Income Tax Archives | Page 13 of 30

Maryland Offers Attractive Amnesty Program – Even for Taxpayers Under Audit!

by Diann Smith, Eric D. Carstens and Stephen P. Kranz | Apr 23, 2015 | Income Tax, Interest and Penalties, Local Tax, Maryland, Sales Tax, Transaction Taxes

Starting September 1, 2015, the Comptroller of Maryland (Comptroller) will offer qualifying taxpayers that failed to file or pay certain taxes an opportunity to remit tax under very attractive penalty and interest terms. The 2015 Tax Amnesty Program (Program) is the first offered in Maryland since 2009, when the state raised nearly $30 million, not including approximately $20 million collected the following year under approved payment plans. The amnesty program offered before that (in 2001) brought in $39.4 million. Consistent with the Maryland amnesty programs offered in the past, the Program will apply to the state and local individual income tax, corporate income tax, withholding taxes, sales and use taxes, and admissions and amusement taxes.

The Program was made law by Governor Larry Hogan when he signed Senate Bill 763, available here, after two months of deliberation in the legislature. While the Program is scheduled to run through October 30, 2015, the Comptroller has a history of informally extending these programs beyond their codified period. For companies that are nervous about potential assessments following the Gore and ConAgra decisions, the amnesty offers an opportunity that should be evaluated.

Perks

The Program’s main benefits include:

Waiver of 50 percent of the interest;
Waiver of all civil penalties (except previously assessed fraud penalties); and
A bar on all criminal prosecutions arising from filing the delinquent return unless the charge is already pending or under investigation by a state prosecutor.

Qualification

The Program is open to almost all businesses, even if under audit or in litigation. The statute provides for only two classifications of taxpayers that do not qualify:

Taxpayers granted amnesty under a Maryland Amnesty Program held between 1999-2014; and
Taxpayers eligible for the 2004 post-SYL settlement period relating to Delaware Holding Companies.

Because the Program’s enacting statute does not prohibit participants from being under audit, or even those engaged in litigation with the Comptroller, even taxpayers with known issues and controversy may find the amnesty an attractive vehicle to reach resolution of a controversy with the state.

Practice Note

Because the range of taxpayers eligible for the Program is so broad, we encourage all businesses to evaluate whether participation will benefit them. Given that past Maryland amnesty programs excluded taxpayers over a certain size (based on employee count), large companies who were not able to resolve uncertain exposure in the state should evaluate this new offering. If your business is currently under audit (or concerned about any tax obligations from previous years), please contact the authors to evaluate whether the Program is right for you.

District of Columbia’s Transfer Pricing Enforcement Program and Combined Reporting Regime: Taking Two Bites of the Same Apple

by McDermott Will & Emery, Diann Smith and Stephen P. Kranz | Apr 20, 2015 | Allocation/Apportionment, Audits, District of Columbia, Income Tax, Local Tax, Tax Base, Transfer Pricing

In his recent article, “A Cursory Analysis of the Impact of Combined Reporting in the District”, Dr. Eric Cook claims that the District of Columbia’s (D.C. or the District) newly implemented combined reporting tax regime is an effective means of increasing tax revenue from corporate taxpayers, but it will have little overlap with D.C.’s ongoing federal-style section 482 tax enforcement. Dr. Cook is chief executive officer of Chainbridge Software LLC, whose company’s product and services have been utilized by the District to analyze corporations’ inter-company transactions and enforce arm’s length transfer pricing principles. Combined reporting, (i.e., formulary apportionment, as it is known in international tax circles) and the arm’s length standard, are effectively polar opposites in the treatment of inter-company taxation. It is inappropriate for the District (and other taxing jurisdictions) to simultaneously pursue both. To do so seriously risks overtaxing District business taxpayers and questions the coherence of the District’s tax regime.

