Tax Type
Individual Income Tax
Description
Personal income of partners; Shipping business
Topic
Partnerships
Date Issued
08-22-1994
August 22, 1994
Re: Request for Ruling: Individual Income Tax
Dear********
This will reply to your letter in which you request a ruling on behalf of ***** (the "Taxpayer") and its members, regarding the apportionment of income to Virginia. I apologize for the delay in responding.
FACTS
The Taxpayer's employees navigate ships through Virginia waterways and the waterways of another state. The Taxpayer charges a per mileage fee for its services. The Taxpayer distributes its earnings to its members.
For federal tax purposes, the Taxpayer is treated as a partnership. Each member is taxed based upon his pro rata share of the Taxpayer's earnings. The number of miles the Taxpayer's employees navigate ships is directly related to its earnings. Since a portion of the Taxpayer's earnings are from Virginia sources and a portion of the earnings are from another state, you request that each member be allowed to report earnings to Virginia waterways based upon the miles the Taxpayer travelled in Virginia during the taxable year as compared to the total miles the Taxpayer travelled during the taxable year.
RULING
Virginia Regulation (VR) 630-4-391 C provides that a partnership shall use the corporate apportionment rules in determining the income from Virginia sources of a nonresident partner "making such changes as necessary after considering the differences between a corporations and partnerships." Normally corporate apportionment rules would require the use of a three factor formula (property, payroll, and sales). A major difference exists between a corporation and a partnership whose partners are individuals. While most states imposing an income tax on corporations use some method of formulary apportionment, such methods are not traditionally used in the taxation of an individual's income. Therefore, a much greater risk of multiple taxation exists for individuals if the apportionment formula used does not closely match the manner in which the income is earned.
Among the considerations relevant to evaluating your requested apportionment method are:
- The use of a specific formula for determining the source of income is not mandated by statute. The regulation merely expresses a strong preference for the corporate formula.
- There is a very close correlation between the proposed method of apportionment and the manner in which the Taxpayer charges for its services and earns its income.
- The other state has agreed to accept this method for its income tax purposes. Examination of the percentages that would be attributable to such state and Virginia for the year in question shows that 100% of the Taxpayer's income is attributed to the two states.
- The Taxpayer only operates in the waters of Virginia and the other state. There are no miles in international waters that would result in a significant portion of the income being attributed to areas in which no state exists or lacks sufficient jurisdiction to impose a tax.
The allocation of income to Virginia based upon the miles traveled in Virginia waterways most reasonably measures the income earned from Virginia sources in this situation. As set forth in Public Document 88-256 (9/9/88), copy enclosed, allocation of income to Virginia sources should be based on some measurement of time or other measure that most reasonably reflects the amount of income earned in Virginia.
Each member should cite this ruling with each tax return filed with Virginia and provide along with the return a K-1 or other statement provided by the Taxpayer listing the number of miles the Taxpayer travelled in Virginia as compared to the total miles the Taxpayer traveled during the taxable year.
Please do not hesitate to contact the department if you have any further questions.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/7564O
Rulings of the Tax Commissioner