Tax Type
Corporation Income Tax
Description
Limited Liability Companies
Topic
Taxpayers
Date Issued
12-08-1998
December 8, 1998
Re: Ruling Request: Corporate Income Tax
Dear *****
This will reply to your letter in which you request a ruling as to the proper application of corporate tax for ***** (the ``Taxpayer') with respect its interest in a limited partnership. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer holds an 18.75% limited partnership interest, by both capital interest and profit, in a business that invests in rental real property within and without Virginia. All the general partners are unrelated third parties. The Taxpayer has no business operations within Virginia outside those of the limited partnership. The Taxpayer is requesting a ruling as to whether or not it would be subject to Virginia corporate income tax as a result of its limited partnership interest.
RULING
In Public Document (P.D.) 95-19 (2-13-95), copy enclosed, 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. The department has set forth a standard in P.D. 95-19 whereby no partnership attribution of apportionment factors would be required for limited partnerships provided a corporation meets all of the following:
The department has not deviated from this standard in determining whether a partnership attribution of apportionment factors is required. However, you point out what appears to be an inconsistency in the department's policy in P.D. 96-316, (11/4/96), copy attached. In that case, the Tax Commissioner excluded limited partnership interests from the apportionment factors referring to the department's original policy stated in P.D. 88-235, (8/10/88), copy attached. Unfortunately, the determination was not clear as to whether the limited partnerships met the standard established in P.D. 95-19. This omission was inadvertent in as the limited partnership interests did in fact qualify under the department's policy established in P.D. 95-19.
Furthermore, you understand the regulations to Code of Virginia Sec. 58.1-391 (B) to apply only to a general partner. Title 23 of the Virginia Administrative Code (VAC) 10-130-20, formerly Virginia Regulation (VR) 630-4-391, does not limit the law's application to general partners. 23 VAC 10-120-160, formerly VR 630-3-409, does provide, in part: ``For purposes of the property factor each item of partnership property shall have the same character for a corporate general partner as if direct corporate ownership of the property existed.' (Emphasis added.) In the promulgation of this regulation and P.D. 88-265, the department recognized that limited partnership interests were, in many cases, more akin to passive investments than to operational activities.
The department has, however, had to modify its position with regard to P.D. 88-265 on a number of occasions (see P.D. 95-19) due to the expanding array of investment and business opportunities available through limited partnerships. For this reason, the policy in P.D. 95-19 was established to provide a bright line test as to when a limited partnership interest is exempted from passing its property, payroll and sales attributes through to a taxable entity. The established policy requires a limited partnership interest to meet all four tests in order to avoid apportionment factor attribution.
Based on the facts this case, the Taxpayer's clearly satisfies two of the four standards by holding a limited partnership interest and having no affiliation with the general partners. The department will not make an advance ruling as to whether or not the entity structure is a device primarily designed to avoid Virginia taxation of the limited partnership's income. Such a determination can only be made after reviewing the nature and substance of the limited partnership and its transactions with the Taxpayer. Nonetheless, such a review is unnecessary as the Taxpayer's ownership exceeds 10% of the limited partnership that invested in rental real estate located in Virginia. The department finds this to be a significant ownership percentage. Thus, the Taxpayer does not meet the provisions of P.D. 95-19.
Accordingly, the Taxpayer has income from Virginia sources that is subject to Virginia income tax and should include its respective share of property, payroll and sales of the limited partnership for purposes of determining its Virginia apportionment factors.
I hope the enclosed addresses all of your questions regarding the determination of Virginia apportionment. If you have any additional questions, please call ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13855O
Re: Ruling Request: Corporate Income Tax
Dear *****
This will reply to your letter in which you request a ruling as to the proper application of corporate tax for ***** (the ``Taxpayer') with respect its interest in a limited partnership. I apologize for the delay in responding to your letter.
FACTS
The Taxpayer holds an 18.75% limited partnership interest, by both capital interest and profit, in a business that invests in rental real property within and without Virginia. All the general partners are unrelated third parties. The Taxpayer has no business operations within Virginia outside those of the limited partnership. The Taxpayer is requesting a ruling as to whether or not it would be subject to Virginia corporate income tax as a result of its limited partnership interest.
RULING
In Public Document (P.D.) 95-19 (2-13-95), copy enclosed, 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. The department has set forth a standard in P.D. 95-19 whereby no partnership attribution of apportionment factors would be required for limited partnerships provided a corporation meets all of the following:
-
- (1) a corporation holds a limited partnership interest; (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.
The department has not deviated from this standard in determining whether a partnership attribution of apportionment factors is required. However, you point out what appears to be an inconsistency in the department's policy in P.D. 96-316, (11/4/96), copy attached. In that case, the Tax Commissioner excluded limited partnership interests from the apportionment factors referring to the department's original policy stated in P.D. 88-235, (8/10/88), copy attached. Unfortunately, the determination was not clear as to whether the limited partnerships met the standard established in P.D. 95-19. This omission was inadvertent in as the limited partnership interests did in fact qualify under the department's policy established in P.D. 95-19.
Furthermore, you understand the regulations to Code of Virginia Sec. 58.1-391 (B) to apply only to a general partner. Title 23 of the Virginia Administrative Code (VAC) 10-130-20, formerly Virginia Regulation (VR) 630-4-391, does not limit the law's application to general partners. 23 VAC 10-120-160, formerly VR 630-3-409, does provide, in part: ``For purposes of the property factor each item of partnership property shall have the same character for a corporate general partner as if direct corporate ownership of the property existed.' (Emphasis added.) In the promulgation of this regulation and P.D. 88-265, the department recognized that limited partnership interests were, in many cases, more akin to passive investments than to operational activities.
The department has, however, had to modify its position with regard to P.D. 88-265 on a number of occasions (see P.D. 95-19) due to the expanding array of investment and business opportunities available through limited partnerships. For this reason, the policy in P.D. 95-19 was established to provide a bright line test as to when a limited partnership interest is exempted from passing its property, payroll and sales attributes through to a taxable entity. The established policy requires a limited partnership interest to meet all four tests in order to avoid apportionment factor attribution.
Based on the facts this case, the Taxpayer's clearly satisfies two of the four standards by holding a limited partnership interest and having no affiliation with the general partners. The department will not make an advance ruling as to whether or not the entity structure is a device primarily designed to avoid Virginia taxation of the limited partnership's income. Such a determination can only be made after reviewing the nature and substance of the limited partnership and its transactions with the Taxpayer. Nonetheless, such a review is unnecessary as the Taxpayer's ownership exceeds 10% of the limited partnership that invested in rental real estate located in Virginia. The department finds this to be a significant ownership percentage. Thus, the Taxpayer does not meet the provisions of P.D. 95-19.
Accordingly, the Taxpayer has income from Virginia sources that is subject to Virginia income tax and should include its respective share of property, payroll and sales of the limited partnership for purposes of determining its Virginia apportionment factors.
I hope the enclosed addresses all of your questions regarding the determination of Virginia apportionment. If you have any additional questions, please call ***** at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13855O
Rulings of the Tax Commissioner