Directive PD-02-1

Subject: Investment Partnerships
Tax: Individual Income
Law: G.S. 105-154
Issued By: Personal Taxes Division
Date: November 6, 2002
Number: PD-02-1

This directive announces a change in the Department of Revenue's position on when an investment partnership is doing business in North Carolina. The Department is making this change to provide clarity and certainty to taxpayers and to promote uniformity among the states. The change is effective for tax year 2001 and subsequent tax years.

An investment partnership is a partnership that is not a dealer in securities, as defined in section 475(c)(1) of the Internal Revenue Code, and that derives income exclusively from buying, holding, and selling securities for its own account. A partnership whose only activity is as an investment partnership is not considered to be doing business in North Carolina. Consequently, an investment partnership is not required to file an income tax return in North Carolina nor pay income tax to North Carolina on behalf of its nonresident partners.

Before this change, the Department applied the facts and circumstances test set out in subsection (c) of administrative rule 17 NCAC 6B .3503 to determine whether an investment partnership was doing business in North Carolina. Factors relevant to that test included the extent of business operations in the State, the principal source of income, the length of time securities were held, the volume of transactions, and the value of securities bought and sold. This directive supersedes 17 NCAC 6B .3503(c), as amended effective July 1, 2000. The rule will be modified to reflect this directive.

If a nonresident individual partner of an investment partnership paid tax to North Carolina for tax year 2001 on its distributive share of income from the investment partnership, the individual may obtain a refund of the tax paid. The individual must file a return or an amended return, as appropriate, for tax year 2001 to obtain the refund. An investment partnership may not apply for a refund on behalf of one or more of its nonresident individual partners.

If you have questions about this directive, you may call the Personal Taxes Division of the North Carolina Department of Revenue at (919) 733-3565. You may also write to the Division at P.O. Box 871, Raleigh, N.C. 27602-0871.