History

Both combined reporting and 482 adjustments have had a renaissance in the past decade. Several tax jurisdictions, including the District, enacted new combined reporting requirements to increase tax revenue and combat perceived tax planning by businesses. At the same time, some tax jurisdictions, once again including the District, have stepped up audit changes based on use of transfer pricing adjustment authority. This change is due in part to new availability of third-party consultants and the interest in the issue by the Multistate Tax Commission (MTC). States have engaged consultants, such as Chainbridge, to augment state capabilities in the transfer pricing area. At the request of some states, the MTC is hoping to launch its Arm’s Length Audit Services (ALAS)[1] program. States thus have increasing external resources available for transfer-pricing audits.

International Context

A similar discussion regarding how to address inter-company income shifting is occurring at the international level, but with a fundamentally important different conclusion. The national governments of the Organization for Economic Cooperation and Development (OECD) and the G-20 are preparing to complete (on a more or less consensual basis) their Base Erosion and Profit Shifting action plan. This plan will reject formulary apportionment as a means of evaluating and taxing inter-company transactions.[2] Thus, in the international context, formulary apportionment and transfer pricing adjustment authority are not seen as complementary, but instead are seen as mutually exclusive alternatives. The history of formulary apportionment in international context sheds light on why states make a mistake when they seek to use both combined reporting and transfer pricing adjustments.

A combined reporting basis of taxation seeks to treat the members of a consolidated group as a single entity, consolidating financial accounts of the member entities and allocating a portion of the consolidated income to the taxing jurisdiction based on some formula or one or more apportionment factors. Under the arm’s length approach, individual entities of a consolidated group within a single jurisdiction are treated (generally) as stand-alone entities and taxed according to the arm’s length value (the value that would be realized by independent, [...]

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Decoding Combination: What Is a Unitary Business

by Catherine A. Battin | Apr 14, 2015 | Allocation/Apportionment, California, Constitutional Issues, Illinois, Income Tax, Nationwide Importance, Tax Base

This article is the first of our new series regarding common issues and opportunities associated with combined reporting. Because most states either statutorily require or permit some method of combined reporting, it is important for taxpayers to understand the intricacies of and opportunities in combined reporting statutes and regulations.

In this article, we will explore the foundation for combined reporting – the unitary business principle.

Read the full article.

New York State Tax Department Releases Guidance on Tax Reform Legislation

by McDermott Will & Emery | Apr 8, 2015 | Income Tax, New York, Nexus

The New York State Department of Taxation and Finance (the Department) has been issuing guidance explaining the 2014 corporate tax reform legislation (generally effective on January 1, 2015) through a series of questions and answers (known as FAQs), recognizing that providing guidance through regulations is cumbersome and takes a long time. On April 1, the Department issued a new set of FAQs explaining some aspects of the legislation. Some of the highlights are discussed below.

Under the new law, related corporations may, and may be compelled to, file combined returns if they are engaged in a unitary business. The old requirement that separate filing distort the incomes of the companies, which led to much controversy, has been repealed. An issue that has been highlighted by the legislation is whether a newly acquired subsidiary can be considered to be instantly unitary with the parent so that the corporations can file combined returns beginning on the date of the acquisition. The FAQs explain that this will depend on the “facts and circumstances” of each case, which is not very informative. We understand from informal conversations with senior Department personnel that their approach, which they have not published, is that corporations will generally be considered to be instantly unitary if they had a significant business relationship before the acquisition (e.g., the subsidiary was a supplier of goods to the parent). If no such pre-existing relationship exists, the corporations will generally not be found to be unitary until the beginning of the next taxable year after the acquisition. The FAQs also clarify that corporations with different taxable years can be included in a combined return. When a related corporation does not have the same taxable year as the company designated as the group’s agent for filing purposes, the related corporation’s income and activities for its taxable year ending within the agent’s taxable year are included in the combined report for the agent’s taxable year.

The FAQs explain that the corporate tax reform legislation has not changed the method for determining the partnership income of a corporate partner in a partnership. The current approach, under which partnership items of income and expense flow through to the corporate partner, has been retained. This approach is reflected in Department regulations. The New York City Department of Finance has not adopted regulations on this subject and we understand that the City does not feel itself bound by the State approach. Taxpayers should be aware that corporations that are limited partners with limited liability and no voting rights may be able to argue successfully that they do not have nexus with New York if they have no other contacts with New York besides their limited partnership interest. Courts in other states have so held, although the case law in New York is not favorable.

