Document Number
08-138
Tax Type
Corporation Income Tax
Description
Board is exempt from federal taxation under IRC § 501(a) and is not required to file to federal income tax return
Topic
Federal Conformity
Pass-Through Entities
Date Issued
07-30-2008


July 30, 2008




Re: Ruling Request: Corporate Income Tax

Dear *****:

This is in response to your letter dated May 14, 2008, in which you request a ruling concerning the application of Virginia's corporate income tax to activities conducted by your client, the ***** (the "Board"). The Board conducts activities in Virginia through five single-member limited liability companies: *****, *****, *****, ***** and ***** (collectively, the "LLCs").

FACTS


The Board is an instrumentality of the ***** created for the purpose of providing professional investment management of various trusts and operating funds established under the laws of *****. The Board operates as a trust forming part of a pension, profit-sharing, or stock bonus plan qualified under Internal Revenue Code (IRC) § 401(c) that is exempt from federal income taxation under IRC § 501(a). The Internal Revenue Service (IRS) has further determined that income earned by the Board is exempt because it is derived in the exercise of an essential governmental function and accrues to *****. As such, the Board has never filed a federal income tax return.

The Board formed the LLCs for the sole purpose of holding real estate assets located in Virginia in order to shield the Board's other investments from any liabilities associated with owning and operating the real estate assets. The Board requests that the Department rule that the income from the LLCs is not subject to Virginia corporate income tax because the income is derived from an essential governmental function of

RULING


Virginia's conformity to federal law is set forth in Va. Code § 58.1-301. This section states that, except as otherwise provided, the terms used in the Virginia income tax statutes will have the same meanings as used in the IRC. Therefore, federal taxable income (FTI) for corporations is identical to that as defined by the IRC.

Under IRC § 115(1), gross income does not include income derived from the exercise of any essential governmental function and accruing to a state or political subdivision. According to IRS Revenue Ruling (Rev. Rul.) 90-74, income earned by an organization formed, operated and funded by more than one political subdivision for the purpose of providing an essential governmental function is excluded from gross income under IRC § 115(1) provided that private interests do not participate in the organization or benefit more than incidentally from the organization.

The Board requested and received a private letter ruling (PLR) from the IRS. In PLR 200243023 (10/25/2002), the IRS concluded that the income of one of the Board's limited liability companies is excludable from gross income under IRC §115. As such, provided that all the LLCs in Virginia meet the requirements specified in PLR 200243023, their income would not be included in the Board's FTI and would not be subject to income tax in Virginia.

Further, the LLCs would not be required to file Virginia pass-through entity returns as required by Va. Code § 58.1-392. In order to be a pass-though entity subject to Virginia's filing requirement, the owners of a pass-through entity must report their share of income, gains, losses, deductions and credits from the entity on their federal income tax returns. See Va. Code § 58.1-390.1. Because the Board is exempt from federal taxation under IRC § 501(a) and is not required to file to federal income tax return, the LLCs would not be considered pass-through entities for purposes of filing pass-through entity returns.

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

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

                • Janie E. Bowen
                  Tax Commissioner


AR/1-2351584611.o

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46