Was a nonresident investment partnership's intangible income South Carolina-source income to its nonresident limited partners under PLR 95-2?

Plain-English summary

South Carolina Private Letter Ruling 95-2 concluded that the described nonresident partnership's investment income was not South Carolina-source income to its nonresident limited partners.

The Delaware partnership pooled resources to invest in stocks, securities, other intangible assets, and limited partnerships for its own account. It did not give financial advice or trade for other people. Its Delaware S-corporation general partner maintained a South Carolina office for administration, selecting outside investment managers, and related services.

The ruling applied the historical rule that a nonresident partnership was not considered to carry on a South Carolina trade or business solely by purchasing and selling property for its own account, unless it was a dealer holding property for customers. Partnership items retained their character and source when passed through to the partners under IRC Section 702.

The Department distinguished a business earning significant fees from advising, deal-making, and financial contracts. It also expressly limited the ruling to sourcing the limited partners' income and did not decide how the general partner was taxed.

Common questions

Q: Did the South Carolina office automatically source the partnership's investment income to the state? No, under the particular facts in the ruling.

Q: What activity supported the result? Buying and selling intangible property solely for the partnership's own account, with no customer trading or financial advice.

Q: Did income from outside partnerships change the conclusion? The stated facts included income from partnerships located and doing business outside South Carolina.

Q: Did the ruling decide the general partner's tax? No. It expressly excluded that issue.

Q: Can another investment partnership rely on PLR 95-2? No. The ruling states that it has no precedential value and only the addressee may rely on it.

Citations and references

• S.C. Code Ann. §§ 12-7-420 and 12-7-450 (historical partnership and nonresident sourcing rules)
• IRC § 702 (character and source of distributive-share items)
• Commission Decision #92-58 (factually distinguished in the ruling)

Subject

Income of a Nonresident Limited Partner

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR95-2.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P. O. Box 125, Columbia, South Carolina 29214

SC PRIVATE LETTER RULING #95-2 (TAX)

TO:

ABC

SUBJECT:

Income of a Nonresident Limited Partner
(Income Tax)

DATE:

January 27, 1995

REFERENCE:

S. C. Code Ann. Section 12-7-420 (Supp. 1993)
S. C. Code Ann. Section 12-7-450 (Supp. 1993)

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (Supp. 1993)
SC Revenue Procedure #94-1

SCOPE:

A Private Letter Ruling is an official advisory opinion issued by the
Department of Revenue to a specific person.

NOTE:

A Private Letter Ruling may only be relied upon by the person to whom it
is issued and only for the transaction or transactions to which it relates. A
Private Letter Ruling has no precedential value.

Question:
Is income generated by ABC, as described in the facts, South Carolina source income to its
nonresident limited partners?
Conclusion:
Income generated by ABC, as described in the facts, is not South Carolina source income to its
nonresident limited partners since the nonresident partnership is not considered to carry on a
business or trade in South Carolina solely by reason of the purchase and sale of property for its
own account.
Facts:
ABC is a limited partnership organized under the law of Delaware for the purpose of pooling
resources in order to maximize investments in stocks, securities, other intangible assets, and
limited partnerships for its own account. It does not give financial advice or trade for others. It
pays professional investment managers and advisors a fee for managing its investments.

1

The general partner of ABC, is an S corporation, XYZ, incorporated under the laws of Delaware
and authorized to do business in South Carolina. ABC does not maintain an office in South
Carolina. XYZ, however, has an office in South Carolina and it's only purpose is to: (1) handle
ABC administrative affairs, (2) provide necessary administrative services for the limited
partnership, and (3) choose the investment advisors and managers who make investments on
behalf of the partners. At this time, such brokers and dealers are not located in South Carolina.
For rendering the above investment and administrative services on behalf of the limited partners,
the general partner, XYZ, receives a management fee from ABC 1
For federal income tax purposes, ABC reports the following character and sources of income on
the limited partners K-1:

• Dividends
• Interest
• Capital gains and losses
• Ordinary income, net of expenses directly related to the income.
  (This income is from trading activities of intangible property.)
• Income from other partnerships that are located outside of South
  Carolina. (This income includes dividends, interest and capital
  gain. It also includes some income generated by a trade or
  business of the second tier partnership doing business outside of
  South Carolina.)
  Discussion:
  Code Section 12-7-420 addresses the taxation of partnerships and reads:
  A partnership is not subject to tax under this chapter. All of the provisions of the
  Internal Revenue Code apply to determine the gross income, adjusted gross income,
  and taxable income of a partnership and its partners, subject to the modifications
  provided in '12-7-430.
  South Carolina has adopted the partnership provisions contained in Subchapter K of the Internal
  Revenue Code. The character of items constituting a partners distributive share is set forth in
  IRC '702 which provides:

1

This document does not address the proper taxation of XYZ. It is limited to the appropriate
sourcing of the nonresident limited partners income and will not address the taxation of the
general partner.

2

the character of any item of income, gain, loss, deduction, or credit included in a
partner's distributive share...shall be determined as if such item were realized
directly from the source from which realized by the partnership, or incurred in the
same manner as incurred by the partnership.
The law, therefore, provides that a partnership is not subject to income tax. Each partner is
directly taxable on his distributive share of partnership income. Items of income, loss and
deduction are separately stated and "passed through" to the partners. Such items retain their
character at the partner level and are treated as if realized by the partner directly from the source
from which realized by the partnership or as if incurred by the partner in the same manner as
incurred by the partnership. (See IRC ' 702(b).)
For South Carolina purposes, the nonresident partners are taxable on their distributive share of
the partnership's South Carolina taxable income as determined for a nonresident under Code
Section 12-7-450. Code Section 12-7-450 taxes the nonresident on the same basis as a resident
but allows several modifications as set out in the subsections of Code Section 12-7-450.
Code Section 12-7-450(a)(6) provides that the South Carolina taxable income includes income
from the following sources:
Income from intangible personal property, including annuities, dividends, interest,
and gains from the disposition of intangible personal property to the extent that such
income is from property employed in a trade, business, profession, or occupation
carried on in South Carolina. A nonresident individual, nonresident
partnership,..., other than a dealer holding property primarily for sale to
customers in the ordinary course of his or its trade or business, is not
considered to carry on a business, trade, profession, or occupation in South
Carolina solely by reason of the purchase and sale of property for his or its own
account; (emphasis added).
Based upon the facts presented, ABC is a nonresident partnership that is organized for the
purpose of pooling resources in order to maximize investments in stocks, securities, other
intangible assets, and limited partnerships for its own account. 2 Pursuant to Code Section 12-7450(a)(6), ABC is not considered to carry on a business in South Carolina since its income is
solely from its purchase and sale of property for its own account. Accordingly, the income
generated by ABC, as described in the facts, is not South Carolina source income to its limited
partners who are nonresidents of South Carolina.
2

This is distinguishable from Commission Decision #92-58 wherein it was factually determined
that the South Carolina S corporation was not deriving income solely by reason of the purchase
and sale of property for its own account. Its activities not only produced gains on sales of
property but also significant fee income from financial advising, deal making, and financial
contracts. The Commission concluded the gains and the interest were derived from property
connected with the taxpayer's business and were properly apportionable, and the dividend
income was allocated to the shareholder's domicile.

3