Tax Type
Corporation Income Tax
Description
Partnerships
Topic
Taxpayers
Date Issued
06-18-1999
June 18, 1999
Re: Request for Ruling: Partnership Taxation
Dear***
This will reply to your letter in which you request a ruling on the taxability of nonresident partners, S corporation shareholders and individuals. I apologize for the delay in responding.
FACTS
A partnership ("P1') located in another state ("State A') operates a wholesale business in the United States and internationally. P1 also operates retail stores in many states including Virginia. P1 files as a partnership for federal income tax purposes. P1 is 50% owned by a partnership ("P2') with offices and operations out of another state ("State B'). P2 is owned by two S corporations ("C') located in State B. C is owned by a State B resident ("R'). During 1996, P2 sold its share of P1. Subsequent to the sale, the remaining partnership interest was turned into a limited liability company.
You request a ruling on the Virginia tax consequences on the capital gain on the sale of P1 to P2, C, and R. You then ask whether the results would change if, for federal purposes, the proceeds from the sale were treated as ordinary income (rather than capital gain). Finally, you ask if any of those entities are taxable, what apportionment method, if any, should be used.
RULING
Virginia's conformity to federal law is set forth in Code of Virginia § 58.1-301, which provides the terms used in the Virginia income tax statutes will have the same meaning as used in the Internal Revenue Code ("IRC'). Therefore, federal adjusted gross income ("FAGI'), the starting point for determining Virginia adjusted gross income, is identical to that as defined by the IRC.
Partnerships
Virginia generally conforms to the federal treatment of partnerships. A partnership as such, is not subject to income tax. Any income tax arising from the income of the partnership is the liability of the partners or shareholders. Every resident or nonresident partner with partnership income from Virginia sources is required to report such income on the appropriate Virginia income tax return. See Public Document ("P.D.') 88-165, copy enclosed. Thus, if a partnership operates a business in Virginia, any item of partnership income will flow to a partner which is a taxable entity.
S Corporations
Similarly, Virginia generally conforms to the federal treatment of S corporations. Electing small business corporations which make the election under Subchapter S of the Internal Revenue Code are exempt from Virginia corporate income tax. See P.D. 88-165. Such corporations are required to file a Virginia return even though exempt from income tax. The same filing requirements applicable to C corporations are applicable to S corporations.
Income received by an S corporation, which is determined to be income from Virginia sources, will remain Virginia source income in the hands of the shareholders. Generally, under federal income tax law, shareholders in an S corporation must be individuals. Accordingly, income from an S corporation is passed through until it reaches a taxable entity.
Apportionment
Title 23 of the Virginia Administrative Code (VAC) 10-130-20 (C), copy enclosed, requires that partnerships which have income from business both within and without Virginia compute their Virginia source income in accordance with the corporate statutory formula set forth in Code of Virginia Secs.58.1-408 through 58.1-421, making such changes necessary after considering the differences between corporations and partnerships. Therefore, such partnerships will usually allocate dividends to the state of commercial domicile and apportion all other income. In general, income is apportioned using a three-factor formula based on the property, payroll and sales within Virginia.
Individuals
The Virginia individual income tax is imposed upon individuals based upon their Virginia taxable income. The Virginia taxable income of a Virginia nonresident is defined under Code of Virginia § 58.1-325 as:
The gain on the sale of P1 will be included in P2's apportionable income. The sale will be reflected in the numerator of P2's sales factor to the extent of the Virginia assets that were sold. In addition, P2's 1996 apportionment factor will included the factor attributes passed through from P1. P2 will pass these income and factor attributes to C, which will in turn pass them through to R. R's income from Virginia sources will include the income of C apportioned to Virginia.
I trust that this ruling addresses your request. If you have any questions, you may contact *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12896R
Re: Request for Ruling: Partnership Taxation
Dear***
This will reply to your letter in which you request a ruling on the taxability of nonresident partners, S corporation shareholders and individuals. I apologize for the delay in responding.
