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Fred M. Ackerson focuses his practice on multistate tax planning and controversies and federal income tax planning. Fred has over 30 years of experience in state and federal taxation. Read Fred M. Ackerson's full bio.

Last year, Illinois enacted a mid-year income tax rate increase. Effective July 1, 2017, Illinois increased the income tax rate for individuals, trusts and estates from 3.75 percent to 4.95 percent, and for corporations from 5.25 percent to 7 percent. The Illinois Personal Property Replacement Tax (imposed on corporations, partnerships, trusts, S corporations and public utilities at various rates) was not changed.

As we previously reported, the Illinois Income Tax Act contains a number of provisions intended to resolve questions regarding how income should be allocated between the two income tax rates applicable in 2017. 35 ILCS 5/202.5(a). The default rule is a proration based on the number of days in each period (181/184). For taxpayers choosing this method, the Department of Revenue (Department) has recommended the use of a blended tax rate to calculate tax liability. A schedule of blended rates is included in the Department’s instructions for the 2017 returns. The blended rate is 4.3549 percent for calendar year individual taxpayers and 6.1322 percent for calendar year C corporation taxpayers. Continue Reading Choices for Illinois Taxpayers in Implementing the 2017 Income Tax Rate Increase

For Illinois corporate clients who pay significant Illinois corporate franchise tax, relief may be on the way.

Illinois is on the verge of joining Delaware and many other jurisdictions that permit simple conversions from corporate to limited liability company (LLC) form, by enacting the “Entity Omnibus Act” as part of House Bill 2963, passed by the Illinois General Assembly and sent to the governor’s office last week. Assuming the governor signs the Bill, the effective date of the new law would be July 1, 2018.

Corporations formed under the Illinois Business Corporation Act often face impediments to conversion to an LLC to be free of the franchise tax. The new Act should make planning and execution considerably easier.

Yesterday afternoon, after months of wrangling and a marathon 4th of July weekend session, the Illinois House of Representatives voted to override Governor Bruce Rauner’s veto of Senate Bill (SB) 9, the revenue bill supporting the State’s Fiscal Year (FY) 2017-2018 Budget. The vote ended Illinois’ two year budget impasse and may avoid a threatened downgrade of Illinois bonds to junk status. The key tax components of the bill as enacted Public Act 100-0022 (Act) are as follows:

Income Tax

Rate increase. Income tax rates are increased, effective July 1, 2017, to 4.95 percent for individuals, trusts and estates, and 7 percent for corporations.

Income allocation. The Act contains a number of provisions intended to resolve questions regarding how income should be allocated between the two rates in effect for 2017.

  • Illinois Income Tax Act (IITA) 5/202.5(a) provides a default rule, a proration based on the days in each period (181/184), for purposes of allocating income between pre-July 1 segments and periods after the end of June when rates increase. Alternatively, IITA 5/202.5(b) provides that a taxpayer may elect to determine net income on a specific accounting basis for the two portions of their taxable year, from the beginning of the taxable year through the last day of the apportionment period, and from the first day of the next apportionment period through the end of the taxable year.

Continue Reading Tax Changes Implemented As Part of Revenue Package Supporting Illinois Budget

Although taxpayers often complain that complying with the tax laws imposed by the numerous state and local taxing jurisdictions that exist in the United States is a burdensome process, many of these tax statutes also provide benefits to taxpayers in the form of exemptions, deductions and credits.  Taxpayers who structure their affairs according to the plain language of these favorable tax laws can be frustrated when state revenue departments attempt to deny them the benefits of the statute.  A recent opinion from the Maryland Tax Court supports the argument commonly advanced by taxpayers in these situations – that when the language of a statute is clear, there is no room for the revenue department to interpret the statute in a contrary manner.  See National Indemnity Co. v. Comptroller of the Treasury, Dkt. No. 14-IN-OO-0433 (Md. Tax Ct. April 24, 2015).

Maryland, like many states, exempts “insurance companies” from the payment of corporate income taxes because these entities are generally subject to tax under some other section of the tax law, insurance law or both.  Also as in many states, insurance companies are defined for purposes of Maryland’s corporate income tax statutes by reference to the state’s insurance law.  The taxpayer in National Indemnity Co. plainly fit within the definition of an insurance company under the Maryland insurance statutes because it was “in the business of writing insurance contracts.”  See Md. Code Insurance § 6-101(a).  While the facts of the case do not disclose whether the company did in fact pay taxes under a different statute, insurance companies in Maryland are subject to tax on all new and renewal gross direct premiums that are allocable to the state and written during the preceding calendar year.  See Md. Code Insurance § 6-102.  Nevertheless, the Maryland Comptroller’s office contended that when an insurance company invests money similar to a commercial bank, it should not be afforded the statutory exemption from corporate income tax.  The Tax Court rejected the Comptroller’s argument, noting that under the plain language of the statute (as well as under the Comptroller’s regulations and other published guidance), insurance companies similar to the taxpayer were not subject to Maryland corporate income tax.

