06-18 | Virginia Tax

Tax Type

Fiduciary Income Tax

Description

Qualified pension trust; pass-through entities that generate Virginia source income

Topic

Exemptions

Date Issued

02-07-2006

February 7, 2006

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") is a limited partner in various pass-through entities that generate Virginia source income is subject to Virginia income tax. I apologize for the delay in responding to your letter.

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 and limited liability companies 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.

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. The Trust owns less than a 2% interest in two partnerships that have UBTI from Virginia sources. You request a ruling as to whether the Trust is subject to Virginia income tax.

RULING

Limited Partnership Interest

Virginia Code § 58.1-360 provides that Virginia income tax is annually imposed on Virginia taxable income for each taxable year of every estate and trust. 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 (2/13/1995), the Trust would be exempt from having to include the apportionment factors from the limited partnerships. The Department has recently ruled that P.D. 95-19 does not apply to trusts holding limited interests in partnerships or limited liability companies. See P.D.05-89 (6/9/2005).

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 UBTI from partnerships that is generated in part from the real estate in Virginia. As such, to the extent that these partnerships have income from Virginia sources, the Trust will have UBTI subject to 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 Unit. 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 at www.tax.virginia.gov in the Tax Policy Library section of the Department of Taxation's web site. If you have any questions regarding this ruling, you may contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/53511E

Rulings of the Tax Commissioner