Income Tax Archives | Page 12 of 31

Income Tax

Inside the New York Budget Bill: Department Issues Guidance Regarding Investment Capital Identification Procedures

by McDermott Will & Emery | Jul 10, 2015 | Income Tax, Local Tax, New York, Tax Base

On July 7, 2015, the New York Department of Taxation and Finance issued guidance (TSB-M-15(4)C, (5)I, Investment Capital Identification Requirements for Article 9-A Taxpayers) on the identification procedures for investment capital for purposes of the New York State Article 9-A tax and New York City Corporate Tax of 2015. Income from investment capital is generally not subject to tax in New York. For New York State and New York City corporate income tax purposes, investment capital is investments in stocks that meet the following five criteria:

Satisfy the definition of a “capital asset” under section 1221 of the Internal Revenue Code (IRC) 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 IRC;
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 IRC section 1236(a)(1) for the stock of a dealer in securities to be eligible for capital gain treatment (for stock acquired prior to October 1, 2015, that was not subject to IRC section 1236(a),such identification must occur before October 1, 2015).

Criterion five, regarding identification procedures, has been an area of concern for many New York taxpayers. While identification has been a concern of securities dealers for federal income tax purposes for many years, the New York identification requirement applies to all taxpayers that seek to have stock qualify as investment capital. Thus, all New York taxpayers, many in uncharted waters, must develop appropriate procedures to comply with this new identification requirement. Unfortunately, the Department’s guidance is somewhat sparse and does not address some important issues that could arise and that have been raised with the Department. The guidance also adopts a troubling position with respect to investments made by partnerships.

Securities Dealers

For taxpayers that are dealers subject to IRC section 1236, stock must be identified before the close of the day on which the stock was acquired (with the exception of floor specialists as defined in IRC section 1236(d) that have stock subject to the seven-day identification period in IRC section 1236(d)(1)(A)) as held for investment under IRC section 1236(a)(1) to satisfy the New York investment capital identification requirement. The presence or absence of a federal identification under IRC section 1236(a)(1) will be determinative, and a separate New York identification will not be allowed. A federal identification under IRC section 475 (relating to marked to market rules) is insufficient.

As a practical matter, many securities dealers that are taxed as corporations for federal income tax purposes do not comply with [...]

Continue Reading

Join McDermott Partners at the NYU SPS 2015 Summer Institute in Taxation

by McDermott Will & Emery | Jul 1, 2015 | False Claims Act, Income Tax, Nationwide Importance, Nexus, Sales Tax

July 13-24, 2015
New York, NY

Join today’s leading national and international tax authorities, including McDermott partners Art Rosen, Peter Faber, Alysse McLoughlin and Mary Kay Martire, for the NYU SPS 2015 Summer Institute in Taxation. The institute will feature a series of in-depth sessions on state and local taxation, partnerships, consolidated returns, trusts and estates, federal wealth tax and international taxation.

To register or for more information, please click here.

House Judiciary Committee Approves Three State Tax Bills

by McDermott Will & Emery, Arthur R. Rosen, Eric D. Carstens and Stephen P. Kranz | Jun 18, 2015 | Constitutional Issues, Income Tax, Local Tax, Nationwide Importance, Nexus, Sales Tax, Transaction Taxes

Yesterday, on June 17, 2015, three state tax bills were favorably reported to the United States House of Representatives (House) by the House Judiciary Committee (House Judiciary) after considering each during a half-day markup. The bills that were advanced included: (1) the Mobile Workforce State Income Tax Simplification Act (Mobile Workforce, H.R. 2315); (2) the Digital Goods and Services Tax Fairness Act (DGSTFA, H.R. 1643); and (3) the Business Activity Tax Simplification Act (BATSA, H.R. 2584).

Mobile Workforce State Income Tax Simplification Act

The Mobile Workforce bill was the first considered and seeks to establish a clear, uniform framework for when states may tax non-resident employees that travel for work. As advanced, the bill generally allows states to impose income tax compliance burdens on non-resident individuals only when the non-resident works in a state other than their state of residence for more than 30 days in a year. The bill also prevents those states from imposing a withholding requirement on employers for wages paid to such employees. Three proposed amendments seeking to limit the adverse revenue impact to New York were discussed and rejected. The Mobile Workforce bill was then favorably reported to the House by a vote of 23-4.

