Date post: | 24-Dec-2015 |
Category: |
Documents |
Upload: | jemimah-sanders |
View: | 220 times |
Download: | 1 times |
Omaha, NE – Tax Executives Institute
Baker & McKenzie Consulting LLC provides tax advisory and economic services and does not provide legal advice or services. Baker & McKenzie LLC is a subsidiary of Baker & McKenzie LLP, a member firm of Baker & McKenzie International, a Swiss Verein of member law firms around the world. In accordance with the common terminology used in professional service organizations, reference within the organization to a “partner” means a person who is a partner, or equivalent, in a member firm or its affiliate. Similarly, reference to an “office” means an office of the member firm or affiliate.
State Income Tax Update
January 20, 2008
J. Pat [email protected](650) 856-5526
John [email protected](212) 626-4232
State Income Tax Update
©2009 Baker & McKenzie 2
Topics• California Update
• Massachusetts Update
• Related Party Transactions
State Income Tax Update
©2009 Baker & McKenzie 4
California Update• Recent Legislation
• Dividends Received Deduction
• LLC Tax
• Treasury Receipts and Apportionment
• Hyatt Case – Audit Practices
• Sales/Use Tax Developments
• Budget Woes
State Income Tax Update
©2009 Baker & McKenzie 5
Recent Legislation• Net Operating Losses
• Substantial Understatement Penalty
• Estimated Tax Payment
State Income Tax Update
©2009 Baker & McKenzie 6
Net Operating Losses
• Utilization Suspended for Tax Years Beginning in 2008-2009– Carryforward Period Extended
• For Losses in Years Beginning After January 1, 2008, Loss Carryforward Extended to 20 Years
• For Losses Incurred After January 1, 2011, Carryback For Two Years
• Loss Carryovers Based on Specific Entity, Not Group Basis
• Compare New Credit Carryforward Provisions
State Income Tax Update
©2009 Baker & McKenzie 7
20% Substantial Understatement Penalty• For Understatement of $1 Million Determined on
Combined Group Basis– Automatic
– No-fault
– Applies to Years Beginning After January 1, 2003• Payment Before May 31, 2009 Relieves Penalty
– Taxpayer Dilemma
State Income Tax Update
©2009 Baker & McKenzie 8
Estimated Tax Payment• Amounts of Estimated Payments Increased for
Both Corporations and Individuals
State Income Tax Update
©2009 Baker & McKenzie 9
Dividends Received Deduction (DRD)
• Dividends From Controlled Foreign Corporations– California Rev. & Tax. Code § 25106: Eliminate
Dividends From Income Included in Combined Report
– Background: Amdahl/Fujitsu Case (2004) Followed IRC § 959 on Previously Taxed Income
• Franchise Tax Board (FTB) Amended Regulation
• FTB and Board of Equalization Claimed That They Are Not Bound by Court of Appeal Decision in Amdahl/Fujitsu
• Apple Computer: Current Status
State Income Tax Update
©2009 Baker & McKenzie 10
Dividends From Unrelated Corporations
• Aftermath of Farmer Brothers
• Statutory Background– Rev. & Tax. Code § 24402: DRD for Dividends
Declared From Income Included in the Measure of Tax
• Farmer Brothers Struck Down Discrimination
• Abbott Laboratories Case– Is Discriminatory Provision Eliminated?
OR
– Is Entire Statute Gone?
State Income Tax Update
©2009 Baker & McKenzie 11
LLC Tax• As Originally Enacted, LLC “Fee” Was Based
On Gross Receipts Everywhere (Without Apportionment)
• LLC Tax Was Held To Violate Commerce Clause– Northwest Energetic
• FTB Pays Refunds to LLCs With No Receipts Apportioned to California
• Legislature Enacts Bill Apportioning Receipts, Purportedly On Retroactive Basis
State Income Tax Update
©2009 Baker & McKenzie 12
LLC Tax• Ventas Finance 1 LLC (2008): Court Limited
Refund As If Statute Provided Apportionment Formula
State Income Tax Update
©2009 Baker & McKenzie 13
Treasury Receipts And Apportionment
• In Microsoft, California Supreme Court Held That Gross Receipts Go Into Sales Factor, But Excluded Them As Distortive Under Rev. & Tax. Code § 25137.
• FTB Amended Reg. § 25137 to Exclude Treasury Receipts From Sales Factor Beginning after January 1, 2007.
