March 2, 2021
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will respond to your letter in which you seek correction of the assessment of individual income tax issued to ***** (the “Taxpayer”) for the taxable year ended December 31, 2018.
FACTS
The Taxpayer filed a Form 765, Unified Nonresident Individual Income Tax Return (Composite Return), on behalf of its Virginia nonresident partners for the 2018 taxable year. Under review, the Department adjusted the rate of tax that was applied and issued an assessment. The Taxpayer appeals, contending the assessment is incorrect because its Virginia taxable income included guaranteed payments made to partners for services performed outside Virginia.
DETERMINATION
Virginia Code § 58.1-395 grants discretionary authority to the Department to permit unified filing under terms acceptable to the Department. The Virginia income tax on the unified return must be computed at the highest rate under Virginia Code § 58.1-320 without the benefit of itemized deductions, standard deductions, personal exemptions, credits for income taxes paid to states of residence, any tax credit carryover amounts, or any other tax credits that are not attributable to the pass-through entity. See Guidelines for Pass-Through Entity Withholding, published as Public Document (P.D.) 15-240 (12/22/2015) (the “Guidelines”). The pass-through entity is required to obtain the qualified nonresident owner’s consent to be included on the unified return and be subject to the same restrictions as described above. See id.
A unified return is an administrative convenience that allows nonresident partners to pay their respective Virginia tax at the entity level. The need for filing a separate Virginia return for each partner is eliminated. It is a privilege extended by the Department to taxpayers at the taxpayers’ election. The convenience to the nonresident partners usually outweighs any benefits that may be lost.
The Taxpayer explains that Virginia income tax due was calculated separately for each partner by taking each partner’s pro-rate share of Virginia source income and affording each partner the benefit of the lower income tax rates and brackets. This method is not permitted by the Guidelines, which state that the tax must be computed at the highest rate under Virginia Code § 58.1-320. In making the adjustment, the Department computed the tax due based on such rate. The Department’s adjustment, therefore, was correct based on the return as filed by the Taxpayer.
The Taxpayer now claims that the participants’ Virginia taxable income amount reported on the return was incorrect because the computation included guaranteed payment amounts to partners for services rendered outside Virginia. The Department has recognized that guaranteed payments are ordinary income to the individual partner and are attributed to the place where the services are performed. If those services are not performed in Virginia, then they are not Virginia source income. See P.D. 05-48 (4/7/2005).
Because the assessment was based on the return as filed by the Taxpayer, if the Taxpayer believes it incorrectly reported its Virginia taxable income, it should file an amended return. The amended return should be submitted within the statute of limitations provided under Virginia Code § 58.1-1823. If the return is filed within 60 days of the date of this letter to: Virginia Department of Taxation, Office of Tax Policy, Appeals and Rulings, P.O. Box 27203, Richmond, Virginia 23161-7203, Attention: *****, the return will be reviewed and the assessment will be adjusted, as appropriate. If the return is not received within the 60 day time period, the assessment will be considered to be correct and collection action may resume.
The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/3554.M