Could a pass-through LLC file one 2015 Virginia unified return for selected nonresident individual and grantor-trust owners?

Subject

Request to File a Unified Nonresident Individual Income Tax Return

Plain-English summary

Virginia permitted a foreign LLC taxed as a partnership to submit a unified Virginia nonresident return for 2015 on behalf of participating owners. The LLC had 22 nonresident individual members and 16 nonresident grantor-trust members whose income passed through to nonresident beneficiaries.

The permission was conditional. Participating qualified nonresident owners had to receive Schedule VK-1 and sign consent forms. The unified return had to use Virginia's highest individual rate on the owners' attributable partnership income, without itemized or standard deductions, personal exemptions, residence-state tax credits, carryover credits, or credits unrelated to the pass-through entity. An authorized entity representative had to sign, and the LLC had to make estimated payments for included owners.

The LLC could include only some qualified nonresident owners, but it then had to pay pass-through withholding for qualified owners left outside the unified return. If the conditions were unacceptable, each nonresident individual or trust with Virginia-source income had to file separately unless a statutory filing exception applied. The Department reserved the right to withdraw or modify the authorization on reasonable notice.

What this means for you

• Unified filing can replace separate Virginia returns for participating qualified nonresident owners.
• Participation requires documented consent and accepts the unified-return limitations.
• Owner-level deductions and most personal credits are unavailable on the unified return.
• Qualified owners not included in the return remain subject to the pass-through withholding rules.

Common questions

Q: Did every nonresident owner have to join the unified return?

A: No. For tax years beginning on or after January 1, 2015, the entity could include only a portion of its qualified nonresident owners if it paid withholding for qualified owners who did not participate.

Q: Could participating owners claim personal deductions or a credit for tax paid to their home state?

A: No. The ruling required tax at the highest Virginia rate without those owner-level benefits.

Q: What records did the LLC need?

A: A signed consent form for each participant containing the owner's name, address, and Social Security number, maintained for the Department on request.

Citations and references

• Va. Code §§ 58.1-395, 58.1-320, and 58.1-441.
• P.D. 07-150 and superseding P.D. 15-240.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 17-164

Original ruling text

September 13, 2017

Re: Request to File a Unified Nonresident Individual Income Tax Return

Dear *:

This will reply to your letter submitted on behalf of your client, * (LLC1), in which you request permission to file a unified income tax return for the taxable year ending December 31, 2015.

FACTS

LLC1, a foreign limited liability company, is treated as a partnership for federal income tax purposes. LLC1's members include 22 nonresident individuals and 16 nonresident grantor trusts. The trusts are treated as disregarded entities for federal income tax purposes, and all income passes to the nonresident beneficiaries. In 2015, LLC1 acquired a membership interest in * (LLC2). Prior to this purchase, LLC1 had no Virginia source income. LLC2 receives income from a real estate investment located in Virginia. As a result of income and factor attributes flowing through from LLC2, LLC1 is not required to file a Virginia return. LLC1 requests permission to file a unified nonresident income tax return on behalf of its nonresident members.

DETERMINATION

Virginia Code § 58.1-395 provides the Tax Commissioner the authority to grant permission to file a statement of combined pass through entity income attributable to nonresident owners and thereby relieve nonresident owners from filing nonresident individual income tax returns. In Public Document (P.D.) 07-150 (9/21/2007), the Department agreed to accept composite returns filed on behalf of multiple nonresident individuals and pass-through entities when certain conditions are met. Such conditions were superseded by P.D. 15-240 (12/22/2015).

For taxable years prior to 2014, a pass-through entity was required to obtain the consent of each nonresident owner in order to file a composite return. Effective for taxable years beginning on or after January 1, 2015, a pass through entity may file a composite return for only a portion of its qualified nonresident owners, provided that the pass-through entity pays the pass-through entity withholding tax for any qualified nonresident owners who are not included in the composite return. Participation in the composite return will be considered as consent to pay Virginia income tax. To file a composite return, a pass through entity must meet the following requirements:

The pass-through entity must provide a completed copy of Schedule VK-1 to each qualified nonresident owner included in the composite return

The Virginia income tax on the composite return must be computed using the highest rate specified under Va. Code § 58.1-320 on the partnership's income attributable to the qualified nonresident owners included on the composite return without the benefit of itemized deductions, standard deductions, personal exemptions, credits for income taxes paid to states of residence, any tax credit carryover amounts, or any other tax credits that are not attributable to the pass-through entity.

The pass-through entity must obtain a signed consent form from each participating qualified nonresident owner indicating the owner's consent to inclusion in the composite return.

The composite return must be signed by an owner, officer, or employee of the pass-through entity who is authorized to act on behalf of the pass-through entity in tax matters. By signing the composite return, the signer is declaring that he or she is an authorized representative of the pass-through entity and that each participant has signed a consent form authorizing the pass-through entity to act on the participant's behalf in the matter of composite returns and acknowledging the participant's understanding and acceptance of all of the terms and conditions of participation in a composite return.

The pass-through entity must make estimated payments on behalf of the qualified nonresident owners included on a composite return.

A qualified nonresident owner's participation in the composite return will indicate his or her consent to be taxed by the Commonwealth. The consent form obtained by the pass-through entity must include the qualified nonresident owner's name, address, and Social Security number. The pass-through entity must maintain such forms and provide them to the Department upon request.

If the aforementioned conditions are acceptable, then LLC1 may submit a 2015 unified return. The Department, however, reserves the right to withdraw or modify any authorization upon reasonable notice. If the conditions are not acceptable, please note that each nonresident individual and trust having income from Virginia sources for the taxable year must file a Virginia nonresident individual or fiduciary income tax return, unless they meet the filing exceptions described in Va. Code § 58.1-441.

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 response, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/712.D