State Income Tax Update
©2009 Baker & McKenzie 14
Hyatt Case – Audit Practices• Hyatt v. FTB
– Las Vegas Jury Awarded Gilbert Hyatt $388 Million in Damages for Emotional Distress and Invasion of Privacy ($138 Million Compensatory and $250 Million Punitive)
– U.S. Supreme Court Ruled That Plaintiff Could Maintain Suit in Nevada Despite California Law Immunizing FTB From Tort Liability
– Abusive Audit Grew Out of Dispute as to When Mr. Hyatt Ceased to be California Resident
State Income Tax Update
©2009 Baker & McKenzie 15
Sales/Use Tax Developments• Dell Computer
• Patton Music
State Income Tax Update
©2009 Baker & McKenzie 16
Budget Woes• September 19, 2008 Budget Passed: Three
Months Late
• Budget Trailer Bills Enacted Without Adequate Review or Public Input
• Illusion of “Balanced Budget” Vanished Quickly
• Current: Deficit Projected Over Next 18 Months $42 Billion
• Political Problem Leading to Fiscal Disaster
State Income Tax Update
©2009 Baker & McKenzie 18
Overview• House Bill 4904 signed into law on July 3, 2008.
– Conformity to Federal Entity Classification Rules
– Combined Reporting Requirement• Shift from separate reporting jurisdiction to combined
reporting for unitary affiliates.
– Change in Public Law 86-272 Position
– Tax Rate Reductions
– Effective for tax years beginning on or after January 1, 2009.
State Income Tax Update
©2009 Baker & McKenzie 19
Entity Classification• As of 1/1/09, Massachusetts generally adopts
the federal “check-the-box” rules for entity classification.– Corrects historical disparity for Massachusetts
business trusts, S-corporation subsidiaries (QSubs), and certain partnerships
– Eliminates rules historically applicable to the taxation of Massachusetts business trusts
– Reclassifies non-conforming entities as of 1/1/09
State Income Tax Update
©2009 Baker & McKenzie 20
Reclassification Guidelines • Change from Partnership to Corporation
– Partnership deemed to contribute all its assets and liabilities to a new corporation.
– Then, partnership is deemed to liquidate and distribute the stock of the corporation to its partners.
• Change from Corporation to Partnership– Corporation deemed to liquidate and make
distribution to its shareholders.• Massachusetts gain may exist upon liquidation,
despite being a federal non-event.– Then, the shareholders are deemed to contribute
those assets and liabilities to the new partnership.
State Income Tax Update
©2009 Baker & McKenzie 21
Reclassification Guidelines
• Change from Corporate Trust to Corporation– Treated generally as a tax-free reorganization.
• Shareholders’ basis in stock shares is the same as in the former trust, except for a reduction for all “tax-free” earnings and profits of the former corporate trust that have not been previously taxed to the former trust or the shareholders.
• Change from Corporate Trust to Partnership– Treated as a tax-free reorganization.
• All “tax-free” earnings and profits of the former corporate trust must be taxable as dividend income to partners on first return after conversion.
State Income Tax Update
©2009 Baker & McKenzie 22
Reclassification Guidelines
• Change from Corporation to Disregarded Entity– Corporation deemed to liquidate and distribute all assets and
liabilities to shareholder.
– Massachusetts gain may exist upon liquidation, despite being a federal non-event.
• Change from Corporate Trust to Disregarded Entity– Corporate trust deemed to have liquidated.
– Generally no recognition of gain or loss; however, tax-free earnings and profits of the former trust must be recognized as taxable dividend income to the owner.
State Income Tax Update
©2009 Baker & McKenzie 23
Combined Reporting – Composition of Combined Group
• Unitary Business Principle– The term “unitary business” shall mean the activities of a group
of 2 or more corporations
• Under common ownership (50%)
• Sufficiently interdependent, integrated or interrelated through their activities so as to provide mutual benefit
• Producing a significant sharing or exchange of value among them or a significant flow of value between the separate parts.
– The term “unitary business” shall be construed to the broadest extent permitted under the United States Constitution.
State Income Tax Update
©2009 Baker & McKenzie 24
Combined Reporting – Composition of Combined Group
• Corporations – Group includes C corporations, S corporations, utility
corporations, financial institutions, REITs, RICs, and certain captive insurance companies.
• Security corporations, non-profits, and insurance companies will generally not be included.
• Partnerships– Any business conducted by a partnership will be treated as the
business of the partners.
• To the extent of the partner’s distributive share of the partnership’s income
State Income Tax Update
©2009 Baker & McKenzie 25
Combined Reporting – Composition of Combined Group
• “Water’s edge” reporting required unless an election is made to the contrary.
• “Water’s edge” report includes:– Corporations incorporated in the U.S.;
– Corporations incorporated outside the U.S., if the average of the property, payroll, and sales factors within the U.S. is 20 percent or more; and
– Corporations that earn “more than 20 percent of its income, directly or indirectly, from intangible property or service-related activities, the costs of which generally are deductible for federal income tax purposes,… but only to the extent of that income and the apportionment factors related thereto.”
State Income Tax Update
©2009 Baker & McKenzie 26
Combined Reporting – Alternatives to Water’s Edge Reporting• Worldwide Election
– Includes all corporations in the unitary group
• Affiliated Group Election– “Limits” the combined group to the federal affiliated group as
defined in IRC 1504, except it:• Includes corporations regardless of place of incorporation• Uses a 50% voting common ownership threshold (rather
than 80% vote and value)• Measures common ownership using the water’s edge group
– Group income is apportionable; no allocable income.
