89-126 | Virginia Tax

Tax Type

Individual Income Tax

Description

Real estate investment common trust fund

Topic

Estates and Trusts

Date Issued

04-24-1989

April 24, 1989

Re: Ruling Request
IRC §584 - Common Trust Fund

Dear****************

This is in reply to your letter dated October 20, 1988 in which you request a ruling concerning the Virginia tax treatment of a Common Trust Fund and the participants in such a fund.

FACTS

A regional bank holding company ("Bank"), incorporated under the laws of Virginia, maintains a real estate investment common trust fund ("Fund"). The Fund invests in real estate located throughout the United States. The Bank will offer investment shares in the Fund to certain trusts ("Trusts"). Neither the Trusts nor the beneficiaries of these trusts are residents of Virginia.

You request that the department rule on the Virginia tax treatment applicable to the Fund, the Trusts and the beneficiaries of the Trusts.

DISCUSSION

Section 584 of the Internal Revenue Code sets forth the federal income tax requirements that relate to a "common trust fund." A common trust fund is similar to a partnership in many ways. It is not subject to taxation and it is not considered to be a corporation [IRC §584 (b)]. Generally, the taxable income of a common trust fund is computed in the same manner and on the same basis as in the case of an individual. The participants in a common trust fund are required to include their proportionate share of the income of the common trust fund in computing their taxable income, whether or not the income was distributable.

DETERMINATION

Virginia is a conformity state and generally conforms to the federal income tax treatment of most items of income and deduction. Since under federal law a common trust fund is not subject to taxation, a common trust fund is similarly not subject to taxation by Virginia. For federal purposes, the participants in the common trust fund are taxed on the income earned by the fund; therefore, to the extent that the participants in a common trust fund are subject to taxation by Virginia, the income of the common trust fund will be taxed to the participants by Virginia.

The participants in the Fund are the Trusts, which under Virginia Code §58.1-302 are considered to be "nonresident trusts." 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 (Va. Code §§58.1-362 and 58.1-363).

Virginia Code §58.1-302 provides that Virginia source income includes:

- 1. Items of income, gain, loss and deduction attributable to:
  - - - a. The ownership of any interest in real or tangible personal property in Virginia; or
        b. A business, trade, profession or occupation carried on in Virginia.
  2. Income from intangible personal property, including annuities, dividends, interest, royalties and gains from the disposition of intangible personal property to the extent that such income is from property employed by the taxpayer in a business, trade, profession, or occupation carried on in Virginia. (Emphasis added.)

Since the Fund invests in real estate throughout the United States, to the extent that the Fund invests in real property in Virginia and has income and expenses related to that investment, the Fund will have Virginia source income. However, as discussed above, a common trust fund is not subject to taxation. It is treated in a manner similar to that of a partnership (in fact, a common trust fund files a federal Partnership return, Form 1065).

Like partners in a partnership, the participants in a common trust fund are required to include their proportionate share of the income of the common trust fund in computing their taxable income. The character of the income earned by a common trust fund generally remains the same in the hands of the participants in the common trust fund. Therefore, to the extent that the Fund has Virginia source income, the participants in the Fund (the Trusts) will have a proportionate share of Virginia source income. Likewise, the nonresident beneficiaries of the Trusts will have Virginia source income to the extent that the Trusts distribute the income received from the Fund.

Based upon the information that you have provided, the Trusts and the beneficiaries of the Trusts will have Virginia source income if the Fund invests in real property in Virginia and has income and expenses related to that investment. However, this ruling is being issued without the benefit of having a meeting to discuss the issues further. If after receiving this ruling, you feel that you have additional information which should be considered, the department will schedule a meeting to discuss this matter further.

Sincerely,

W. H. Forst
Tax Commissioner

Rulings of the Tax Commissioner