Does Utah tax a nonresident partner's share of income from an investment partnership that itself invests in a Utah-based fund, the way New York, California, and North Carolina exempt this kind of investment-only income?

Plain-English summary

An investment partnership that itself invests in a portfolio of other investment partnerships — most located outside Utah, but with one Utah-based fund producing Utah-source income starting in 1996 — asked how Utah taxes its nonresident partners on that Utah-connected income. The taxpayer pointed out that several other states (New York, New York City, North Carolina, and California) exempt nonresident limited partners entirely when a partnership's only activity is trading investment securities for its own account — treating that kind of passive investment activity as not "doing business" in the state at all — and asked whether Utah has a similar carve-out.

Utah does not have that blanket exemption, but the actual rule the Commission described is more nuanced than a flat "nonresidents pay tax on all Utah-sourced partnership income" reading of the TC-65 instructions might suggest:

• Under Utah Code Ann. § 59-10-303, a nonresident partner is taxed on their distributive share of partnership income, gains, and losses that are derived from Utah sources.
• What counts as Utah-source turns on the type of underlying asset, not on where the investment partnership itself is organized or managed. If a partner's interest or capital gains arise from investments in real or tangible personal property physically located in Utah, that income IS taxable in Utah.
• But if the interest or capital gains come from investments in intangibles (such as stock) — or from real/tangible property located outside Utah — that income is instead taxed in the partner's own state of domicile, not Utah, even if the fund generating it happens to be a Utah-based investment partnership.
• Separately, a partnership can file a composite return on behalf of nonresident partners who have no other Utah-source income, per Utah Admin. Rule R865-9I-13 — a filing convenience worth using where it applies.

What this means for you

Investment partnerships (funds of funds) with nonresident limited partners

Don't assume a Utah-based portfolio investment automatically makes your nonresident partners' whole distributive share Utah-source income. Trace the underlying investments: gains and interest tied to Utah real estate or Utah tangible property are Utah-source; gains and interest tied to intangibles like stock (even held through a Utah fund) are sourced to each partner's home state.

Nonresident limited partners in Utah-connected investment funds

Utah doesn't categorically exempt your investment-only income the way New York, North Carolina, and California do — but you may still owe no Utah tax on much of your distributive share if it's derived from intangible investments rather than Utah real or tangible property.

Accountants and tax professionals

This is a useful comparative-law example: contrast Utah's asset-type sourcing approach under § 59-10-303/Rule R865-9I-21 with the entity-level "not doing business" exemptions used by NY (Tax Law § 631(D)), NYC (Admin. Code § 11-502(c)), NC, and CA (Rev. & Tax. Code § 17955) for pure investment partnerships — Utah reaches a similar practical result for intangibles-only income, but through a different legal mechanism (sourcing the income by asset type rather than exempting the partner's filing obligation entirely).

Common questions

Q: Does investing through a Utah-based fund automatically make a nonresident partner's income Utah-taxable?
A: No — only the portion tied to real or tangible personal property actually located in Utah. Income from intangible investments like stock is sourced to the partner's home state.

Q: Does Utah have an exemption like New York's or California's for nonresident limited partners in pure trading/investment partnerships?
A: Not a blanket entity-level exemption — Utah instead sources income by asset type under § 59-10-303 and Rule R865-9I-21.

Q: Can the partnership simplify filing for nonresident partners with no other Utah income?
A: Yes — a composite return is available under Rule R865-9I-13 for nonresident partners who have no other Utah-source income.

Citations and references

Statutes and rules:

• Utah Code Ann. § 59-10-303 (nonresident partner taxation)
• Utah Admin. Rule R865-9I-21 (sourcing rule)
• Utah Admin. Rule R865-9I-13 (composite return)

Comparative state law cited by the taxpayer (not Utah authority):

• N.Y. Tax Law § 631(d); N.Y.C. Admin. Code § 11-502(c)
• North Carolina investment-partnership sourcing practice
• California Rev. & Tax. Code § 17955

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/96-151.htm

Original ruling text

96-151

Response
November 6, 1996

Request

October
2, 1996

XXXXX

Utah
State Tax Commission

Fax
XXXXX

Dear
XXXXX

RE:
Utah Law on Investment Partnerships

We
have an investment partnership who invests in other investment partnerships
that have no Utah source income for 1995 as all the partnerships invested in
are outside the state. However, for
1996, we do have one investment in a Utah investment partnership located in
Utah and producing Utah source income.
We would like to get some written documentation from you or the Utah Tax
Code regarding treatment of Utah source income for non-resident partners. Based on the instructions for the TC-65,
non-residents are to file in Utah and be taxed on the Utah source income. In other states that we file in due to
source income from them, there are no exclusions in their tax code for non-residents who have no other source
income from their state and the source income being passed through to them is
from an investment partnership training on their behalf, and the income
consists solely of capital gains, interests and dividends. We would like to determine before our 1996
filing, if something of this nature exists under the Utah Tax Code. Some examples from other states are as
follows:

**New
York State **

As
all of the partnership's items of income, gain, loss and deductions are
attributable to the trading of intangible property for its own account, they
are not considered as derived from, or connected with, New York State
sources (NYS tax law section
631(D)). Accordingly, non- resident
limited partners are not required to file New York non-resident returns with
respect to their interest in Example, L.P.

New
York City

Example,
L.P. is not subject to the New York City unincorporated business tax under
section 11- 502 (C) of the New York City tax code which exempts an
unincorporated entity that trades for its own account as does Example, L.P.

North
Carolina

If
a partnerships only activities within North Carolina are in the nature of an
investment account in which the securities are held for capital appreciation
and income, the receipt of dividends and interest and the occasional sales of
stocks and bonds does not constitute carrying on a trade or business in this
State. A non-resident partner does not
include his distributive share of the partnership income in the numerator of
the fraction in determining North Carolina taxable income.

California

Example,
L.P. is a limited partner in several California based limited partnerships, all
of which are investment partnerships which trade in qualified investment
securities for the purpose of California Revenue and the Tax Code Section
17955. Accordingly, California non-resident
partners are not required to file California non-resident income tax returns
with respect to their interest in Example, L.P.

Please
fax or mail us any written/verbal information you may have discussing the issue
as it pertains to the state of Utah.

Thank
you for your help.

Sincerely,

XXXXX

XXXXX

Advisory
Opinion - Taxation of Investment Partnership Income from Utah Sources

Dear
XXXXX

We have received your request for tax
guidance for non-resident investors who receive income from an investment
partnership which earns income from Utah sources. We offer the following guidance:

Under section 59-10-303 of the Utah
Code, a non-resident partner is subject to Utah income tax on his distributive
share of partnership income, gains, and losses derived from Utah sources. (See Utah Administrative Rule R865-9I-21,
enclosed). If the partners have interest
or capital gains arising from investments in real or tangible personal property
located in Utah, the interest or
capital gains is taxable in Utah. If
the interest or capital gains is earned from investments in intangibles (such
as stock), or from investments in real or tangible personal property outside
Utah, the income is taxable in the partner�s state of domicile.

For non-resident partners, the
partnership may file a composite return for those partner who have no other
income from Utah sources. See Utah Administrative
Rule R865-9I-13 (enclosed) for more information about the composite return.

Please let us know if you have other
questions.

For
the Commission,

Joe
B. Pacheco,

Commissioner