• Elections cannot be in effect simultaneously – Elections must be made on a timely-filed, original return– Binding for 10 years
State Income Tax Update
©2009 Baker & McKenzie 27
Combined Reporting - Mechanics
• Calculation of Group Tax Base– To be addressed in regulations:
• Elimination of intercompany transactions
• Treatment of net operating losses and credits
• Addback rules
– Working Draft of 830 CMR 63.32B.1 was issued for public comment on 11/6/2008
State Income Tax Update
©2009 Baker & McKenzie 28
Apportionment Mechanics• Apportionment Methodology
– Each member required to use its applicable apportionment formula
• Consider formulas applicable to general corporations, manufacturing corporations, financial institutions.
– Sales of non-taxable members attributed to taxable members
• Sales of non-taxable members attributed by ratio of taxable member Massachusetts sales to total Massachusetts sales of all taxable members.
– Sales factor uses a Finnigan approach
• Taxable member sales not subject to throwback where any group member has nexus with destination state.
State Income Tax Update
©2009 Baker & McKenzie 29
FAS 109 Deduction
• For any increase in a “net deferred tax liability” as a result of combined reporting
• Pro-rated over seven years starting in 2012
• Only available for public companies
• Must file statement with DOR by July 1, 2009, specifying the total amount of the deduction to be claimed
State Income Tax Update
©2009 Baker & McKenzie 30
Public Law 86-272• P.L. 86-272 generally prohibits states from
imposing income tax on entities whose business in the state is limited to the solicitation of sales of tangible personal property.
• As of 1/1/09, P.L. 86-272 does not protect taxpayers from the non-income measure of the Massachusetts corporate excise.– Massachusetts historically took the position that this
protection extended to the non-income measure of the corporate excise.
State Income Tax Update
©2009 Baker & McKenzie 31
Rate Reduction• Corporate excise rate (Net income measure) of
9.5% applicable to business corporations (other than S corporations) will be gradually reduced over three years to 8.0%.
• Financial institution excise rate of 10.5% will be gradually reduced over three years to 9.0%.
State Income Tax Update
©2009 Baker & McKenzie 33
Related Party Transactions• Combined/Unitary Reporting
• Statutory Intercompany Expense Add Backs
• Economic Nexus
State Income Tax Update
©2009 Baker & McKenzie 34
Combined/Unitary Reporting• Massachusetts: Effective January 1, 2009
• West Virginia: Effective January 1, 2009
• New York: Effective January 1, 2007
• Vermont: Effective January 1, 2008
State Income Tax Update
©2009 Baker & McKenzie 35
Statutory Intercompany Expense Add Backs• Alabama: VFJ Ventures, Inc. and Statutory
Change
• Ohio: Family Dollar Stores of Ohio
• Tennessee: Disclosure Statement and 50% Penalties
State Income Tax Update
©2009 Baker & McKenzie 36
Statutory Intercompany Expense Add Backs• Michigan
• Minnesota
• Rhode Island
• Wisconsin
State Income Tax Update
©2009 Baker & McKenzie 37
Adjustments to Economic Nexus• U.S. Supreme Court Developments
– West Virginia: MBNA American Bank, cert., Petition Denied
– New Jersey: Lanco, Inc., cert., Petition Denied
• Where Do We Go From Here?
State Income Tax Update
©2009 Baker & McKenzie 38
Adjustments to Economic Nexus• Louisiana: Geoffrey
• Maryland: Chicago Classics
• Alabama: Graduate Supply House
• New Jersey: Praxair
• Massachusetts: Capital One; Geoffrey
• New York: “Amazon” Law
State Income Tax Update
©2009 Baker & McKenzie 39
Adjustments to Formulary Apportionment• Trend Towards Single Sales Factor
• Sourcing Service Revenue: Cost Of Performance Versus Market-Based Sourcing
• Throw-Out Rule: New Jersey– Status Of Litigation
– Repealed July 1, 2010
State Income Tax Update
©2009 Baker & McKenzie 40
Other Developments• “Captive” REITS
– North Carolina: Wal-Mart Stores
– Massachusetts: Fleet Funding
• Disallowance of Dividends Paid Deductions
• Business/Non Business Income– MeadWestvaco v. Illinois
• Davis v. Kentucky– Sequel to Cuno v. DaimlerChrysler
– Implications for State Credits
Omaha, NE – Tax Executives Institute
Baker & McKenzie Consulting LLC provides tax advisory and economic services and does not provide legal advice or services. Baker & McKenzie LLC is a subsidiary of Baker & McKenzie LLP, a member firm of Baker & McKenzie International, a Swiss Verein of member law firms around the world. In accordance with the common terminology used in professional service organizations, reference within the organization to a “partner” means a person who is a partner, or equivalent, in a member firm or its affiliate. Similarly, reference to an “office” means an office of the member firm or affiliate.
State Income Tax Update
January 20, 2008
J. Pat [email protected](650) 856-5526
John [email protected](212) 626-4232