Digital Goods and Services Tax Fairness Act

DGSTFA would implement a uniform sourcing framework for states and localities seeking to tax digital goods and services. In doing so, the bill prevents any state or locality from imposing multiple or discriminatory taxes. Of the three pieces of legislation considered yesterday, only the DGSTFA was amended. The amendment, offered by the bill’s lead sponsor Representative Lamar Smith, was technical in nature and did not change the basic protections the bill would provide. At the markup, Chairman Goodlatte noted that the National Governors Association (NGA), which had previously voiced objections, was no longer opposed to the legislation after the revisions—though the NGA testimony indicated that the organization could not support the legislation without addressing the remote seller sales tax nexus issue.

The first technical changes in the adopted amendment were to the definitions of delivered or transferred electronically and provided electronically. The amendment added the term digital good and digital service after each respective term of art to clarify that digital goods are delivered or transferred electronically, whereas digital services are provided electronically. The second technical change was to the definition of digital good. In modifying the term, the amendment clarifies that streaming and other similar digital transmissions that do not “result in the delivery to the customer of a complete copy of such software or other good, with the right to use permanently or for a specified period” are not digital goods and would instead fall under the definition of a digital service.

Business Activity Tax Simplification Act

BATSA would codify the prerequisite of physical presence for a state to impose a direct tax on a non-resident business. BATSA would modernize the existing federal protection against state income taxation offered under P.L. 86-272 to include solicitation for sales of intangible property and services [...]

Continue Reading

Tax Amnesty Hits the Midwest (and Beyond)

by Diann Smith, Eric D. Carstens and Stephen P. Kranz | Jun 12, 2015 | Arizona, Audits, Income Tax, Indiana, Interest and Penalties, Local Tax, Maryland, Missouri, Oklahoma, Property Tax, Sales Tax, South Carolina, Tax Base, Transaction Taxes

With many state legislatures wrapping up session within the past month or so, there has been a flurry of last-minute tax amnesty legislation passed. Nearly a half-dozen states have authorized upcoming tax amnesty periods. These tax amnesties include a waiver of interest and, in some circumstances, allow taxpayers currently under audit or with an appeal pending to participate. This blog entry highlights the various enactments that have occurred since the authors last covered the upcoming Maryland amnesty program.

Missouri

On April 27, 2015, Governor Jay Nixon signed a bill (HB 384) that creates the first Missouri tax amnesty since 2002. The bill creates a 90-day tax amnesty period scheduled to run from September 1, 2015, to November 30, 2015. The amnesty is limited in scope and applies only to income, sales and use, and corporation franchise taxes. The amnesty allows taxpayers with liabilities accrued before December 31, 2014, to pay in full between September 1, 2015, and November 30, 2015, and be relieved of all penalties and interest associated with the delinquent obligation. Before electing to participate in the amnesty program, taxpayers should be aware that participation will disqualify them from participating in any future Missouri amnesty for the same type of tax. In addition, if a taxpayer fails to comply with Missouri tax law at any time during the eight years following the agreement, the penalties and interest waived under the amnesty will be revoked and become due immediately. Finally, taxpayers who are the subject of civil or criminal state-tax-related investigations, or are currently involved in litigation over the obligation, are not eligible for the amnesty.

According to the fiscal note provided in conjunction with the bill, the state estimates that 340,000 taxpayers will be eligible for the amnesty and that the program will raise $25 million.

Oklahoma

On May 20, 2015, Governor Mary Fallin signed a bill (HB 2236) creating a two-month amnesty period from September 14, 2015, to November 13, 2015. The bill allows taxpayers that pay delinquent taxes (i.e., taxes due for any tax period ending before January 1, 2015) during the amnesty period to receive a waiver of any associated interest, penalties, fines or collection costs.

Taxes eligible for the amnesty include individual and corporate income taxes, withholding taxes, sales and use taxes, gasoline and diesel taxes, gross production and petroleum excise taxes, banking privilege taxes and mixed beverage taxes. Notably, franchise taxes are not included in this year’s amnesty (they were included in the 2008 Oklahoma amnesty).

Indiana

In May, Governor Mike Pence signed a biennial budget bill (HB 1001) that included a provision authorizing the Department of Revenue (Department) to implement an eight-week tax amnesty program before 2017. While the Department must promulgate emergency regulations that will specify exact dates and procedures, several sources have indicated that the amnesty is expected to occur sometime this fall. The upcoming amnesty will mark the second-ever amnesty offered by Indiana (the first occurred in 2005). Taxpayers that participated in the 2005 program [...]

