Tax Type
Corporation Income Tax
Description
Apportionment of income; Limited partnerships
Topic
Allocation and Apportionment
Date Issued
10-16-1995
October 16, 1995
Re: Ruling Request: Corporate Income Taxes
Dear****************:
This will reply to your letters of June 1, 1995, September 28, 1995, and October 10, 1995, in which you request a ruling with respect to corporate income tax apportionment on behalf of an anonymous client.
FACTS
A is a limited partnership formed outside of Virginia, which owns real property in numerous states. A has over 100 partners. A also serves as the general partner of other partnerships. A, through its general partnership interests in other partnerships, indirectly owns real property in Virginia.
B is a corporation formed outside of Virginia, is the sole general partner of A, and owns approximately 59% of A. B is a publicly traded corporation.
C, and its parent corporation D, are corporations formed outside of Virginia and are owned and controlled by members of the Z family. D is the parent of a consolidated group which includes C, and various subsidiaries of C (the "C Subsidiaries"). Certain C Subsidiaries contributed assets to A in exchange for limited partnership interests in A.
C also participates as general partner of various partnerships (the "C Partnerships"). Certain of the C Partnerships contributed assets to A in exchange for limited partnership interests in A. The C Subsidiaries and the C Partnerships acquired their limited partnership interests in connection with the formation of A.
Certain of the C Subsidiaries and the C Partnerships sold their interests in A to unrelated third parties immediately following the formation of A.
Collectively, the Z family, C, and the participating C Subsidiaries and C Partnerships now own approximately 39% of A. The remaining limited partners of A (representing less than 2% of A) are unrelated individuals, trusts and corporations. Members of the Z family collectively own less than .1% of common stock of B.
Neither C, D, nor any of the C Subsidiaries or the C Partnerships, is organized in Virginia, conducts business in Virginia, or directly or indirectly owns real or tangible property located in Virginia other than through their limited partnership interests in A.
It is requested that the department rule that no C Subsidiary which continues to own a limited partnership interest in A is required to include its proportionate share of A's Virginia property, payroll or sales in order to determine a Virginia income tax apportionment factor for such corporation.
It is also requested that the department find that the C Subsidiaries which disposed of a limited partnership interest in A immediately following the formation of A are not required to report any amount of gain attributable to such disposition as Virginia source income or as includable as a sales factor amount for purposes of Virginia corporate income apportionment.
RULING
In Public Document (P.D.) 95-19 (2-13-95), copy attached, the department ruled that a corporate limited partner is generally required to include its proportionate share of the partnership's property, payroll and sales with its own property, payroll and sales for purposes of determining its Virginia apportionment factor. P.D. 95-19 modified the department's previous policy with regard to this issue. However, in that ruling the department set forth a safe harbor provision whereby no partnership attribution of apportionment factors would be required if:
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- (1) a corporation holds a limited partnership; (2) all general partners are unrelated third parties; (3) the combined partnership interests held by the corporation and all related parties constitute 10% or less of the profit and capital interest of the limited partnership; and (4) the structure is not a device primarily designed to avoid Virginia taxation of the limited partnership's income.
In the instant case, the Z family owns approximately 39% of the limited partnership interests of A, either directly or through their controlled corporations. The department finds this to be a significant ownership percentage, which is materially in excess of the safe harbor percentage provided in P.D. 95-19.
Perhaps more importantly, A was formed to take a closely held real estate business public. This business was owned and controlled by the Z family, which continues to hold a material ownership percentage in such business. This was not a passive investment, such as an investor might make in a publicly traded limited partnership, but an active trade or business investing in real estate both within and without of Virginia.
Given the facts as presented, the department does not find it appropriate to extend the safe harbor provisions of P.D. 95-19 to the instant case. Accordingly, D, C and the C subsidiaries should each include their respective share of A's property, payroll and sales (and A's Virginia property, payroll and sales) for purposes of determining their own Virginia apportionment factors.
With respect to the sale of limited partnership interests in A by certain of the C Subsidiaries, the department would consider this to be a sale of an intangible asset. Such sale would be "sourced" in accordance with VR 630-3-416, copy attached, with respect to where the income producing activity was incurred. Although we do not have enough information to make a determination with respect to this issue, the income producing activity would likely be deemed to have occurred at the corporation's headquarters or commercial domicile, or where such sale was negotiated and closed.
Although the gain on such sale would be included in taxable income subject to possible Virginia apportionment and taxation, as stated above the net gain on such sale is not likely to be considered a Virginia sale for purposes of determining the Virginia sales apportionment factor. However, the C Subsidiaries may have a Virginia apportionment factor as a result of their ownership of Virginia property, or interests in partnerships holding Virginia property, for periods of the taxable year preceding the formation and sale of the interests in A.
I hope the enclosed addresses all of your questions regarding the determination of Virginia apportionment. If you have any additional questions, please call*****************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/9767M
Rulings of the Tax Commissioner