold a business it both owned and operated solely in Virginia. As the sole activity of LP3, the Taxpayer's proportionate share of the ordinary income and gain from the operations and sale of the Virginia business would retain this character as it was passed through from LP3 for federal income tax purposes.

Instead of apportioning the ordinary income and gain from the operations and sale of the Virginia business passed through from LP3, the Taxpayer incorrectly allocated these items of income to Virginia. The Department has previously ruled that a partnership carrying on a business, trade, profession or occupation in Virginia or receiving income as a partner in a partnership that is carrying on a business, trade, profession or occupation in Virginia, will continue to pass through Virginia source income until the income is received by a partner that is a taxable entity. See Public Document ("P.D.") 88-165, (6/29/88). In the instant case, the partners of the Taxpayer receive Virginia source income by virtue of their direct and indirect ownership interest in the Virginia business activities of LP3.

In addition, the pass-through of property, payroll, and sales attributable to both Virginia and everywhere must continue until a taxable entity is reached. There is an exception for certain limited partnership interests. See P.D. 95-19, (2/13/95).

In this instant, the property, payroll and sales factors of the Virginia business would be passed through and added to the property, payroll and sales factors of the other activities of LP3, then LP2, and then to the Taxpayer, and would continue until it passes through to a taxable entity. At that point, the individual or corporation will compute its income tax on the pass-through income based on the principles of Virginia law as explained in P.D. 88-165.

I trust this ruling addresses your request. Copies of Code of Virginia sections, regulations, and public document cited are available on-line in the Tax Policy Library section of the Department's web site, located at www.tax.state.va.us. If you have any other questions, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/133080

Rulings of the Tax Commissioner