Continue Reading

NYS Tax Appeals Tribunal Provides Guidance Respecting Unitary Business Determinations

by McDermott Will & Emery | Jun 2, 2015 | Income Tax, Nationwide Importance, New York, Unitary Business

The New York State Tax Appeals Tribunal has just provided timely guidance respecting the unitary business rule in New York State. In SunGard Capital Corp. and Subsidiaries (DTA Nos. 823631, 823632, 823680, 824167, and 824256, May 19, 2015), the Tribunal found that a group of related corporations were conducting a unitary business and that they should be allowed to file combined returns, reversing an administrative law judge determination.

The unitary business rules have assumed increased importance in New York this year because of recently-enacted corporate tax reform legislation. Effective January 1, 2015, the only requirements for combination in New York State and City are that the corporations must be linked by 50 percent stock ownership and must be engaged in a unitary business. It is no longer necessary for the party seeking combination (whether the taxpayer or the Department of Taxation and Finance) to show that separate filing would distort the corporations’ New York incomes.

In a related but different context, the Department’s unpublished position with respect to when an acquiring corporation and a recently purchased subsidiary can begin filing combined returns (the so-called “instant unity” issue) generally is that combined returns can be filed from the date of acquisition only if the corporations were engaged in a unitary business before they became linked by common ownership. In a recent set of questions and answers about the new law, the Department indicated that instant unitary decisions would be done on a facts-and-circumstances basis, but we understand from conversations with the Department that the existence of a unitary business between the corporations before the acquisition will be of great importance.

The SunGard case involved prior law under which distortion was an issue, but the interesting aspects of the case involve the question of whether the corporations were engaged in a unitary business, as the taxpayers contended. The corporations’ primary business involved providing information technology sales and services information, software solutions and software licensing. The administrative law judge had concluded that there were similarities among the different business segments but that the different segments operated autonomously. Although the parent provided general oversight and strategic guidance to the subsidiaries, the judge concluded that centralized management, one of the traditional criteria for a unitary business, was not present because the parent’s involvement was not operational. The centralization of certain management functions such as human resources and accounting did not involve operational income-producing activities. The judge held that holding companies, inactive companies, and companies with little or no income or expenses could not be viewed as unitary with the active companies. The judge noted that there were few cross-selling or intercompany transactions. Although programs had been developed to encourage cross-selling, they were not initiated until after the taxable years at issue.

The Tribunal reversed the administrative law judge’s decision and engaged in a detailed discussion of the elements of a unitary business that will provide useful guidance to both taxpayers and tax administrators in the future.

Although there were differences among the different segments of [...]

Continue Reading

Ohio Supreme Court Rules City of Cleveland’s Taxation of Nonresident NFL Players’ Compensation Out-Of-Proportion to Games Played at the Browns’ Stadium

by Diann Smith | May 27, 2015 | Allocation/Apportionment, Income Tax, Local Tax, Ohio

On April 30, 2015, out-of-state professional football players earned victories against the City of Cleveland, Ohio. In a pair of cases decided by the Ohio Supreme Court, the court first struck the City’s method of allocating a nonresident professional athlete’s compensation as unconstitutional, and later that day ruled that the city tax cannot reach the income of a nonresident athlete who was not present in the Cleveland when the Browns hosted his team.

In Hillenmeyer v. Cleveland Bd. of Review, Slip Opinion No. 2015-Ohio-1623 (Ohio Apr. 30, 2015), Hunter Hillenmeyer, a former linebacker for the Chicago Bears, appealed the denial of his claims for refunds of income taxes paid to Cleveland. Hillenmeyer argued that he paid too much tax to the city because the city’s method of allocating his compensation overstated his income earned in the city. Cleveland had applied a “games-played” method to allocate a nonresident professional athlete’s income, meaning that the city’s taxing ratio was the number of games played in Cleveland over the total number of games played during a year. Under this method, a visiting football player who travels to Cleveland for one game out of a 20 game season (including preseason and regular season games in a non-playoff season) would have 5 percent of his income allocated to and taxable by the city.

Hillenmeyer argued that this method ignored the fact that his compensation, like that of other players in the National Football League (NFL), was based not only on games played, but also on a mandatory mini camp following the NFL draft, preseason training camp (including preseason games, practices and meetings), practices and game preparation during the regular season, and postseason games and practice (if necessary). None of these other activities occurred in Cleveland.