Several FAQs focus on the new economic nexus rule in New York State. The FAQs indicate that franchisors that sell goods and services or licenses to franchisees located in New York [...]

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Inside the New York Budget Bill: New York City Tax Reform

by McDermott Will & Emery | Apr 3, 2015 | Allocation/Apportionment, Income Tax, Local Tax, Nexus, Tax Base

The New York Legislature has passed bills related to the 2015–2016 budget (S2009-B/A3009-B and S4610-A/A6721-A, collectively referred to herein as the Budget Bill) containing several significant “technical corrections” to the New York State corporate income tax reform enacted in 2014, along with sales tax provisions and amendments to reform New York City’s General Corporation Tax. This post is the eighth in a series analyzing the New York Budget Bill, and summarizes the amendments to reform New York City’s General Corporation Tax.

Background

In 2014, New York State enacted sweeping reforms with respect to its taxation of corporations, including eliminating the tax on banking corporations, enacting economic nexus provisions, amending the combined reporting provisions and implementing customer-based sourcing. New York City’s tax structure, however, was not changed at that time, resulting in concern among taxpayers about having to comply with two completely different sets of rules for New York State and New York City, and concern from representatives of the New York City Department of Finance, who would have lost the benefit of the joint audits that they currently conduct with New York State and the automatic conformity to any New York State audit changes resulting from separately conducted New York State audits.

Although it came down to the wire, the Budget Bill did make the necessary changes to largely conform the New York City corporate franchise tax provisions to those in place for New York State. These changes will be effective as of January 1, 2015, which is the same general effective date for the New York State corporate tax reform.

Differences Between New York State and City Tax Laws

Even after passage of the Budget Bill, there remain some differences in the tax structures of New York State and New York City. Some examples include the following:

New York State has economic nexus provisions, but New York City does not (except for credit card banks).
New York State will phase out its alternative tax on capital (with rate reductions implemented until the rate is 0 percent in 2021; different, lower rates apply for qualified New York manufacturers), and the maximum amount of such tax is capped at $5 million (for corporations that are not qualified New York manufacturers). Not only will New York City not phase out such alternative tax, it has increased the cap to $10 million, less a $10,000 deduction. Also, New York City will not have a lower cap for manufacturers.
Under New York State’s corporate tax reform, a single tax rate is imposed on the business income base for all taxpayers (except for favorable rates for certain taxpayers, such as qualified New York manufacturers), with the amount of such rate being decreased from 7.1 percent to 6.5 percent in 2016. Qualified New York manufacturers are subject to a 0 percent tax rate on the business income base. In the Budget Bill implementing New York City’s tax reform, there is no similar rate reduction. Furthermore, instead of using a single rate for all taxpayers (except [...]

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Inside the New York Budget Bill: Net Operating Losses and Investment Tax Credit

by McDermott Will & Emery | Apr 3, 2015 | Incentives, Income Tax, New York, Tax Base

The New York Legislature has passed bills related to the 2015–2016 budget (S2009-B/A3009-B and S4610-A/A6721-A, collectively referred to herein as the Budget Bill) containing several significant “technical corrections” to the New York State corporate income tax reform enacted in 2014, along with sales tax provisions and amendments to reform New York City’s General Corporation Tax. The Budget Bill’s technical corrections to last year’s corporate income tax reform include changes to the economic nexus, tax base and income classification, tax rate (including clarifications to rules applicable to certain taxpayers, such as qualified New York manufacturers), apportionment, combined reporting, net operating loss and tax credit provisions. The technical corrections are effective on the same date as last year’s corporate income tax reform, which was generally effective for tax years beginning on or after January 1, 2015.

This post is the sixth in a series analyzing the New York Budget Bill, and discusses changes to the net operating loss (NOL) and investment tax credit provisions.

