05-89 | Virginia Tax

Tax Type

Fiduciary Income Tax

Description

Trust is subject to Virginia income tax

Topic

Estates and Trusts

Date Issued

06-09-2005

June 9, 2005

Re: Request for Ruling: Fiduciary Income Tax

Dear *****:

This will reply to your letter in which you request a ruling on whether a qualified pension trust (the "Trust") that is a limited partner in a partnership that generates Virginia source income is subject to Virginia income tax. I apologize for the delay in the Department's response.

FACTS

You represent that the Trust is a nonresident trust that is exempt from income tax under Internal Revenue Code ("IRC") § 401. The Trust invests in numerous partnerships and limited liability companies that, in turn, invest in commercial real estate and tangible personal property located throughout the United States, including Virginia. The Trust is a limited partner in all of the partnerships in which it invests. The Trust does not share common ownership, nor does it have any relationship, with any general or other limited partner in the various partnerships. The Trust owns less than a 6% interest in all of the partnerships except one, in which it owns an interest exceeding 10%.

A portion of the Trust's income from some of the limited partnerships is reported as unrelated business taxable income ("UBTI") for federal income tax purposes. You request a ruling as to whether the Trust is subject to Virginia income tax. If it is determined that the Trust is liable for Virginia income tax, you offer to make a voluntary disclosure and settlement offer for the Trust's Virginia income tax liability.

RULING

Limited Partnership Interest

Virginia Code § 58.1-360 provides that trusts are liable for Virginia income tax on Virginia taxable income. Virginia taxes a nonresident trust on its gross income from sources within Virginia less expenses attributable to the income from Virginia sources reduced by the amount of income from Virginia sources distributed to beneficiaries. See Va. Code §§ 58.1-362 and 58.1-363.

You contend that, pursuant to Public Document ("P.D.") 95-19 (2/13/95), the Trust would be exempt from having to include the apportionment factors from the limited partnerships. In P.D. 95-19, the Department ruled that a corporate limited partner is generally required to include its proportionate share of the partnership's property, payroll and sales with its own property, payroll and sales for purposes of determining its Virginia apportionment factor. This ruling, however, applies only to apportionment factor attribution for corporate limited partners. It does not apply to trusts that hold limited partnership interests.

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. Internal Revenue Code ("IRC") § 702(b) states, "The 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." 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. See Va. Code § 58.1-391 B.

Virginia Code § 58.1-362 provides that the Virginia taxable income of a nonresident trust is its share of income, gain, loss and deduction attributable to Virginia sources with certain adjustments. According to the information provided, the Trust owns real estate in Virginia through limited partnership interests. The Trust receives income from these partnerships that is generated in part from the real estate in Virginia. As such, if a portion of the income is Virginia source income, the Trust is liable for Virginia income tax.

Voluntary Disclosure

With regard to your request for a voluntary disclosure agreement for prior years' liabilities, the information provided will be forwarded to ***** of the Department's Revenue Analysis and Planning/Compliance section. You may reach him
at *****.

This ruling is based on the facts presented as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections and public documents cited are available on-line in the Tax Policy Library section of the Department of Taxation's web site, located at www.policylibrary-tax.virginia.gov. If you have any questions regarding this ruling, you may contact ***** in the Office of Policy and Administration, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/53324B

Rulings of the Tax Commissioner