The court agreed with Hillenmeyer, finding the city’s games-played method overstated Hillenmeyer’s Cleveland income tax liability. The court ruled the games-played method unconstitutional on due process grounds on the basis that it imposed tax on income earned outside of Cleveland. The court reasoned that for taxation of a nonresident’s compensation to comport with due process, the tax base—the work performed—must be performed in the taxing jurisdiction. Additionally, relying on precedent applying the state income tax to a nonresident Cincinnati Reds player, the court also held that a nonresident professional athlete’s total work performed should include not only games played, but all activities for which the athlete was compensated, including preseason training.

Applying these principles, the court adopted Hillenmeyer’s proposed method of allocation—utilized by other jurisdictions—and termed the “duty-days” method, as consistent with due process. Under the “duty-days” method, income is allocated based on the number of work days spent in a city over the total number of work days. For Hillenmeyer, this equated to 2 days in Cleveland per game. Applying this method to the years at issue, the court found that Hillenmeyer was entitled to refunds because less than 1.5 percent of his annual compensation was allocable to Cleveland.

Later the same day, in Saturday v. Cleveland [...]

Continue Reading

read more

U.S. Supreme Court’s Wynne Decision Calls New York’s Statutory Resident Scheme into Question

by McDermott Will & Emery and Arthur R. Rosen | May 21, 2015 | Connecticut, Constitutional Issues, Delaware, Income Tax, Maine, Maryland, Massachusetts, Nationwide Importance, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont
On May 18, the U.S. Supreme Court issued its decision in Comptroller of the Treasury of Maryland v. Wynne. In short, the Court, in a five-to-four decision written by Justice Alito, handed the taxpayer a victory by holding that the county income tax portion of Maryland’s personal income tax scheme violated the dormant U.S. Constitution’s Commerce Clause.

Specifically, the Court concluded that the county income tax imposed under Maryland law failed the internal consistency test under the dormant Commerce Clause, because it is imposed on both residents and non-residents with Maryland residents not getting a credit against that Maryland local tax for income taxes paid to other jurisdictions (residents are given a credit against the Maryland state income tax for taxes paid to other jurisdictions).

The Supreme Court emphatically held (as emphatically as the Court can be in a five-to-four decision) that the dormant Commerce Clause’s internal consistency test applies to individual income taxes. The Court’s holding does create a perilous situation for any state or local income taxes that either do not provide a credit for taxes paid to other jurisdictions or limit the scope of such a credit in some way.

The internal consistency test—one of the methods used by the Supreme Court to examine whether a state tax imposition discriminates against interstate commerce in violation of the dormant Commerce Clause—starts by assuming that every state has the same tax structure as the state with the tax at issue. If that hypothetical scenario places interstate commerce at a disadvantage compared to intrastate commerce by imposing a risk of multiple taxation, then the tax fails the internal consistency test and is unconstitutional.

Although the Wynne decision does not address the validity of other taxes beyond the Maryland county personal income tax, the decision does create significant doubt as to the validity of certain other state and local taxes such as the New York State personal income tax in the way it defines “resident.” New York State imposes its income tax on residents on all of their income and on non-residents on their income earned in the state; this is similar to the Maryland county income tax at issue in Wynne.

“Resident” is defined as either a domiciliary of New York or a person who is not a domiciliary of New York but has a permanent place of abode in New York and spends more than 183 days in New York during the tax year. N.Y. Tax Law § 605. (New York City has a comparable definition of resident.) N.Y.C. Administrative Code § 11-1705. Thus a person may be taxed as a statutory resident solely because they maintain living quarters in the state and spend more than 183 days in the state, even if those days have absolutely nothing to do with the living quarters; this category of non-domiciliary resident is commonly referred to a “statutory resident.” As such, under New York’s tax scheme, a person can be a resident of two states—where domiciled and where a statutory resident—and thus [...]

Continue Reading

read more

Illinois Circuit Court Dismisses Challenge to Retained Job EDGE Credits

by Scott M. Susko | May 20, 2015 | Illinois, Incentives, Income Tax
Corporations with Illinois Economic Development for a Growing Economy (EDGE) credit agreements giving credit for retained jobs can breathe a sigh of relief: The litigation challenging the state’s ability to grant EDGE credits for retained jobs has been dismissed by an Illinois Circuit Court.

Illinois EDGE credits are discretionary income tax credits awarded by the Illinois Department of Commerce and Economic Opportunity (DCEO). The credits are generated as a percentage of employee wage withholding. Sometimes DCEO has awarded credits for retained jobs as well as new jobs.

