Virginia Court Decision Affects Corporate Apportionment of Income from a PTE

In a recent Virginia Court of Appeals decision, the general requirement that a corporation use blended apportionment factors when the corporation is an owner of a pass-through entity (PTE) was held to be inconsistent with the U.S. Constitution to the extent that such corporation and such PTE do not have a unitary relationship. 

Court’s decision 

The Virginia Court of Appeals recently decided Dep’t of Taxation v. FJ Mgmt., Inc., 907 S.E.2d 541 (Va. App. Ct. 2024) (“the FJ Mgmt. case”), which concerned a corporation that owned an ownership interest in a PTE. The Court held that because the corporate owner did not have a unitary relationship with that PTE, the corporate owner’s share of the PTE’s property, payroll, and sales factors may not be included in its own to create one, blended apportionment formula. As a result, the amount of the non-unitary PTE’s income on which a corporate partner is to be taxed equals its distributive share of such income apportioned to Virginia at the PTE-level based on the PTE’s own apportionment factors.

Additional information 

Details, including instructions for impacted corporations, can be found in Tax Bulletin 25-5.