Tax Type
Corporation Income Tax
Description
Partnerships; Limited partner
Topic
Taxpayers' Remedies
Date Issued
02-13-1995
February 13, 1995
Re: Ruling request: Corporate income taxes
Dear********
This will reply to your letter of December 13, 1994, in which you have requested a ruling on corporate apportionment with respect to limited partnership interests.
FACTS
Two foreign corporations, "A" and "B," are members of the same affiliated group filing a consolidated return for federal income tax purposes. A and B contemplate forming a limited partnership ("LP"), with A becoming a 99% limited partner, and B becoming a 1% general partner. A and LP would be in different lines of business. LP would be an operating entity with property, payroll and sales in Virginia. A's sole business would be holding the limited partnership interest, and would have no connection to Virginia other than its interest in LP. You have requested a ruling as to A's tax status in Virginia.
Alternatively, you ask if the department's position would be different if we assumed the same facts except that: (i) A is an operating entity in the same line of business as LP, and (ii) A's only connection to Virginia is its limited partnership interest in LP.
RULING
The department has previously ruled that if a partnership is carrying on a business, trade, profession or occupation in Virginia or is receiving income as a partner in a partnership which is carrying on a business, trade, profession or occupation in Virginia, the pass through of Virginia source income will continue until the income is passed through to a partner which is a taxable entity. See Public Document (P.D.) 88-165 (6129188), copy attached. Accordingly, Corporation A will be deemed to have income from Virginia sources and is therefore subject to the corporate income tax. See VR 630-3-400, copy attached.
If Corporation A is not subject to taxation in a state other than Virginia, 100% of its income will be subject to taxation in Virginia. See P.D. 93-245 (12128193), copy attached. Assuming that A is taxable in another state, it may allocate and apportion its income in accordance with Code of Virginia §58.1-406, et seq.
The department has previously ruled that a corporation which holds a general partnership interest in a partnership must include its proportionate share of partnership property, payroll and sales in its own factors for purposes of apportioning Virginia taxable income. See P.D. 88-226 (7129188), copy attached. However, in P.D. 88-235 (8/10/88), copy attached, the department ruled that a corporation which was a limited partner was not required to include its share of partnership property, payroll and sales for purposes of determining its Virginia apportionment factor.
The department's position in P.D. 88-235 has been modified several times. In P.D. 92-60 (511192), copy attached, the department ruled that where a corporation was both a general and a limited partner in the same partnership, the corporation had to include its proportionate share (general and limited) of partnership property, payroll and sales in its own factors for purposes of apportioning Virginia taxable income. In P.D. 94-240 (815194), copy attached, the department again modified its position with respect to factor attribution from a limited partnership. In that ruling, factor attribution attributable to a limited partnership interest held by an S Corporation was required in order to properly reflect the Virginia taxable income of nonresident S Corporation shareholders.
In the instant case, the department finds it necessary to again modify its ruling in P.D. 88-235. Company A holds a 99% limited partnership interest. Company B, a related party, holds a 1% general partnership interest. The department finds that this fact pattern is significantly different from the cases which prompted its prior rulings.
The department's prior experience with this issue has involved situations in which the general partner was an unrelated third party. The limited partnership interests were typically minority interests in "tax shelters" or"master limited partnerships." The department found that because the partnership interests were passive investments representing a small overall percentage interest in the partnership, factor attribution in such situations was not required. However, under the facts described in your letter, the general partner will be a related party, the partnership will be an active operating company, and the affiliated group will hold 100% of the partnership interests.
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- Code of Virginia §58.1-445 provides:
In any case of two or more related trades or businesses liable to taxation under this chapter owned or controlled directly or indirectly by the same interests, the Department may, and at the request of the taxpayer shall, if necessary in order to make an accurate distribution or apportionment of gains, profits, income, deductions or capital between or among such related trades or businesses, consolidate the accounts of such related trades or businesses.
- Code of Virginia §58.1-445 provides:
In the instant case, the department has the authority to require factor attribution from a limited partnership. Given the facts as presented, failure to do so would allow A to avoid Virginia taxation on 99% of the Virginia business activity carried on by LP, which would improperly reflect Virginia taxable income from business done in Virginia. Accordingly, A will be required to include its proportionate share of LP's property, payroll and sales with its own property, payroll and sales for purposes of determining its Virginia apportionment factor. The result will be the same regardless of whether A has any other business activity in addition to holding the limited partnership interest.
In the event that the department finds that requiring A to include its share of LP's factors improperly reflects Virginia taxable income from business done in Virginia, the department can, and if necessary will, seek other remedies which may include consolidating A with LP, or consolidating A with B.
The department's position with respect to P.D. 88-235 is therefore modified as provided herein. However, pending the promulgation of regulations in this area, the department shall continue to follow P.D. 88-235 in situations where: i) a corporation holds a limited partnership interest; ii) all general partners are unrelated third parties; iii) the combined partnership interests held by the corporation and all related parties constitute 10% or less of the profit and capital interests of the limited partnership; and iv) the structure is not a device primarily designed to avoid Virginia taxation of the limited partnership's income. The department will examine other situations on a case by case basis upon request.
If you have any additional questions regarding this ruling, please contact**********
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- Sincerely,
Danny M. Payne
Tax Commissioner
- Sincerely,
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OTP/8916M
Rulings of the Tax Commissioner