FACTS
A partnership ("P1') located in another state ("State A') operates a wholesale business in the United States and internationally. P1 also operates retail stores in many states including Virginia. P1 files as a partnership for federal income tax purposes. P1 is 50% owned by a partnership ("P2') with offices and operations out of another state ("State B'). P2 is owned by two S corporations ("C') located in State B. C is owned by a State B resident ("R'). During 1996, P2 sold its share of P1. Subsequent to the sale, the remaining partnership interest was turned into a limited liability company.
You request a ruling on the Virginia tax consequences on the capital gain on the sale of P1 to P2, C, and R. You then ask whether the results would change if, for federal purposes, the proceeds from the sale were treated as ordinary income (rather than capital gain). Finally, you ask if any of those entities are taxable, what apportionment method, if any, should be used.
RULING
Virginia's conformity to federal law is set forth in Code of Virginia § 58.1-301, which provides the terms used in the Virginia income tax statutes will have the same meaning as used in the Internal Revenue Code ("IRC'). Therefore, federal adjusted gross income ("FAGI'), the starting point for determining Virginia adjusted gross income, is identical to that as defined by the IRC.
Partnerships
Virginia generally conforms to the federal treatment of partnerships. A partnership as such, is not subject to income tax. Any income tax arising from the income of the partnership is the liability of the partners or shareholders. Every resident or nonresident partner with partnership income from Virginia sources is required to report such income on the appropriate Virginia income tax return. See Public Document ("P.D.') 88-165, copy enclosed. Thus, if a partnership operates a business in Virginia, any item of partnership income will flow to a partner which is a taxable entity.
S Corporations
Similarly, Virginia generally conforms to the federal treatment of S corporations. Electing small business corporations which make the election under Subchapter S of the Internal Revenue Code are exempt from Virginia corporate income tax. See P.D. 88-165. Such corporations are required to file a Virginia return even though exempt from income tax. The same filing requirements applicable to C corporations are applicable to S corporations.
Income received by an S corporation, which is determined to be income from Virginia sources, will remain Virginia source income in the hands of the shareholders. Generally, under federal income tax law, shareholders in an S corporation must be individuals. Accordingly, income from an S corporation is passed through until it reaches a taxable entity.
Apportionment
Title 23 of the Virginia Administrative Code (VAC) 10-130-20 (C), copy enclosed, requires that partnerships which have income from business both within and without Virginia compute their Virginia source income in accordance with the corporate statutory formula set forth in Code of Virginia Secs.58.1-408 through 58.1-421, making such changes necessary after considering the differences between corporations and partnerships. Therefore, such partnerships will usually allocate dividends to the state of commercial domicile and apportion all other income. In general, income is apportioned using a three-factor formula based on the property, payroll and sales within Virginia.
Individuals
The Virginia individual income tax is imposed upon individuals based upon their Virginia taxable income. The Virginia taxable income of a Virginia nonresident is defined under Code of Virginia § 58.1-325 as:
-
- [a]n amount bearing the same proportion to his Virginia taxable income, computed as though he were a resident, as the net amount of his income, gain, loss and deductions from Virginia sources bears to the net amount of his income, gain, loss and deductions from all sources.
- [a]n amount bearing the same proportion to his Virginia taxable income, computed as though he were a resident, as the net amount of his income, gain, loss and deductions from Virginia sources bears to the net amount of his income, gain, loss and deductions from all sources.
The gain on the sale of P1 will be included in P2's apportionable income. The sale will be reflected in the numerator of P2's sales factor to the extent of the Virginia assets that were sold. In addition, P2's 1996 apportionment factor will included the factor attributes passed through from P1. P2 will pass these income and factor attributes to C, which will in turn pass them through to R. R's income from Virginia sources will include the income of C apportioned to Virginia.
I trust that this ruling addresses your request. If you have any questions, you may contact *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12896R
Rulings of the Tax Commissioner