Tax Type
Corporation Income Tax
Description
Common Trust Fund
Topic
Exemptions
Date Issued
09-06-1991
September 6, 1991
Re: Request for Ruling: Common Trust Fund
Dear*****************
This will reply to your letter of January 7, 1991, in which you request a ruling, on behalf of your client, concerning permission to file a unified income tax return for a common trust fund and its participants.
FACTS
Your client has an existing common trust fund (the "Fund") that invests primarily in real property. The Fund qualifies as a common trust fund for federal income tax purposes and, therefore, is exempt from federal income taxes. The Fund's income and other tax attributes are included in the participants' federal income tax returns.
Approximately 50% of the units in the Fund are held by personal trusts (mostly simple trusts) and 50% by charitable trusts. The income generated by the Fund is ultimately included in the income beneficiaries' income tax returns; the charitable trusts are comprised primarily of organizations exempt from federal income taxes under various provisions of the Internal Revenue Code.
The Fund is considering investing in real property in Virginia. You request permission to file a unified income tax return for the Fund and its participants, thus relieving the participants of the responsibility of having to file separate Virginia returns. The unified return would allocate the Fund's taxable income between the taxable and tax-exempt participants and pay the tax associated with the income allocated to the taxable participants.
DETERMINATION
The department has previously ruled that Virginia conforms to the federal treatment of common trust funds. P.D. 89-126 (April 24, 1989) (copy enclosed). Therefore, a common trust fund is not subject to taxation in Virginia and the participants in the 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.
If the Fund invests in real property in Virginia, and has income and expenses related to that investment, the Fund will have Virginia source income as defined under Va. Code § 58.1-302. Virginia source income to the Fund remains Virginia source income to the participants, which are taxed on this income.
Section 630-4-391(C)(2) of the Virginia Taxation of Partnership Regulations provides that the Tax Commissioner may grant permission to nonresident partnerships to file a statement of combined partnership income attributable to nonresident partners. This provision of the regulations relieves the nonresident partners of the responsibility of having to file nonresident individual income tax returns. Similarly, the department has granted permission to nonresident S corporations to file unified nonresident individual returns, A common trust fund is similar to a partnership; therefore, this regulation seems applicable.
Your letter does not state if all the participants in the Fund and income beneficiaries of the personal trusts are nonresidents of Virginia. The department will allow the Fund to file a unified income tax return on behalf of the nonresident participants and nonresident income beneficiaries under the following conditions:
1. A schedule must be provided containing the total income of the common trust fund and the amount attributable to Virginia from investment in Virginia real property and other Virginia sources
2. The unified return must reflect only the income or loss attributable to Virginia nonresident participants who have no income from Virginia sources other than income attributable to the common trust fund.
3. All nonresident participants without other income from Virginia sources must elect to join in the filing of such a return and a statement to such effect will be included in the return.
4. The return will include each nonresident participant's name, address, federal employer identification number and Virginia taxable income attributable to each participant (taxable or nontaxable) receiving Virginia source income from the Fund.
5. The Virginia income tax will be computed at the rates specified under Va. Code § 58.1-320 on the Fund's income attributable to the taxable nonresident participants without benefit of itemized deductions, standard deductions, personal exemptions or credit for income taxes paid to states of residence. Participants which can demonstrate that they are charitable trusts not subject to Virginia income tax may be excluded.
6. The return will contain a statement indicating the responsibility of each nonresident participant or income beneficiary for its share of the total tax and any statements made on its behalf. The statement will be signed by each nonresident participant or income beneficiary.
7. A similar unified return will be filed and payment made for the declaration of estimated tax, if required.
If the above is acceptable, the Fund may commence the unified filing under the above conditions effective for taxable year 1991. However, we reserve the right to withdraw or modify the foregoing authorization upon reasonable notice to you. Each resident participant or income beneficiary having taxable income for a taxable year must file a Virginia income tax return and may not join in the unified return.
If the above is not acceptable, please note that each nonresident participant having taxable income for a taxable year must file a Virginia return, unless the trust meets the filing exceptions described in Va. Code § 58.1-321. Failure to file a nonresident fiduciary return would subject the nonresident participant to penalty and interest, which could not be mitigated by the fact that a unified filing had been made unless the unified filing was in accordance with the conditions set forth above.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner