Virginia’s change to its policy of blended apportionment

Virginia has a longstanding administrative policy requiring blended apportionment for corporate partners of partnerships engaged in business in the Commonwealth. A Virginia Department of Taxation bulletin changed that treatment relating to non-unitary partnerships.

In 2024, the Virginia Court of Appeals in Commonwealth v. FJ Management, Inc. ruled that a corporate partner (LLC member) that was not unitary with an LLC doing business in Virginia could not be required to include its share of the non-unitary LLC’s apportionment factors with its apportionment factors. The LLC was taxed as a partnership for federal and Virginia income tax purposes. After the Virginia Supreme Court declined to review the Court of Appeals’ decision in May 2025, the Department of Taxation issued Tax Bulletin 25-5 in October 2025. The Tax Bulletin changes Virginia’s across-the-board blended apportionment policy.  A non-unitary corporate partner must treat its distributive share of partnership income the same as allocable dividend income and, unlike actual allocable dividend income under Virginia law, the non-unitary partner’s distributive share is specifically allocated to Virginia based on the partnership’s apportionment of the income. 

The policy change is applicable to 2025 returns (the extended due date of 2025 corporate returns for calendar year filers is November 16, 2026). Despite the FJ Management case, the Tax Bulletin also provides “transition relief” for 2024 and prior year returns. For those years, corporate taxpayers are given two options: (1) if the non-unitary partner filed its 2024 or prior year returns using blended apportionment, no action is required; or (2) amended returns may be filed using the allocation treatment provided in the Tax Bulletin. Tax Bulletin 25-5 acknowledges that FJ Management “represents a meaningful change.”

Virginia is a “full apportionment” state that treats all income as apportionable, subject to a corporate taxpayer’s right to petition for alternative apportionment, except dividends. Thus, the bulletin raises questions about whether Tax Bulletin 25-5’s change in longstanding administrative policy is permissible and whether the new policy has statutory support.