Net Operating Losses – Prior NOL Conversion Subtraction

For tax years beginning on or after January 1, 2015, the calculation of the New York NOL deduction has changed dramatically. As a result, the Tax Law provides for a transition calculation, a prior NOL Conversion Subtraction, for purposes of computing the allowable deduction for NOLs incurred under the prior law.

To calculate the Conversion Subtraction, the taxpayer first must determine the amount of NOL carryforwards it would have had available for carryover on the last day of the “base year”—December 31, 2014, for calendar year filers, or the last day of the taxpayer’s last taxable year before it is subject to the new law—using the former (i.e., 2014) Tax Law, including all limitations applicable under the former law. This amount is referred to as the “unabsorbed NOL.” Second, the taxpayer must determine its apportionment percentage (i.e., its BAP) for that base year (base year BAP), again using the former (i.e., 2014) Tax Law; this is the BAP reported on the taxpayer’s tax report for the base year. Third, the taxpayer must multiply the amount of its unabsorbed NOL by its base year BAP, then multiply that amount by the tax rate that would have applied to the taxpayer in the base year (base year tax rate). The resulting amount is divided by 6.5 percent (qualified New York manufacturers use 5.7 percent). The result of these computations is the prior NOL Conversion Subtraction pool.

A taxpayer’s Conversion Subtraction will equal a portion of its Conversion Subtraction pool computed as outlined above. The standard rule provides that one-tenth of the Conversion Subtraction pool, plus, in subsequent years, any amount of unused Conversion Subtraction from prior years, may be deducted as the Conversion Subtraction. The Tax Law as originally drafted also provided that any unused Conversion Subtraction could be carried forward until tax years beginning on or after January 1, 2036 (tax year 2035 for calendar year filers). The technical corrections include slight changes to that carryforward provision. Now, any unused Conversion [...]

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Inside the New York Budget Bill: Combined Reporting

by McDermott Will & Emery | Apr 3, 2015 | Income Tax, New York

The New York Legislature has passed bills related to the 2015–2016 budget (S2009-B/A3009-B and S4610-A/A6721-A, collectively referred to herein as the Budget Bill) containing several significant “technical corrections” to the New York State corporate income tax reform enacted in 2014, along with sales tax provisions and amendments to reform New York City’s General Corporation Tax. The Budget Bill’s technical corrections to last year’s corporate income tax reform include changes to the economic nexus, tax base and income classification, tax rate (including clarifications to rules applicable to certain taxpayers, such as qualified New York manufacturers), apportionment, combined reporting, net operating loss and tax credit provisions. The technical corrections are effective on the same date as last year’s corporate income tax reform, which was generally effective for tax years beginning on or after January 1, 2015.

This post is the fifth in a series analyzing the New York Budget Bill, and summarizes the technical corrections to New York’s combined reporting provisions.

Investment Income

Last year’s corporate reform provisions provided that (1) the election to reduce investment income or other exempt income by 40 percent in lieu of attributing interest expenses to that income and (2) the election to apportion income and gains from qualifying financial instruments using the 8 percent rule apply to all members of a combined group. The Budget Bill provides that the following elections also apply to all members of the combined group: the election to waive the net operating loss carryback period and the election to deduct up to one-half of the prior year net operating loss conversion subtraction pool over a two-year period beginning with the tax year beginning on or after January 1, 2015.

The Budget Bill also provides that the new 8 percent cap on investment income (for more information about this cap see our prior post, Inside the New York Budget Bill: Tax Base and Income Classifications) applies by comparing the investment income of the combined group (before the deduction of attributable interest expenses) to the entire net income of the combined group.

Designated Agent

Under current law, each combined group must have one designated agent, and that designated agent must be a New York taxpayer (i.e., must have nexus with New York). The Budget Bill eliminates the requirement that the designated agent be the parent corporation of the combined group (taxpayers were permitted to choose another designated agent only if there was no parent corporation included in the combined group or the parent was not a taxpayer). This change gives combined groups greater flexibility in selecting the designated agent for the combined group.

