Tax Type
Individual Income Tax
Partnerships
Description
Royalty income
Topic
Partnerships
Date Issued
06-27-1988
June 27, 1988
Re: Request for Ruling; Partnership Income
Master Limited Partnerships
Dear***************
This is in response to your letter of January 7, 1988, in which you requested a ruling regarding the filing of partnership information and related individual and corporate income tax returns. I apologize for the delay in responding. Attached to this letter is your memorandum of the facts and questions presented.
Discussion
First, the 1988 General Assembly enacted 1988 Acts of Assembly, Chapter 249, which eliminates the requirement for partnerships to file informational income tax returns with Virginia. The necessary information must still be provided to the partners for preparation of each partner's Virginia income tax returns.
From the facts given, it appears that several operating Partnerships (OP) are receiving royalty income from independent franchisees located in Virginia. Under federal and Virginia law this royalty income will retain its character as it is passed from an OP through the Master Limited Partnership (MLP) to the general public or to the corporate general partner. I.R.C. §702(b) and Va. Code §58.1-391(b).
The threshold question is whether the royalty income is "income and deductions from Virginia sources" within the meaning of Va. Code §58.1-302. If it is, then the royalty income will retain its character as Virginia income in the hands of each recipient.
In a ruling dated April 5, 1988, P.D. No. 88-58 (copy enclosed), a corporation was held to be in the business of licensing and servicing franchisees, therefore its royalty income from Virginia franchisees was income from Virginia sources. The ruling went on to hold that there would be no taxable income because its property, payroll and sales factors would be zero.
Therefore the royalty income received by the OPs is income from Virginia sources. However, Virginia Regulation VR 630-4-391 C. (copy enclosed) provides that a partnership shall use the corporate allocation and apportionment formula to determine the income of a nonresident partner subject to tax in Virginia. As a result, the MLP and its individual partners will not be deemed to have taxable income for Virginia purposes.
The corporation owns a 1% general partnership interest in the MLP and each of the OPs. As a general partner the property, payroll and sales of the partnership flow through to the corporation along with the income and must be included in the corporation's apportionment factors. See VR 630-3-409 A.2.b. (copy enclosed). Assuming that the corporation had no other contact with Virginia, the share of the royalty income passed through the partnerships would not result in taxable income for Virginia purposes and a Virginia income tax return would not be required for the corporation.
Finally, you ask whether the result would be different if the OPs owned and operated the businesses in Virginia instead of operating as a franchisor. If the OPs own and operate businesses in Virginia they will have property, payroll and sales in Virginia. Therefore, nonresident partners of the OPs will have taxable income for Virginia purposes and the corporate general partner will have property, payroll and sales to include in the numerator of its factors on its Virginia return.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner