Tax Type
Individual Income Tax
Description
Taxable income of partners; "Check-the-box' elections
Topic
Partnerships
Date Issued
10-14-1998
October 14, 1998
Dear********:
This will reply to your letter in which you are requesting a ruling on behalf of your client (the Taxpayer) concerning Virginia's treatment of partnerships that elect to be taxed as corporations pursuant to the Treasury Regulations Sec. 301.7701 et. seq.
FACTS
New Treasury Regulations Sec. 301.7701-1 et seq., effective January 1, 1997, 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 based on the historical differences under local law between partnerships and corporations..
The Taxpayer is a holding company for a number of corporations that operate in a number of states including Virginia. Under a restructuring plan, some of the corporations may be converted to partnerships. These partnerships would elect to be taxed as corporations for federal income tax purposes. You request a ruling as to whether a partnership that elects to be treated as a corporation under the "check the box' regulations would be also treated as a corporation for income tax purposes in Virginia.
RULING
Virginia's conformity to federal law is set forth in Code of Virginia Sec. 58.1-301, which provides that the terms used in the Virginia income tax statutes will have the same meaning as used in the Internal Revenue Code (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 in Public Document (P.D.) 97-343, (8-2897), (copy attached), that Virginia's conformity with the IRC means that Virginia will follow an election by a limited liability company (LLC) not to be treated as a separate entity for federal taxation purposes. The ruling went on to state that the member entities would be subject to tax on their Virginia income even if they have no nexus with Virginia because of the Virginia tax attributes of the LLC. If, however, the LLC checks the box and makes the election to be taxed as a corporation for federal income tax purposes, it will have FTI and would be subject to tax on its income if it has nexus with Virginia. Therefore, for Virginia purposes the taxable income of the LLC and its member or members would be determined in accordance with federal treatment.
Traditionally, a partnership, although having a legal existence and business activities, will pass all its income and other tax attributes to its partners for federal and Virginia income tax purposes. However, while a federal information return is required of partnerships, Virginia stopped requiring partnership returns with the taxable years beginning on or after January 1, 1987. See P.D. 88-43, (3-29-88), copy attached.
The "check the box' regulations now allow a partnership to be treated as a corporation for federal income tax purposes. Under this election, the income and other tax attributes of a partnership would not pass through to the partners. Instead, the partnership will file an income tax return as if it were a corporation. This would free the partners from having to include the income on their returns and could relieve them from filing nonresident or corporate income tax returns in all states where the partnership operates.
Because of Virginia's conformity to the definition of FTI, a partnership electing to be treated as a corporation under the "check the box' regulations and which has income from Virginia sources will have income subject to Virginia income tax. Consequently, if the partnerships in this case elect corporation treatment under the federal regulations, they would be required apportion income to Virginia and file Virginia corporate income tax returns.
Under such an election, the Taxpayer and the other partners will not be considered as owners of the partnerships' assets and liabilities. As such, the department would not regard the Taxpayer and the other partners as having the attributes and conducting the activities of the partnerships and would not have to include the income or loss of the partnerships in determining Virginia taxable income or the partnerships' 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.
Dear********:
This will reply to your letter in which you are requesting a ruling on behalf of your client (the Taxpayer) concerning Virginia's treatment of partnerships that elect to be taxed as corporations pursuant to the Treasury Regulations Sec. 301.7701 et. seq.
FACTS
New Treasury Regulations Sec. 301.7701-1 et seq., effective January 1, 1997, 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 based on the historical differences under local law between partnerships and corporations..
The Taxpayer is a holding company for a number of corporations that operate in a number of states including Virginia. Under a restructuring plan, some of the corporations may be converted to partnerships. These partnerships would elect to be taxed as corporations for federal income tax purposes. You request a ruling as to whether a partnership that elects to be treated as a corporation under the "check the box' regulations would be also treated as a corporation for income tax purposes in Virginia.
RULING
Virginia's conformity to federal law is set forth in Code of Virginia Sec. 58.1-301, which provides that the terms used in the Virginia income tax statutes will have the same meaning as used in the Internal Revenue Code (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 in Public Document (P.D.) 97-343, (8-2897), (copy attached), that Virginia's conformity with the IRC means that Virginia will follow an election by a limited liability company (LLC) not to be treated as a separate entity for federal taxation purposes. The ruling went on to state that the member entities would be subject to tax on their Virginia income even if they have no nexus with Virginia because of the Virginia tax attributes of the LLC. If, however, the LLC checks the box and makes the election to be taxed as a corporation for federal income tax purposes, it will have FTI and would be subject to tax on its income if it has nexus with Virginia. Therefore, for Virginia purposes the taxable income of the LLC and its member or members would be determined in accordance with federal treatment.
Traditionally, a partnership, although having a legal existence and business activities, will pass all its income and other tax attributes to its partners for federal and Virginia income tax purposes. However, while a federal information return is required of partnerships, Virginia stopped requiring partnership returns with the taxable years beginning on or after January 1, 1987. See P.D. 88-43, (3-29-88), copy attached.
The "check the box' regulations now allow a partnership to be treated as a corporation for federal income tax purposes. Under this election, the income and other tax attributes of a partnership would not pass through to the partners. Instead, the partnership will file an income tax return as if it were a corporation. This would free the partners from having to include the income on their returns and could relieve them from filing nonresident or corporate income tax returns in all states where the partnership operates.
Because of Virginia's conformity to the definition of FTI, a partnership electing to be treated as a corporation under the "check the box' regulations and which has income from Virginia sources will have income subject to Virginia income tax. Consequently, if the partnerships in this case elect corporation treatment under the federal regulations, they would be required apportion income to Virginia and file Virginia corporate income tax returns.
Under such an election, the Taxpayer and the other partners will not be considered as owners of the partnerships' assets and liabilities. As such, the department would not regard the Taxpayer and the other partners as having the attributes and conducting the activities of the partnerships and would not have to include the income or loss of the partnerships in determining Virginia taxable income or the partnerships' 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.
Rulings of the Tax Commissioner