The Budget Bill made a few additional clarifying amendments to the combined reporting provisions:

When computing the combined business income base, the apportioned business income of the group is reduced by any prior net operating loss conversion subtraction as well as any net operating loss deduction (the original reform provision referred to only the net operating loss deduction).
A combined net operating loss is composed of net [...]

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Inside the New York Budget Bill: Apportionment

by McDermott Will & Emery | Apr 2, 2015 | Allocation/Apportionment, Income Tax, New York

The New York Legislature has passed bills related to the 2015–2016 budget (S2009-B/A3009-B and S4610-A/A6721-A, collectively referred to herein as the “Budget Bill”) containing several significant “technical corrections” to the New York State corporate income tax reform enacted in 2014, along with sales tax provisions and amendments to reform New York City’s General Corporation Tax. The Budget Bill’s technical corrections to last year’s corporate income tax reform include changes to the economic nexus, tax base and income classification, tax rate (including clarifications to rules applicable to certain taxpayers, such as qualified New York manufacturers), apportionment, combined reporting, net operating loss and tax credit provisions. The technical corrections are effective on the same date as last year’s corporate income tax reform, which was generally effective for tax years beginning on or after January 1, 2015.

This post is the fourth in a series analyzing the New York Budget Bill, and summarizes the technical corrections to New York’s apportionment provisions.

Treatment of Excess Investment Income

As discussed in a previous blog post, the Budget Bill includes a “cap” whereby investment income cannot exceed 8 percent of a corporation’s (or a combined group’s) entire net income. A follow-up issue is the impact of this cap and the “excess” investment income that it creates on the apportionment factor that will be applied to a taxpayer’s business income, assuming that inclusion of the excess investment income is Constitutional.

As a preliminary matter, the excess investment income will not be eligible for the 8 percent fixed sourcing election since such income cannot be considered income from qualified financial instruments (QFIs); a financial instrument that qualifies as investment capital cannot also qualify as a QFI. Even though through operation of the cap excess investment income will be treated as business income and not investment income, there is no corresponding provision in the statute specifying that the character of investment capital that gave rise to such excess investment income will switch to business capital. Thus, a taxpayer’s election to use the 8 percent fixed sourcing election will not apply to any excess investment income. Instead, the excess investment income will need to be sourced under the general customer sourcing rules for financial instruments. Under those general rules, dividends and net gains from sales of stock are not included in either the numerator or denominator of the apportionment formula, unless the Commissioner determines that inclusion is necessary to properly reflect the business income or capital of the taxpayer. The Commissioner’s determination is governed by the Tax Law’s general provision on alternative apportionment, meaning that taxpayers can request factor representation to the extent necessary to properly reflect their business income or capital. Interestingly, in those cases where the excess investment income is properly included in business income, inclusion in the apportionment formula should be required on Constitutional grounds (factors used in an apportionment formula must reasonably reflect how income is earned).

Description of QFI

The rule concerning what will qualify as a QFI for purposes of the 8 percent [...]

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Inside the New York Budget Bill: Tax Rates and Qualified New York Manufacturers

by McDermott Will & Emery | Apr 2, 2015 | Incentives, Income Tax, New York

The New York Legislature has passed bills related to the 2015–2016 budget (S2009-B/A3009-B and S4610-A/A6721-A, collectively referred to herein as the “Budget Bill”) containing several significant “technical corrections” to the New York State corporate income tax reform enacted in 2014, along with sales tax provisions and amendments to reform New York City’s General Corporation Tax. The Budget Bill’s technical corrections to last year’s corporate income tax reform include changes to the economic nexus, tax base and income classification, tax rate (including clarifications to rules applicable to certain taxpayers, such as qualified New York manufacturers), apportionment, combined reporting, net operating loss and tax credit provisions. The technical corrections are effective on the same date as last year’s corporate income tax reform, which was generally effective for tax years beginning on or after January 1, 2015.

This post is the third in a series analyzing the New York Budget Bill, and discusses changes to the tax rates and to the qualified New York manufacturer provisions.

Qualified New York Manufacturers

Effective for tax years beginning on or after January 1, 2014, qualified New York manufacturers are subject to a 0 percent business income tax rate and to beneficial rates for purposes of the tax on business capital and the fixed dollar minimum tax.

