Tax Type
Corporation Income Tax
Description
Limited liability companies; Trade or business
Topic
Taxpayers' Remedies
Date Issued
11-03-1995
November 3, 1995
Re: Request for Ruling: Income Tax
Dear****************:
This will reply to your letter of July 28, 1995, in which you request a ruling concerning the Virginia income tax treatment of the nonresident members of************* (the "LLC"), a limited liability company.
FACTS
The LLC is a Virginia limited liability company, organized as the common investment vehicle for certain investors. Memberships in the LLC are offered through private placement and the LLC is exempt from registering with the Securities and Exchange Commission. The members of the LLC are likely to include institutions (pension plans, insurance companies, banks) and individuals.
The managing member of the LLC is a registered investment advisor. The managing member will have a small or token investment in the LLC, and will receive a fee for investment services performed for the LLC.
The LLC invests in stock markets and bonds in foreign countries, with the objective of holding securities for capital gain, dividend and interest income. Expenses of the LLC are limited to the fees paid to the managing member, costs of investment transactions, and legal and accounting fees. The LLC is treated as a partnership for federal income tax purposes.
Most of the members are domiciled or located outside of Virginia. You ask if the nonresident members of the LLC are subject to Virginia income tax on the income they derived from their investment in the LLC.
DETERMINATION
Virginia conforms to the federal income tax treatment of a limited liability company. Therefore, a limited liability company which is treated as a partnership for federal income tax purposes will likewise be treated as partnership for Virginia purposes. As such, the limited liability company will not be subject to Virginia income tax. However, every resident and nonresident member of a limited liability company that has income from Virginia sources is required to report such income on the appropriate Virginia income tax return.
Income from Virginia sources, as defined by Code of Virginia § 58.1-302, 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 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.
The department has previously issued a ruling which is relevant to the case at hand. See Public Document ("P.D.") 94-275 (9/16/94), copy attached. In this ruling, the department examined a limited partnership that engaged in investment activities.
The partnership's income in P.D. 94-275 consisted of portfolio income (i.e. interest, dividends and capital gain) from investments in stocks and bonds. The partnership's expenses consist solely of allocable nonbusiness expenses allowable under Internal Revenue Code ("I.R.C.") 212. The partnership owned no property and had no employees. The partnership was not considered a trade or business for federal income tax purposes.
In P.D. 94-275, the department held 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. Therefore, the department ruled that the nonresident limited partners distributive share of income of the partnership's income would not be considered Virginia source income.
Many of the facts presented in the instant case are analogous to those presented in P.D. 94-275. Both the limited partnership and the LLC derive income of a passive nature. The expenses of the LLC appear to be restricted to nonbusiness expenses, only deductible under I.R.C. § 212. It appears the LLC is administered from the office of the managing member, and therefore, the LLC itself has no tangible property or payroll. Consequently, if the activities of the LLC do not exceed those of the limited partnership described in P.D. 94-275, its nonresident members will not have income from Virginia sources.
However, should the activities of the LLC rise to the level of a trade or business, it is unlikely the nonresident members would incur a material tax liability because of Virginia's income tax subtraction for certain types of income derived from foreign sources. Under Virginia law, both individuals and corporations are permitted to exclude interest, dividends, gains and certain other types of passive income derived from foreign sources in computing Virginia taxable income. See Code of Virginia §§ 58.1-322(C)(7), 58.1-402(C)(8) and the definition of foreign source income in Code of Virginia § 58.1-302, copies attached. Based on the facts presented, it appears that substantially all of the interest and dividend income generated by the LLC and passed-through to its members would be of the type that qualifies for this exclusion, and thus be exempt from Virginia income taxation.
I trust this will answer the questions posed in your letter; however, please contact*****at **********if you have additional questions or if we may be of any further assistance.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10187L
Rulings of the Tax Commissioner