Tax Type
Individual Income Tax
Description
Taxable income of partners; Liability of nonresident partners
Topic
Partnerships
Date Issued
04-10-1996
April 10, 1996
Re: Ruling Request: Individual Income Tax
Dear***********
This will reply to your letter of January 3, 1996, requesting a ruling concerning the taxation of nonresident partners of six limited partnerships (the "Partnerships").
FACTS
The Partnerships were organized under the laws of Delaware. The limited partners of the Partnerships include individuals, trusts, partnerships, and corporations. Investments into the Partnerships are offered through private placement, and the Partnerships are not registered as investment companies under the Investment Company Act of 1940. Ninety-nine percent of the Partnerships' assets are invested directly or indirectly into securities on the major stock exchanges or publicly traded mutual funds and the remaining 1% of the assets are invested in financial futures. Earnings from the Partnerships consist of interest, dividends, and net short-term and long-term capital gains and losses. Expenses are fully deducted under § 162 of the Internal Revenue Code on the federal partnership returns reporting the activities of the Partnerships. The arrangement established by the Partnerships is commonly known as a "hedge fund."
The General Partner of the Partnerships is an S corporation whose primary office is located in another state, and is a registered investment advisor under the laws of that state. The General Partner receives management fees, annual performance-based fees, and reimbursement of expenses for managing the Partnerships's affairs. The General Partner is considering relocating a secondary office to Virginia. The Partnerships want a ruling on whether the nonresident partners of the Partnerships will be subject to Virginia tax on income from Virginia sources if the secondary office is relocated to Virginia.
DETERMINATION
A nonresident's taxable income from Virginia sources includes intangible income only if it arises from property employed by the taxpayer in a trade or business in Virginia. Code of Virginia § 58.1-302. A partnership's income from intangible property, therefore, will be taxable to nonresident partners only if the partnership is engaged in a trade or business in Virginia.
The facts of this case are similar to those in PD 94-275 (September 16, 1994). In that case the department ruled that the nonresident partners would not be subject Virginia taxation on the intangible income distributed from the partnership. Nonresident shareholders of the general partner, however, would be liable for income from Virginia sources as the general partner would be carrying on a trade or business in Virginia.
In this instance, after the General Partner establishes a secondary office in Virginia, the Partnerships would have no real or tangible property in Virginia and would not be carrying on a trade or business in Virginia. The property of the Partnerships includes certificates and other evidence of ownership of securities which, even if physically located in Virginia, would not cause the income from the securities to be income from Virginia sources" taxable to a nonresident partner.
The General Partner, however, would be conducting a trade or business in Virginia after establishing a secondary office here. A portion of its income from management fees, commissions, and other sources would be considered income from Virginia sources on which nonresident shareholders of the General Partner would be subject to Virginia income tax.
I trust this will answer the question posed in your letter; however, please contact **** at **** if you have additional questions or if we may be of further assistance.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10761N
Rulings of the Tax Commissioner