Under the original corporate tax reform provisions enacted in 2014, a “qualified New York manufacturer” is a manufacturer (either a single taxpayer or a combined group) that meets two qualifications. First, it has property in New York that is described in section 210-B.1 of the Tax Law (i.e., property that is eligible for the investment tax credit), and either (1) the adjusted basis of such property for federal income tax purposes at the close of the taxable year is at least $1 million, or (2) all of its real and personal property is located in New York. Second, it is principally engaged in qualifying activities (e.g., manufacturing, processing or assembling) (the “principally engaged” test).

A taxpayer—or, in the case of a combined report, a combined group—that does not satisfy the principally engaged test may still be a qualified New York manufacturer if the taxpayer or the combined group employs during the taxable year at least 2,500 employees in manufacturing in New York, and has property in the state used in manufacturing, the adjusted basis of which for federal income tax purposes at the close of the taxable year is at least $100 million.

The technical corrections in the 2015 Budget Bill restrict the types of property eligible for consideration in the principally engaged test to property mentioned in Tax Law section 210-B.1(b)(i)(A) (property that is principally used by the taxpayer in the production of goods by manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture or commercial fishing), rather than property described in the entirety of section 210-B.1. This correction mirrors the definition of eligible property before the 2014 law changes.

The technical corrections also contain an important clarification with respect to the application of the qualified New [...]

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Inside the New York Budget Bill: Tax Base and Income Classifications

by McDermott Will & Emery | Apr 2, 2015 | Allocation/Apportionment, Income Tax, New York, Tax Base

The New York Legislature has passed bills related to the 2015–2016 budget (S2009-B/A3009-B and S4610-A/A6721-A, collectively referred to herein as the Budget Bill) containing several significant “technical corrections” to the New York State corporate income tax reform enacted in 2014, along with sales tax provisions and amendments to reform New York City’s General Corporation Tax. The Budget Bill’s technical corrections to last year’s corporate income tax reform include changes to the economic nexus, tax base and income classification, tax rate (including clarifications to rules applicable to certain taxpayers, such as qualified New York manufacturers), apportionment, combined reporting, net operating loss and tax credit provisions. The technical corrections are effective on the same date as last year’s corporate income tax reform, which was generally effective for tax years beginning on or after January 1, 2015.

This post is the second in a series analyzing the New York Budget Bill, and summarizes the technical corrections to New York’s tax base and income classifications.

Although the modifications are described as “corrections” to last year’s corporate tax reform provisions, the Budget Bill makes a number of substantive changes with respect to the income classification rules.

Investment Capital

Last year’s corporate tax reform narrowed the definition of investment capital to mean investments in stocks held by a taxpayer for more than six consecutive months but not held for sale to customers in the regular course of business, and excluding stock that is a “qualified financial instrument” for which the taxpayer has elected to use the 8 percent apportionment sourcing rule, stock in a unitary business, stock in a business that is included in a combined report with the taxpayer, and stock issued by the taxpayer.

This year’s Budget Bill further narrows the definition of investment capital by extending the holding period from six months to one year, by tying the definition of investment capital to certain Internal Revenue Code provisions, and by requiring taxpayers to separately identify stock held as investment capital in their books and records. Investment capital now means investments in stocks that meet the following criteria:

Satisfy the definition of a “capital asset” under section 1221 of the Internal Revenue Code at all times the taxpayer owned the stock during the taxable year;
Are held for investment for more than one year;
The dispositions of which are, or would be, treated by the taxpayer as generating long-term capital gains or losses under the Internal Revenue Code;
For stocks acquired on or after January 1, 2015, have never been held for sale to customers in the regular course of business at any time after the close of the day on which they are acquired; and
Before the close of the day on which the stock was acquired, are clearly identified in the taxpayer’s books and records as stock held for investment in the same manner as required under section 1236(a)(1) of the Internal Revenue Code for the stock of a dealer in securities to be eligible for capital gain treatment (for [...]

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