Could a partnership compute a Virginia combined nonresident return separately for each partner instead of on aggregated income?

Subject

Income tax computed on the aggregated income of the pass-through entity attributable to the nonresident members

Plain-English summary

Virginia upheld computation of the combined nonresident return on the partnership's aggregated income attributable to participating nonresident partners. The entity could not calculate tax separately for each partner under the elective combined-return program.

The Tax Commissioner had discretion to permit combined returns and set their terms. The taxpayer's permission required applying the individual graduated rates to aggregated nonresident-partner income without itemized or standard deductions, personal exemptions, or credits for tax paid to the partners' home states.

Virginia reviewed the calculation and confirmed that graduated rates—not a flat rate—had been used. It found and corrected a minor mathematical error, but otherwise sustained the assessment method.

What this means for you

• Combined nonresident returns are elective administrative arrangements, not simply collections of separate individual calculations.
• Review the permission letter and program terms before calculating entity-level tax.
• Aggregation can change the result because individual deductions, exemptions, and credits may be unavailable.
• Recalculate the Department's arithmetic even when the legal method is correct.

Citations and references

• Va. Code §§ 58.1-395, 58.1-320, and 58.1-390.2.
• 2004 Va. Acts, Special Session I, ch. 3; former 23 VAC 10-130-20(C)(2).
• P.D. 84-260 (December 28, 1984), P.D. 91-213 (September 6, 1991), and P.D. 97-334 (August 27, 1997).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-206

Original ruling text

December 5, 2007

Re: § 58.1-1821 Appeal: Individual Income Tax

Dear *:

This is in reply to your letter in which you request correction of an individual income tax assessment issued to * (the "Taxpayer") for the taxable year ended December 31, 2004. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer, a limited liability partnership, filed a combined nonresident individual income tax return on behalf of its nonresident partners for the 2004 taxable year. The tax was computed separately for each partner included on the return. The Department adjusted the return by computing the tax on the Taxpayer's total income attributable to nonresident individuals and issued an assessment.

The Taxpayer contents the assessment, asserting that Virginia law makes owners of pass-through entities liable for their separate or individual income, not the entire income of the pass-through entity. Further, the Taxpayer argues that the Department used a flat rate to compute the tax instead of the statutory graduated rates used for individual income taxes.

DETERMINATION

A combined nonresident individual income tax return is an administrative convenience that allows nonresident partners to pay their respective Virginia tax at the entity level. The need for filing a separate Virginia return for each partner is eliminated. The Tax Commissioner has sole discretion to grant permission to file a combined nonresident return, and has the authority to set the terms for filing such a return. See Va. Code § 58.1-395. It is a privilege extended by the Department to taxpayers at the taxpayers' election. The convenience to the nonresident partners usually outweighs any benefits that may be lost.

When enacting Va. Code § 58.1-395, the Virginia General Assembly specifically granted the Tax Commissioner the sole discretion to grant permission to file combined nonresident returns under "such terms as he may determine." See Acts of Assembly, Chapter 3, 2004 Special Session I. This legislation codified the Department's regulatory and procedural practice of permitting pass-through entities to file combined nonresident income tax returns. See Title 23 of the Virginia Administrative Code (VAC) 10-130-20 C 2 (effective 1/1/1985, repealed 3/10/2007), Public Document (P.D.) 84-260 (12/28/1984), P.D. 91-213 (9/6/1991), and P.D. 97-334 (8/27/1997).

In 2002, the Department granted the Taxpayer permission to file a unified nonresident return. Permission to file such a return was granted provided the Taxpayer follow the conditions stipulated by the Department. One of the conditions requires the Taxpayer to compute Virginia income tax at the rates specified under Va. Code § 58.1-320 on the Taxpayer's income attributable to the nonresident partners without benefit of itemized deductions, standard deductions, personal exemptions or credit for income taxes paid to states of residence.

The Taxpayer contends that Va. Code § 58.1-320 mandates the use of a rate schedule for computing Virginia income tax, and Va. Code § 58.1-390.2 provides that each individual owner is individually liable for the tax on his or her share of a pass­through entity's income. The Taxpayer argues that this statute requires the Department to compute the tax on a combined nonresident return separately for each individual partner.

As stated above, permission to file a combined nonresident income tax return is authorized under Va. Code § 58.1-395, not Va. Code § 58.1-390.2 or Va. Code § 58.1-320. Under its longstanding policy, the Department has required the income tax to be computed on the aggregated income of the pass-through entity attributable to the nonresident members. This policy continues under the authority of Va. Code § 58.1-395. Accordingly, the Department correctly adjusted the tax liability on the Taxpayer's combined nonresident individual income tax return for the 2004 taxable year.

In addition, pursuant to the Taxpayer's appeal concerning how the assessment was computed, a review of the computation has been conducted and shows the tax was computed at the graduated rates specified under Va. Code § 58.1-320. A minor mathematical error, however, was discovered and has been corrected.

An updated bill will be issued shortly, which will include accrued interest. Payment of the outstanding balance should be sent to: Virginia Department of Taxation, Office of Customer Relations, Collections unit, 3600 West Broad Street, Richmond, Virginia 23230, Attention: *. No additional interest will accrue provided the outstanding balance is paid within 30 days from the date of the updated bill. Please attach a copy of this letter when remitting your payment.

The Code of Virginia sections, regulation, and public documents cited, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this response, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-1035048593E