Tax Type
Corporation Income Tax
Description
Apportionment of Income; Corporate General Partners
Topic
Allocation and Apportionment
Date Issued
04-29-1992
April 29, 1992
Dear**********.
This will reply to your August 30, 1991 letter in which you make an application under Va. Code § 58.1-1821 on behalf of * * * (the "Taxpayer').
FACTS
The taxpayer and affiliates are partners in a general partnership. Due to a recent audit, the taxpayer's Virginia return was adjusted to include the partnership's pro rata share of property, payroll, and sales in the apportionment factors of the corporate general partners. The taxpayer protests the inclusion of the sales, and payroll of the partnership in the taxpayers' respective apportionment factors, and agrees to the inclusion of the partnership's property in the taxpayers' property apportionment factors.
RULING
The Department has a long-standing policy requiring the inclusion of a corporate general partner's proportion of a partnership's property, payroll, and sales in its apportionment factors on the corporation income tax return. As you point out in your letter, the authority for inclusion of a partnership's property in the property factor is spelled out in Virginia Regulation (VR) 630-3-409. The authority for requiring inclusion of the partnership's payroll and sales amounts in the apportionment factor of the general partner is less specific, but nonetheless exists.
Federal Conformity
Virginia is a federal conformity state, in that federal taxable income is the starting point for the computation of the Virginia income tax. See VR 630-3-301.
As a federal conformity state, Virginia looks to federal law for determining the treatment of many different income and expense items for Virginia tax purposes, including the payroll expense, and sales (gross revenue) of a general partnership. Internal Revenue Code Regulation (I.R.C.Reg) § 1.702(b) provides that any item of income, gain, loss, or deduction (as described in I.R.C. Secs. 702(a)(1)=(8)) included in a partner's distributive share shall be determined "as if such item were realized directly from the source from which realized by the partnership, or incurred in the same manner as incurred by the partnership.'
I.R.C. § 702(a)(8) provides that each partner shall take into account his separate share of taxable income or loss, exclusive of any other items requiring separate computation in § 702(a). Among those items are payroll expense and sales receipts. Applying this logic to the instant case, the payroll expense, and the sales receipts are treated as if paid and received, respectively, by the corporate general partner. Therefore, the Virginia and everywhere payroll and sales would be included in the numerator and denominator, respectively, of the corporate general partners payroll and sales apportionment factors.
Virginia Law
Further support for this treatment of general partnership payroll and sales factors is found in Va. Code § 58.1-391.B. This section requires that "each item of partnership income, gain, loss or deduction shall have the same character for a partner under this chapter as for federal income tax purposes. Where an item is not characterized for federal income tax purposes, it shall have the same character for a partner as if realized directly from the source from which realized by the partnership or incurred in the same manner by the partnership.'
It should be noted that Virginia law, and conformity to federal law allow for "factor representation', meaning that the income earned by the partnership which is included in the partners' federal taxable income is proportionally represented in the apportionment factor of each corporate partner. See Public Document 88-165 (6/29/88) (copy attached). Allowing the income of a general partnership to be included in a corporate partner's tax return without a corresponding apportionment factor inclusion would possibly have a distortive effect on the Virginia tax liability of the corporation. Allowing the inclusion in the corporation's apportionment factor of partnership property only, and not payroll and sales, would have an equally distortive effect.
Accordingly, I hold that the assessment is correct as made and is now due and payable. You will be billed shortly for the amount owed with interest accrued to date. The bill should be paid within 30 days of receipt to avoid additional interest charges.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner