Tax Type
Corporation Income Tax
Fiduciary Income Tax
Individual Income Tax
Description
Request to file a unified return
Topic
Partnerships
Date Issued
11-03-2003
November 3, 2003
Re: Ruling Request: Corporate, Individual and Fiduciary Income Tax
Dear *****:
This will reply to your letter in which you request a ruling concerning Virginia's conformity with federal entity classification regulations and unified returns. I apologize for the delay in responding to your letter.
FACTS
A limited liability company ("LLC1") was formed to hold a number of partnership interests in real estate properties previously held by a number of corporations and partnerships. LLC1's only connection with Virginia is an interest in a general partnership that owns real property located within Virginia. The members of LLC1 consist of a C corporation and another limited liability company ("LLC2").
LLC2's members are made up of a number of C corporations and partnerships. Partners of the member partnerships include individuals, S corporations, simple and complex trusts. For federal income tax purposes, LLC1 and LLC2 will be taxed as partnerships pursuant to the federal entity classification regulations. You believe none of LLC2's members or the taxable owners of the LLC2's members would be required to file Virginia income tax returns except for the fact that they ultimately own an interest in income producing real estate within Virginia through LLC1.
To alleviate the administrative burden on the taxpayers and the Department, you are requesting permission for LLC1 to be treated as a corporation for Virginia income tax purposes only and, thus, file a Virginia Corporation Income Tax Return to report its Virginia taxable income. Alternatively, you request a ruling as to the conditions under which LLC2 would be permitted to file a unified tax return on behalf of its nonresident members.
RULING
"Check the Box" Election
Virginia's conformity to federal law is established in Va. Code § 58.1-301, which provides that the terms used in the Virginia income tax statutes will have the same meaning as used in the Internal Revenue Code ("IRC"). In Public Document ("P.D.") 97-343 (8/28/97), the Department ruled that it would follow the federal election made by a limited liability company pursuant to the "check the box" regulations under Treasury Regulation § 301.7701-1 et seq. In fact, Virginia's conformity statute requires such a ruling because a limited liability company that is treated as a partnership or a disregarded entity for federal income tax purposes will have no federal taxable income as a starting point for computing its Virginia taxable income. Absent a change to the Virginia statute, the Department must accept and enforce the federal "check the box" election made by a limited liability company for Virginia income tax purposes.
Unified Return
Title 23 of the Virginia Administrative Code ("VAC")10-130-20(C)(2) provides that the Tax Commissioner may grant permission to partnerships to file a statement of combined partnership income attributable to nonresident partners. The permission is granted based upon such terms as the parties may agree. This provision does not transfer the liability for the tax to the partnership, but simply relieves the nonresident partners from the responsibility of having to file Virginia nonresident individual income tax returns.
As an administrative convenience, the Department has granted similar permission to other enterprises that are not subject to entity level income tax in Virginia. This includes S corporations (P.D. 84-260, 12/28/84), trusts (P.D. 91-213, 9/6/91), and limited liability companies (P.D. 97-334, 8/27/97).
Over the years, the policy of permitting unified returns has evolved with the proliferation of multi-tiered entities. For example, in P.D. 87-281 (12/11/87) a partnership whose partners included individuals, S corporations and a C corporation was granted permission to file a unified return for the nonresident individual partners and nonresident shareholders of the S corporation. Because of the inherent differences between individual and corporate income taxation, the C corporation was required to file a Virginia return and allocate and apportion its income in Virginia.
The Department also permitted unified filing in a case where a partnership's partners consisted of three S corporations and two partnerships. One of the two partnerships had twenty complex trusts as partners. The second partnership's partners were an S corporation and an individual. See P.D. 89-127 (4/24/89).
It is clear, however, that an entity may only file a unified return on behalf of nonresident individuals or trusts whose only income from Virginia sources is through the entity filing the unified return. See P.D. 87-144 (5/13/87).
Under federal income tax law, a 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. In most cases, the investor in the entity that is a partner of the partnership will be the entity subject to Virginia taxation. If the Department were to grant permission to file a unified return, LLC2 would be required to identify all of the partners, beneficiaries, and shareholders of its members that are pass-through entities, determine if they have Virginia income from sources other than LLC2, and obtain the required information from each individual investor. It may be more appropriate for each of the members that are S corporations, grantor trusts or partnerships, to file a unified return on behalf of their investors.
The Department would, however, grant LLC2 permission to file a unified return on behalf of the individuals and trusts that ultimately receive a share of the LLC2's income from Virginia sources under the following conditions:
1. A schedule must be provided containing the total income of LLC2 and the
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- amount attributable to Virginia under the applicable state apportionment
formula, as provided in Va. Code §§ 58.1-408 through 58.1-4.21.
- amount attributable to Virginia under the applicable state apportionment
2. The unified return must reflect only the income or loss attributable to
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- nonresident individuals and trusts that have no income from Virginia sources
other than income attributable to LLC2.
- nonresident individuals and trusts that have no income from Virginia sources
3. All nonresident individuals and trusts, including those receiving income from
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- LLC2 through additional pass-through entities, without other income from
Virginia sources must elect to join in the filing of such a return and a
statement to such effect must be included in the return.
- LLC2 through additional pass-through entities, without other income from
4. The return must include a schedule containing the name, address, federal
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- employer identification number or social security number and Virginia taxable
income attributable to each individual and entity (taxable or nontaxable)
receiving Virginia source income from LLC2.
- employer identification number or social security number and Virginia taxable
5. The Virginia income tax must be computed at the rates specified under Va.
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- Code § 58.1-320 on LLC2's income attributable to the nonresident individuals
and trusts without benefit of itemized deductions, standard deductions,
personal exemptions, or credit for income taxes paid to states of residence.
- Code § 58.1-320 on LLC2's income attributable to the nonresident individuals
6. The return must contain a statement indicating the responsibility of each
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- nonresident individual and trust for their share of the total tax and any
statements made on their behalf. The statement must be signed by each
nonresident individual and trustee.
- nonresident individual and trust for their share of the total tax and any
7. A similar unified return must be filed and payment made for the declaration of
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- estimated tax, if required. Payment must be made in the name of the LLC2
and will use the LLC2's identification number. Estimated income tax
payments should be made using Form 760ES, Virginia Estimated Income tax
Payments for Individuals, Estates, and Trusts.
- estimated tax, if required. Payment must be made in the name of the LLC2
8. A copy of the letter from the Tax Commissioner authorizing the filing of a unified
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- nonresident income tax return must be attached to the unified return when it is filed. The unified nonresident income tax return is to be filed using Form 763, Virginia Nonresident Individual Income Tax Return.
9. The members that are C corporations shall file separately as required under
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- Va. Code § 58.1-441.
10. The members that are S corporations shall file an information return as required under Va. Code § 58.1-441.
If the aforementioned conditions are acceptable, LLC2 may submit a request to the Department to file a unified return. The Department, however, reserves the right to withdraw or modify any authorization upon reasonable notice to LLC2.
If the conditions are not acceptable, please note that each nonresident individual and trust having income from Virginia sources for the taxable year must file a Virginia individual nonresident or fiduciary return, unless they meet the filing exceptions described in Va. Code § 58.1-321. Failure to file an individual nonresident or fiduciary return would subject the nonresident individual or trust to penalty and interest.
In the alternative, if any of the nontaxable members of LLC2 or partners of LLC2's members wish to file a unified return on behalf of their nonresident owners, they may apply to the Department for permission.
I trust that the foregoing addresses your concerns. Copies of the Code of Virginia sections, regulations, and public documents cited, along with other reference documents, 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 *****.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/139320
Rulings of the Tax Commissioner