Did a Virginia LLC with one rental property have to withhold 5% for its nonresident members after fully disclosing every owner?

Subject

Taxpayer is eligible for the nonresident withholding exception

Plain-English summary

A Virginia LLC earned income from one Virginia rental property and had both resident and nonresident members. Its pass-through return reported nonresident withholding on a capital gain, but it made no withholding payment, leading to an assessment of tax, penalty, and interest.

Virginia generally required a pass-through entity to withhold 5% of Virginia-source income allocated to nonresident owners. But the statute created an exception when the entity received rental income from four or fewer Virginia dwelling units and disclosed every owner's name and federal taxpayer identification number on the return.

The LLC maintained one rental property and properly disclosed all members. It therefore qualified for the exception, and Virginia abated the withholding assessment.

Common questions

What were the two requirements for this exception? Four or fewer Virginia rental dwelling units and full owner-name and federal-ID disclosure.

Did the members' own payment of tax create the exception? The ruling based the result on the statutory rental-property and disclosure requirements.

Citations and references

• Va. Code § 58.1-486.2 A, B 1, and C 4.
• P.D. 07-150 and P.D. 11-103.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-238

Original ruling text

December 22, 2015

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter submitted on behalf of * (the "Taxpayer") in which you seek correction of the pass through entity withholding tax assessment issued for the tax year ended December 31, 2013.

FACTS

The Taxpayer is a Virginia LLC whose members reside within and outside of Virginia. The Taxpayer's income is derived from rental property located in Virginia. The Taxpayer filed a Virginia pass through entity return and reported nonresident withholding on a capital gain. Because no withholding payment was made, the Department issued an assessment for tax, penalty and interest. The Taxpayer appeals the assessment, contending the tax liability was allocated to and paid by the each of its members.

DETERMINATION

Virginia Code § 58.1-486.2 A, provides that "a pass-through entity that has taxable income for the taxable year derived from or connected with Virginia sources, any portion of which is allocable to a nonresident owner" must pay withholding tax. The amount of tax that must be withheld is equal to 5% of the nonresident owner's share of income from Virginia sources of all nonresident owners that may lawfully be taxed by Virginia and which is allocable to a nonresident owner. See Va. Code § 58.1-486.2 B 1 and Public Document (P.D.) 07-150 (9/21/2007).

Pursuant to Va. Code § 58.1-486.2 C4, withholding is not required for a nonresident owner when the pass-through entity receives rental income from four or fewer dwelling units within the Commonwealth, provided the pass-through entity discloses the name and federal taxpayer identification number of all such owners on its pass-through entity return.

The Taxpayer maintained one rental property in Virginia during the 2013 taxable year. In addition, the Taxpayer properly disclosed the names and federal identification number of all of its resident and nonresident members in its pass-through entity return. Because it maintained less than four properties within Virginia and made proper disclosure of all of its members, as prescribed in P.D. 11-103 (6/10/2011), the Taxpayer is eligible for the nonresident withholding exception. As such, the Department's assessment will be abated.

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

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-6038353247.D