What Virginia returns were required when an out-of-state limited partnership's only Virginia activity was owning leased commercial property?

Subject

Income tax filing requirements of an out-of-state limited partnership.

Plain-English summary

An out-of-state limited partnership bought Virginia commercial real estate subject to a triple-net lease. Its only Virginia activity was owning that property. The partnership had two equal owners: an individual general partner and a corporate limited partner, both located outside Virginia.

Virginia required the partnership to file an annual pass-through entity information return. Income, gain, loss, or deduction attributable to Virginia real property was Virginia-source income, and owning the commercial property went beyond the sales-solicitation protection of P.L. 86-272.

The partnership itself generally was not subject to income tax, but the Virginia-source character passed through to its owners. The individual general partner had to file a Virginia nonresident individual return. The corporate limited partner had to file a Virginia corporate income tax return and apportion its income under the cited Virginia provisions.

What this means for you

• Passive ownership of income-producing Virginia real estate can create a Virginia filing obligation even without another Virginia business operation.
• A partnership's Virginia-source items retain that character as they pass through ownership tiers until reaching a taxable owner.
• Each owner must evaluate its own return: an individual may need a nonresident return, while a corporate owner may need a corporate return and apportionment.

Citations and references

• Va. Code §§ 58.1-302, 58.1-391 B, and 58.1-392.
• Va. Code §§ 58.1-408 through 58.1-421, corporate apportionment.
• 15 U.S.C. §§ 381-384, P.L. 86-272.
• I.R.C. § 702(b), character of partnership items.
• Wisconsin Department of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992).
• P.D. 93-75 (March 17, 1993) and P.D. 88-165 (June 29, 1988).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-50

Original ruling text

April 26, 2007

Re: Request for Ruling: Pass-Through Entity Income Tax

Dear *:

This will reply to your letter in which you request a ruling as to the income tax filing requirements of an out-of-state limited partnership.

FACTS

A partnership (the "Partnership"), located in * (State A), has two 50% equity partners. The general partner is an individual who resides in *** (State B). The limited partner is a State B corporation. The partnership purchased commercial property in Virginia under a triple net lease. Neither the partnership nor the partners conduct any other business in Virginia other than the ownership of the Virginia commercial property. You request a ruling as to whether any of the parties are required to file Virginia income tax returns.

RULING

Virginia Code § 58.1-392 requires every pass-through entity doing business in Virginia or having income from Virginia sources to file an annual information return with the Department of Taxation setting forth its income and a list of owners, effective for taxable years beginning on or after January 1, 2004. Pursuant to Va. Code § 58.1-302, an entity has income from Virginia sources if it has any income, gain, loss or deduction attributable to the ownership in real property located in Virginia. As such, because the Partnership owns income-producing real property in Virginia, it must file an informational return.

Public Law (P.L.) 86-272, codified at 15 U.S.C. §§ 381-384, prohibits a state from imposing a net income tax where the only contacts with a state are a narrowly defined set of activities constituting solicitation of orders for sales of tangible personal property. The Department also applies P.L. 86-272 to the solicitation of sales of other than tangible personal property. See Public Document (P. D.) 93-75 (3/17/93). The Department limits the scope of P.L. 86-272 to only those activities that constitute solicitation, are ancillary to solicitation, or are de minimis in nature. See Wisconsin Department of Revenue v. William Wrigley, Jr., Co. , 505 U.S. 214 (1992). The Partnership's ownership of commercial property in Virginia clearly exceeds the protection provided by P.L. 86-272.

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. Internal Revenue Code § 702(b) states, "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." Each item of pass-through entity income, gain, loss or deduction has the same character for an owner for Virginia income tax purposes as for federal income tax purposes. See Va. Code § 58.1-391 B.

Thus, if a partnership operates a business in Virginia, any item of partnership income, gain, loss, deduction, or credit will retain its Virginia source character no matter how many partnerships it passes through. The pass through of Virginia source income will continue to occur from partnership to partner until the income is passed through to a partner that is a taxable entity.

In the situation you present, the income generated by the commercial property will retain its character as Virginia source income and pass through to both the general and limited partners, which are taxable entities. As such, the general partner will need to file a nonresident Virginia individual income tax return and the limited partner will need to file a Virginia corporate income tax return apportioning income in accordance with Va. Code §§ 58.1,-408 through 58.1-421. See Public Document (P.D.) 88-165 (6/29/88).

This ruling is based on the facts presented as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections and public document 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 ruling, please contact * in the Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-592718941B