Did a securities-investment partnership managed from Virginia have to file a Virginia return or make its nonresident partners taxable?

Subject

Partnership requirements to file a return when liable for income tax

Plain-English summary

A Delaware partnership invested only in exchange-traded securities held in a Virginia brokerage account. Its general partner lived in Virginia, its accounting occurred here, and a corporation owned by the general partner managed the investments from a Virginia office. The partnership itself had no employees, real property, or tangible property in Virginia.

Virginia ruled that merely investing in intangible personal property under these facts was not carrying on a Virginia trade or business. The partnership therefore had no Virginia-source income and did not have to file the annual pass-through information return described in Va. Code § 58.1-392.

The nonresident partners were not required to file Virginia returns based on this partnership income unless they had other Virginia-source income. The Virginia-resident general partner remained taxable on all income, including the partnership income.

What this means for you

• Virginia management and a Virginia brokerage account did not alone turn this securities-only partnership into a Virginia trade or business.
• The result depended on the partnership having no employees, real property, tangible property, or other operating activity in Virginia.
• Resident and nonresident partners can have different Virginia filing consequences from the same partnership income.

Citations and references

• Va. Code § 58.1-392, annual information returns for pass-through entities doing business in Virginia or having Virginia-source income.
• Va. Code § 58.1-302, nonresident intangible income from property employed in a Virginia trade or business.
• Va. Code § 58.1-322, taxation of a Virginia resident's income.
• Tax Bulletin 05-6, pass-through reporting requirements.
• P.D. 94-275 and P.D. 96-42, securities investing and nonresident partners.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-77

Original ruling text

May 18, 2007

Re: Request for Ruling: Individual Income Tax

Dear *:

This will reply to your letter in which you request a ruling concerning the taxation of * (the "Partnership") and its partners.

FACTS

The Partnership is organized under the laws of Delaware. The limited partners of the Partnership include individuals, trusts, partnerships, and corporations. Investments into the Partnership are offered through private placement, and the Partnership is not registered as an investment company under the Investment Company Act of 1940. All of the Partnership's assets are held in a brokerage account located in Virginia and all investments consist of securities traded on the major stock exchanges.

The general partner resides in Virginia and the Partnership's accounting is done in Virginia. The investments are managed by a corporation owned by the general partner from an office located in Virginia. The investment manager corporation is paid a fee and reimbursed for direct expenses. For federal income tax purposes, the Partnership is classified as a trader or as an investor based on the volume of transactions for the year. You request a ruling as to whether the Partnership is required to file a return and whether the nonresident partners are liable for income tax.

RULING

Partnership

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.

The Department has held that pass-through entities that are established solely to invest in intangible personal property, such as stocks and bonds, and that have no employees, and no real or tangible property are not considered to be carrying on a trade or business. See Public Document ("P.D.") 94-275 (9/16/94). Income from the intangible property held by an investment pass-through entity is not income from Virginia sources, and these types of pass-through entities will not be required to file a return. See Tax Bulletin 05-6 (5/6/05).

In the scenario presented, the Partnership assets are held in a Virginia brokerage account located in Virginia, and all investments consist of securities traded on the major stock exchanges. The Partnership does not have any employees, real property or tangible property in Virginia. Based on the information provided and the above-cited authorities, the Partnership is not carrying on a trade or business in Virginia and does not have income from Virginia sources. Therefore, the Partnership does not fall within the scope of Va. Code § 58.1-392 and is not required to file an annual information return with the Department.

Nonresident Partners

A nonresident's taxable income from Virginia sources includes intangible income only if it arises from property employed by the taxpayer in a trade or business in Virginia. See Va. Code § 58.1-302. A partnership's income from intangible property, therefore, will be taxable to nonresident partners only if the partnership is engaged in a trade or business in Virginia.

The facts of this case are similar to those in P.D. 94-275 (9/16/94). In that case, the Department ruled that the nonresident partners would not be subject to Virginia taxation on the intangible income distributed from the partnership because the activity of investing in securities does not constitute a trade or business. See also P.D. 96-42 (4/10/96).

In addition, the recently enacted legislation regarding pass-through entities primarily established reporting and computational requirements. These new rules, however, do not affect Virginia's policy with regard to subjecting nonresident partners to Virginia income tax. Accordingly, the nonresident partners will not be required to file Virginia income tax returns unless they have other income that results from Virginia sources.

General Partner

The general partner is a Virginia resident. As such, all of his income, including income from the Partnership, is subject to Virginia tax. See Va. Code § 58.1-322.

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, Tax Bulletin 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 ruling, please contact * in the Department's Office of Policy and Administration, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/57200B