Tax Type
Individual Income Tax
Description
Limited liability companies; Filing requirements
Topic
Partnerships
Date Issued
08-28-1997
August 28, 1997
Re: Request for Ruling: Corporation Income Tax
Dear**********
This will reply to your letter in which you are requesting a ruling on behalf of your client (the "Taxpayer") concerning the election by a single member limited liability company (LLC) to be disregarded as an entity separate from its owner under new Treasury Regulations related to Internal Revenue Code (IRC) § 7701.
FACTS
Effective January 1, 1997, the IRS has issued new regulations, Treasury Regulations § 301.7701-1 et seq., that allow entities to choose a federal classification or be classified under the regulation's default provisions. These regulations, labeled "check the box" regulations, replaced existing regulations for classifying business organizations as associations or partnerships based on the historical differences under local law between partnerships and corporations.
The Taxpayer is considering forming a wholly owned LLC to develop a project. The Taxpayer would elect to treat the LLC as a division for federal tax purposes. Because Virginia generally conforms with the IRC, you believe the LLC's income or loss will flow into the Taxpayer's taxable income and apportionment factors for Virginia. You wish to verify that this approach is correct.
DETERMINATION
Virginia's conformity to federal law is set forth in Code of Virginia § 58.1-301, which provides that the terms used in the Virginia income tax statutes will have the same meaning as used in the IRC. For Virginia, federal taxable income (FTI) and federal adjusted gross income (FAGI), the starting points for determining income taxable in Virginia for corporations and individuals, respectively, are identical to that as defined by the IRC.
The department has previously ruled on a similar issue in relation to a real estate investment trust (REIT) as defined by IRC § 856. See Public Document (P.D.) 94-139, (4-27-94), copy enclosed. Under IRC § 856, all assets, liabilities, and items of income, deduction, and credit of a qualified REIT subsidiary are treated as assets, liabilities, and items of income, deduction, and credit of the REIT. The federal taxable income of a REIT includes the income of any qualified REIT subsidiaries. Therefore, for Virginia purposes the taxable income of a REIT and qualified REIT subsidiaries would be determined in accordance with federal treatment.
Because the LLC will not be treated as a separate entity for federal taxation purposes, it will not have any FTI. Although the LLC will continue its legal existence and business activities, it will have no FTI for computing a Virginia taxable income and would not be required to file an income tax return if it operated in Virginia.
For federal income tax purposes, the Taxpayer will be considered the owner of all the LLC's assets and liabilities. Consequently, the department will regard the Taxpayer as having the attributes and conducting the activities of the LLC. Thus, the Taxpayer will include the income or loss of the LLC in determining Virginia taxable income and the LLC's property, payroll and sales in determining income apportioned to Virginia.
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 further assistance.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12512O
Rulings of the Tax Commissioner