In National Indemnity, Maryland’s corporate income tax statute clearly exempted insurance companies from the payment of corporate income taxes, and clearly defined insurance companies by reference to the Maryland insurance law.  The Comptroller’s argument appeared to be that, despite the fact that the taxpayer at issue fit within the statutory definition of an insurance company, it wasn’t “acting like” an insurance company and therefore shouldn’t be taxed like an insurance company.  While the National Indemnity opinion is short, its import is clear—where the legislature has plainly spoken on a subject, the revenue department is obligated to follow the plain language of the statute, whether that statute is favorable to the revenue department or not.  Companies should also be aware that Maryland (like a number of other states) does allow the prevailing party in a civil action to recover the costs of the action plus reasonable expenses (including reasonable attorneys’ fees) if the court finds that the conduct of any party in maintaining or defending any proceeding was in bad faith or without substantial justification.  See Md. Gen. Rule 1-341.  Thus, taxpayers facing a revenue agency that is attempting to contravene the plain language of a statute without substantial justification should consider whether litigation costs are potentially recoverable from the agency.

The Supreme Court granted the petition for certiorari filed by the Maryland Comptroller of Treasury in Comptroller v. Wynne, Dkt. No. 13-485 (U.S. Sup. Ct., cert. granted May 27, 2014).  The central issue in Wynne is whether a state must allow its residents a credit for income taxes paid to other states, in a manner sufficient to prevent double taxation of income from interstate commerce, to avoid violating the fair apportionment and discrimination prongs of the dormant Commerce Clause.

Like most states, Maryland taxes its residents on their entire income, wherever earned, and permits a credit for income tax paid to other states, limited to the amount of Maryland tax on the income taxed by other states.  But Maryland’s income tax includes both a state and a county tax component, and Maryland permitted a credit for taxes paid to other states only with respect to its state income tax.  The state rate was 4.75 percent and the county tax rate applicable to the Wynnes was 3.2 percent (which could vary by county).  The county tax was imposed and administered by the state on the same tax base as the state income tax, and residents file a single return that reflects both state and county income taxes.  Thus, Maryland provided a credit only against the Maryland state income tax, but not the substantial county income tax, on the income taxed by other states, resulting in a form of double taxation of that income (i.e., by the other state and by the Maryland county).

The Wynnes reported substantial income on their 2006 individual return from business activities in interstate commerce.  They owned 2.4 percent of an S corporation doing business in 39 states, and paid income tax to most of those states on the income that flowed through to their individual return.  The Wynnes reported $2.7 million of income and $126,636 of Maryland state income tax (not including the county income tax portion) prior to credits, and claimed a credit of $84,550 for taxes paid to other states.  The Maryland Comptroller permitted the Wynnes to claim a credit against the state income tax, but not the county portion of the income tax, for taxes paid to other states.  Maryland’s highest court, the Court of Appeals, agreed with the Wynnes that they suffered double taxation of the income in violation of the dormant Commerce Clause doctrine that taxation of multistate business requires fair apportionment and no discrimination against interstate commerce, citing Complete Auto Transit v. Brady, 430 U.S. 274 (1977) and other Supreme Court cases.

In its petition for certiorari, the Maryland Comptroller relied upon settled Due Process doctrine that states have plenary power to tax all of the income of their residents.  The Comptroller’s petition essentially ignored the Commerce Clause issues raised by the Maryland Court of Appeals.

The U.S. solicitor general filed an amicus curiae brief supporting the Maryland Comptroller’s position, recognizing the different standards imposed by the Due Process Clause and the Commerce Clause but nonetheless contending that the longstanding Due Process Clause precedents permit states to tax all of the income of their residents without regard to the Commerce Clause.  The solicitor general’s support likely was a significant factor in the Supreme Court’s decision to grant the Maryland Comptroller’s petition.

Comptroller v. Wynne is an important case because growing numbers of large multistate businesses are conducted in pass-through entity form as S corporations, partnerships or limited liability companies, and the income from these enterprises often is reported on individual tax returns.  Despite the substantial precedent supporting a state’s right to tax all of the income of resident individuals without a credit for taxes paid to other states, this Due Process doctrine collides with Commerce Clause principles that prevent undue burdens on interstate commerce when applied to income that resident individuals receive as pass-through income from entities clearly engaged in interstate commerce.  A decision in favor of the Maryland Comptroller has the potential to validate double taxation by states of their residents on income earned in interstate commerce, while a ruling for the taxpayers has the potential to cost state and local governments tens of millions of dollars per year.

The Wynne case may raise other significant Due Process and Commerce Clause issues, including whether any distinction should be drawn between double taxation attributable to county rather than state level income taxes and whether a substantial but imperfect credit for taxes paid to other states can satisfy the Commerce Clause doctrines.  The final decision may have far reaching implications for taxation of individuals, trusts and other taxpayers that traditionally have been protected by Due Process limits on state taxation, but whose protection by the Commerce Clause has been uncertain.