Tax Type
Fiduciary Income Tax
Description
Resident estates and trusts; Taxable income; Nexus with Virginia
Topic
Estates and Trusts
Date Issued
08-26-1993
August 26, 1993
Re: Va. Code §58.1-1821 Application: Resident Trust
Dear*****************
This will reply to your letter dated November 23, 1992, requesting a refund of the Virginia fiduciary income tax paid by the*************(the "Trust").
FACTS
The Trust was established in 1988 while the grantor was a resident of Fairfax County, Virginia. Although the grantor was a resident of Virginia, the Trust was funded with securities held in a brokerage account in Florida. Additionally, the Trust is administered by an executor in the District of Columbia and the beneficiaries are domiciled in California, Maryland, and Washington.
DETERMINATION
Pursuant to Virginia Code §58.1-381, every resident trust required to file a federal income tax return for the taxable year must also file a Virginia fiduciary income tax return. Virginia Code §58.1-302 defines a Virginia resident trust as a "trust created, or consisting of property of a person domiciled in the Commonwealth". "Domicile" is defined as "the permanent place of residence of a taxpayer". See Va. Code §58.1-302. Thus, when a trust is created its classification can be determined by the domicile of the grantor. Here, when the Trust was created it was a Virginia resident trust.
However, the facts presented in the instant case require additional inquiry before upholding the assessment of a Virginia tax against a trust which appears to have no connection to the Commonwealth except that the grantor was domiciled in Virginia when the trust was created but has since died.
Virginia may only tax the Trust if there is sufficient nexus between the Trust and Virginia to provide a basis for the state's authority to tax. W hen the grantor, beneficiaries, trustee(s), and property are all located in Virginia, there is little question that sufficient nexus exists and the imposition of the tax on the undistributed assets of the trust is correct.
However, in a case such as this where the grantor is deceased, the Department must consider not just the domicile of the grantor at the time the Trust was created but also the current domicile of the trustee(s), beneficiaries, and the location of the Trust property. If any of these parties are domiciles of Virginia, the tax imposed on Virginia resident trusts or estates under Va. Code §58.1-381 is appropriate. However, where none of these parties are Virginia domiciles, and the trust property is not located in Virginia, there may not be sufficient nexus to impose the tax.
In the instant case, neither the beneficiaries, trustees, nor the Trust property are in Virginia. It appears as if none of these entities receive the benefit or protection of Virginia law. Thus, there does not appear to be sufficient nexus for Virginia to currently tax the undistributed assets of the Trust.
As long as the circumstances remain the same, and the only connection between the Commonwealth of Virginia and the Trust is that Virginia was the domicile of the grantor when the Trust was created, Virginia will not impose the tax. However, it is important to note that under Virginia law the Trust is a Virginia resident trust. As such, the examination of the relationship between the Trust and Virginia is continuous and ongoing. Should either a beneficiary, trustee, or the Trust property become domiciled or located in Virginia, sufficient nexus may then exist to permit taxation of the Trust by the Commonwealth.
Accordingly, the requested relief is hereby granted. A refund in the amount of *********plus the appropriate interest, will be issued to the Trust in due course.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6610L
Rulings of the Tax Commissioner