Tax Type
Individual Income Tax
Description
Taxation of nonresidents; Nonresident limited partners
Topic
Taxpayers' Remedies
Date Issued
09-16-1994
September 16, 1994
Re: Request for Ruling: Income Tax
Dear*********
This will reply to your letter of January 14, 1994, in which you request a ruling on the taxability of limited partners, who are nonresidents of Virginia.
FACTS
Your client is a limited partnership (the "Partnership") organized under the laws of another state and is not currently located in Virginia. Interests in the Partnership were offered through private placement and the Partnership is not registered as an investment company under the Investment Company Act of 1940. The limited partners (the "Limited Partners") include individuals, trusts and corporations. The Partnership has no employees, nor does it own any tangible or real property.
The general partner (the "General Partner"), an S Corporation, is a registered investment advisor. All decisions regarding investment strategy and trades for the Partnership are made solely by the General Partner. In addition to the income derived from its interest in the Partnership, the General Partner also receives a quarterly management fee and performance based bonuses for its management of the Partnership.
The Partnership invests solely in stocks and bonds of companies listed on one of the major stock exchanges. Consequently, the earnings consist of interest, dividends and net short and long term capital gains and losses. Such an arrangement is commonly known as a "hedge fund". Furthermore, the Partnership is not considered a trade or business for federal income tax purposes.
Both the Partnership and General Partner are contemplating a relocation to Virginia. You inquire if such a relocation did occur, would the nonresident Limited Partners have income from Virginia sources as defined by Va. Code § 58.1-302.
RULING
Virginia generally conforms to the federal treatment of partnerships. A partnership as such, is not subject to income tax. But rather, every resident or nonresident partner with partnership income from Virginia sources is required to report such income on the appropriate Virginia income tax return.
Income from Virginia sources is defined by Va. Code § 58.1-302. The portion of Va. Code §58.1-302 applicable to the ownership of partnership interest provides;
-
- Income from Virginia sources includes:
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.
- Income from Virginia sources includes:
In the instant case, the activities of the Partnership are of a passive nature limited strictly to investing in stocks and bonds. All income is reported on the federal partnership tax return as portfolio income. The Partnership's expenses consist solely of allocable nontrade or nonbusiness expenses allowable under Internal Revenue Code § 212. Initially, many of the Limited Partners had separately established investment accounts with the General Partner prior to the formation of the Partnership. Since the objectives of these separate accounts were similar, the General Partner consolidated the accounts by the formation of the Limited Partnership.
The department has previously ruled in Public Document (P.D.) 88-232 (7129188), copy attached, that the nonresident limited partners of a partnership engaged in trading securities and commodities would have income from Virginia sources and be required to file Virginia income tax returns. However, an important difference exists which distinguishes the facts in P.D. 88-232 from the instant case. In P.D. 88-232, the partnership had both Virginia property and payroll. In the instant case, the Partnership has neither property nor payroll.
Based on the above, it is apparent that if the Limited Partners held these assets on their own, as opposed to in limited partnership form, these holdings would merely constitute an investment and not a trade or business. The Partnership is little more than a pooling of assets by investors, similar in substance to a mutual fund. Therefore, the nonresident Limited Partners distributive share of the Partnership's income would not be considered Virginia source income.
Nevertheless, it is evident that the activities engaged in by the General Partner constitute a trade or business. The General Partner, an S Corporation, actively manages the investments of the Partnership and receives a quarterly fee and bonuses for acting in this capacity. In addition to its responsibilities of developing investment strategy and executing trades, the General Partner also performs recordkeeping functions, hires outside consultants and communicates results to the other partners. Therefore, each individual nonresident shareholder of the S Corporation would have income from Virginia sources and thus be liable to file a nonresident individual income tax return with Virginia.
I trust this will answer the questions posed in your letter; however, please contact the department if you have additional questions or if we may be of any further assistance.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/7607L
Rulings of the Tax Commissioner