Back in January 2015, the Liberty Justice Center, acting on behalf of several taxpayers, filed a complaint alleging that it was illegal for Illinois to give credits for retained jobs. Jenner v. Illinois Department of Commerce and Economic Opportunity, No. 15-MR-16 (Cir. Ct. 7th Jud. Cir., Sangamon Cty.). The plaintiffs’ theory was that the EDGE credit statute authorized awards only for new jobs, and thus DCEO’s regulation allowing credits for retained jobs exceeded statutory authorization.

In March 2015, the state moved to dismiss for lack of standing. The plaintiffs claimed that they had standing as taxpayers challenging illegal use of state funds, but the Circuit Court now has agreed with the Attorney General: on May 12, 2015, the motion to dismiss was granted. The plaintiffs plan to appeal the decision.

This ruling is in line with the general trend of rejecting taxpayer standing in challenges to tax credit programs, including economic development tax credits. See, e.g., DaimlerChrysler Corp. v. Cuno, 547 U.S. 332 (2006); Arizona Christian School Tuition Org. v. Winn, 131 S. Ct. 1436 (2011).

read more

Plain and Simple: Maryland Tax Court Holds Insurance Company is Exempt from Corporate Income Taxes

by McDermott Will & Emery | May 13, 2015 | Income Tax, Insurance Tax, Maryland, Procedure
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 [...]

Continue Reading

read more

D.C. Proposes Law to Allow Indefinite Suspension of Limitation Period for Assessment and Collection

by Diann Smith, Eric D. Carstens and Stephen P. Kranz | May 6, 2015 | Audits, District of Columbia, Income Tax, Procedure, Sales Tax, Transaction Taxes
The Fiscal Year 2016 Budget Support Act of 2015 (BSA), introduced by the Washington, D.C. Council at the request of Mayor Muriel Bowser on April 2, 2015, contains a subtitle (see Title VII, Subtitle G, page 66-67) that would give the Office and Tax and Revenue (OTR) complete discretion to indefinitely suspend the period of limitation on assessment and collection of all D.C. taxes—other than real property taxes, which contain a separate set of rules and procedures. The change to the statute of limitation provision would eliminate a fundamental taxpayer protection that exists today in all states. Those concerned should reach out to members of the D.C. Council to discourage adoption of this subtitle of the BSA.

Current Law

Under current law, the amount of tax imposed must be assessed (in other words, a final assessment must be issued) within three (3) years of the taxpayer’s return being filed. See D.C. Code § 47-4301(a). Practically speaking, this requires the mayor to issue a notice of proposed assessment no later than two (2) years and 11 months after the return is filed—to allow the taxpayer the requisite 30 days to file a protest with the Office of Administrative Hearings (OAH). See D.C. Code § 47-4312(a). As the law reads today, the running of the period of limitation is suspended between the filing of a protest and the issuance of a final order by OAH, plus an additional 60 days thereafter. See D.C. Code § 47-4303. The District has 10 years after the final assessment to levy or begin a court proceeding for collections. See D.C. Code § 47-4302(a).

Proposed Changes

The BSA would extend the limitation period for assessment and collection, as follows:

The BSA would add a new provision to statutorily require the chief financial officer (CFO, the executive branch official overseeing the OTR) to send a notice of proposed audit changes at least 30 days before the notice of proposed assessment is sent; and

The BSA would toll the running of the statute of limitation on assessment and collection during the period after the CFO/OTR issues the aforementioned notice of proposed audit changes until the issuance of a final assessment or order by OAH.

The BSA does not indicate an applicable date for these changes. As a result, the provision likely would be applicable to any open tax period, effectively making the change retroactive to returns already filed.

Effect

By changing the law to toll the statute of limitation for the period after OTR issues a notice of proposed audit changes, the BSA would allow OTR to unilaterally control whether the three-year statute of limitation is running. The current statute requires that OTR issue its notice of proposed assessment before the expiration of the three-year statute—and gives taxpayers the ability to protest such notices before the OAH. By tolling the statute upon issuance of a notice of proposed audit changes, which is not subject to review by OAH, the BSA would strip taxpayers of the [...]

Continue Reading

read more

Older Posts »

« Newer Posts

Search for:

BLOG EDITORS

Stephen P. Kranz

Mary Kay McCalla Martire

Richard C. Call

STAY CONNECTED

Subscribe

TOPICS
TOPICS

ARCHIVES
ARCHIVES

RECENT POSTS

Diann Smith honored with prestigious NYU Paul H. Frankel achievement award

Biting the hand that feeds? California faces new proposed wealth tax

California SB 711: Closing the conformity gap with the IRC

Decoupling from DC: How HB 4961 redefines Michigan’s tax base

Washington DOR issues interim guidance on advertising services