FOR LIVE PROGRAM ONLY Multistate Tax Treatment of Multi-Tier Partnerships: Navigating State Rules For Nonresident Tiered Pass-Through Entities THURSDAY , AUGUST 31, 2017, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours . To earn credit you must: • Participate in the program on your own computer connection (no sharing) – if you need to register additional people, please call customer service at 1-800-926-7926 x10 (or 404-881-1141 x10). Strafford accepts American Express, Visa, MasterCard, Discover . • Listen on-line via your computer speakers. • Respond to five prompts during the program plus a single verification code . You will have to write down only the final verification code on the attestation form, which will be emailed to registered attendees. • To earn full credit, you must remain connected for the entire program. WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations : -Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10) For Assistance During the Live Program : -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.
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Multistate Tax Treatment of Multi-Tier Partnerships Aug. 31, 2017 Karen A. Lake, CPA, Associate Director of Tax Services Berkowitz Pollack Brant Advisors and Accountants, Ft. Lauderdale, Fla. klake@bpbcpa.com Michael Hirsch, JD, LLM, Senior Manager of Tax Services Berkowitz Pollack Brant Advisors and Accountants, Ft. Lauderdale, Fla. mhirsch@bpbcpa.com Richard Cabrera, Corporate Tax Senior Manager Berkowitz Pollack Brant Advisors and Accountants, Ft. Lauderdale, Fla. rcabrera@bpbcpa.com
Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
Multistate Tax Treatment of Multi-Tier Partnerships: Navigating State Rules for Non-resident Tiered Pass-Through Entities 5
Speaker Panel • Karen Lake, CPA • Associate Director of Tax Services • Berkowitz Pollack Brant Advisors and Accountants • Ft. Lauderdale, FL • klake@bpbcpa.com • (305) 960-1202 • Richard Cabrera, CPA, JD, LLM • Senior Manager of Tax Services • Berkowitz Pollack Brant Advisors and Accountants • Ft. Lauderdale, FL • rcabrera@bpbcpa.com • (954) 712-7017 • Michael Hirsch, JD, LLM • Senior Manager of Tax Services • Berkowitz Pollack Brant Advisors and Accountants • Ft. Lauderdale, FL • mhirsch@bpbcpa.com • (954) 712-7083 6
Agenda • Nexus Issue for Pass-Through Entities and Their Corporate Owners • State Sourcing of Partnership Income • Determining Treatment of Lower-Tier Apportionment Factors • Pass-Through Entity Owner Considerations • Entity-Level Taxes 7
Nexus Issues for Pass-Through Entities and Their Corporate Owners 8
Physical Presence Any of the following activities conducted within a state may result in nexus: • Traveling employees and partners • Telecommuters • Visiting potential investments and portfolio companies • Visiting investors and road shows • Visiting governmental agencies 9
Economic Presence / Factor Based Nexus Growing trend among states to enact an additional nexus trigger based on a certain amount of sales to an in-state customer 10
Does merely holding an interest in a pass-through entity create nexus for the owner with the state in which the pass-through entity does business? 11
• For corporations, merely holding shares of stock in a subsidiary is not enough to create nexus • For pass-through entities, the U.S. Supreme Court has never addressed the situation • Conclusion varies depending upon whether the corporate partner is a Limited Partner or General Partner 12
Emergence of “bright line” or economic nexus standards draw in members of pass-through entities doing business in the state 13
Some recent cases call into question whether a state has nexus over corporate partners at all – Louisiana – franchise tax – New Jersey – income tax – Missouri – holding corporation found to be engaged in the same business as predecessor taxpayer after restructuring even though business operating through an LP 14
California – Traditionally, a foreign corporation is not transacting intrastate business just because it is a LP or member manager of an LLC – But the Franchise Tax Board asserts that the activities of a SMLLC doing business in CA will be attributed to the corporate owner • California economic nexus standards (first enacted January 1, 2011) make this ruling even more important (effective January 1, 2016): – Commercial domicile in CA; or – $547,711 or 25% of sales to CA; or – $54,771 or 25% of property to CA; or – $54,771 or 25% of payroll to CA 15
California – FTB Amendments to Market-Based Sourcing Regulations (Cal. Code Regs. tit. 18, § 25136-2 (September 15, 2016) – Changes the state to which revenues derived from dividends, interest, securities and other intangible property are assigned for purposes of determining the California sales factor • Assigned to California based on the location of legal entity sold or distributing income – Coupled with California’s bright-line nexus standards, companies that are not currently filing tax returns in California may not find out they are subject to California taxation, including the state’s $800 minimum tax – Partners of partnerships “doing business” in California to the extent the partnership is doing business 16
Pennsylvania – 72 P.S. 7402.2 61 Pa. Code § 153.29(a)(1) • A corporate taxpayer’s interest in a partnership is considered a direct interest in the assets of the partnership rather than an intangible interest • The taxpayer’s share of the partnership’s property, payroll, and sales shall be included in the apportionment factors of the taxpayer unless otherwise excluded 17
Rhode Island When a partnership or other pass-through entity is directly or indirectly held by a corporation, the business conducted by such a partnership or pass- through entity is considered the business of the corporation to the extent of the corporation’s distributive share of the partnership and pass- through entity net income 18
Illinois Gen. Inf. Ltr. IT 12-0028-GIL (September 27, 2012) • Individual nonresident without any personal physical presence in Illinois is subject to Illinois tax because limited liability partnership of which he was a partner conducted business in Illinois • K-1 showed partner received guaranteed payments and Illinois-sourced partnership business income • Ruling does not specify whether the type of partnership mattered (e.g., General Partnership or Limited Partnership) 19
State Sourcing of Partnership Income 21
Does owning an interest in a pass-through entity operating in a state create nexus for that partner? • Yes, if the activity of the pass-through is treated as the activity of its partners. – For example, in CA business entities that own a membership interest in a multi-member LLC that has elected to be taxed as a partnership will be treated as doing business in the state if the LLC is doing business in the state (Letter Ruling 2014-01). – However, Swart Enterprises found that an out-of-state company whose in-state interests were limited to investment in a managed LLC investment fund may not have a CA filing responsibility for purposes of the $800 annual corporate franchise tax. 22
Two general methods used by the states • No apportionment factor flow-up (Allocation or Non-Unitary Method) – Apportionment at the pass-through entity level – Business income is apportioned to the state by the partnership – Partners treat the partnership business income as allocable 23
Apportionment Factor Flow-Up (Aggregate or Unitary Method) – Apportionment at the owner level – Partner includes its share of the partnership's apportionment factors in computing its own apportionment factor – Partnership business income is apportioned using the partner’s apportionment factor 24
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