LLCs and LLPs: Navigating Variable State Tax Treatment Responding to Latest Changes in LLC Taxation, Non-Resident Withholding, Entity Level Tax, Etc. THURSDAY, JUNE 13, 2013, 1:00-2:50 pm Eastern IMPORTANT INFORMATION This program is approved for 2 CPE credit hours . T o earn credit you must: • Respond to verification codes presented throughout the seminar . If you have not printed out the “Official Record of Attendance”, please print it now . (see “Handouts” tab in “Conference Materials” box on left -hand side of your computer screen). To earn Continuing Education credits, you must write down the verification codes in the corresponding spaces found on the Official Record of Attendance form . • Complete and submit the “Official Record of Attendance for Continuing Education Credits,” which is available on the program page along with the presentation materials. Instructions on how to return it are included on the form. • To earn full credit, you must remain on the line for the entire program. For this program, attendees must listen to the audio over the telephone. WHOM TO CONTACT For Additional Registrations : -Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10) For Assistance During the Program : - On the web, use the chat box at the bottom left of the screen - On the phone, press *0 (“star” zero)
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LLCs and LLPs: Navigating Variable State Tax Treatment Seminar June 13, 2013 Carolyn Joy Lee, Jones Day Patrick Smith, Baker Tilly cjlee@jonesday.com patrick.smith@bakertilly.com William T . Thistle II, Bradley Arant Boult Cummings wthistle@babc.com
Today’s Program State Conformity To Federal Pass-Through Treatment Slide 7 – Slide 17 [ Will Thistle II ] Slide 18 – Slide 28 Nexus Implications [ Carolyn Joy Lee and Will Thistle II ] Apportionment Issues Slide 29 - Slide 40 [ Carolyn Joy Lee and Will Thistle II ] Trends In Information Reporting Slide 41 – Slide 44 [ Patrick Smith ] PTE Withholding Slide 45 – Slide 50 [ Patrick Smith ] Entity-Level Taxes Slide 51 – Slide 55 [ Patrick Smith ]
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.
Will Thistle II, Bradley Arant Boult Cummings STATE CONFORMITY TO FEDERAL PASS-THROUGH TREATMENT
State Conformity (Or Not) To Federal Treatment of Pass-Through Entities • Treas. Reg. §§ 301.7701-1 to -3 – Starting point for any state tax discussion on pass-through entities ( PTEs ) – Check-the-box ( CTB ) regulations (eff. 1997) • U.S. domestic unincorporated entity can elect its tax status, for federal income tax purposes. – Defaults for U.S. entities (automatic): • Single member Disregarded entity ( DRE ) • Multiple members Partnership 8
State Conformity (Or Not) To Federal Treatment Of Pass-Through Entities (Cont.) • States are sovereign; they can set their own rules. • Thankfully, state legislatures quickly acted to conform. – 25 states conformed in 1997. – Today, the vast majority of states conform (see charts included with Reference Materials for this program). • But … there are exceptions. 9
State Conformity (Or Not) To Federal Treatment Of Pass-Through Entities (Cont.) • While conformity seems relatively straightforward … – It still leaves questions unanswered today. • How the states conformed : – DOR issued bulletins on conformity, or – Legislatures enacted specific conformity statutes. 10
State Conformity (Or Not) To Federal Treatment Of Pass-Through Entities (Cont.) • Some states … – Only addressed LLCs, • And forgot about other PTEs (i.e., partnerships and/or business trusts ). – Most say CTB only applies to income tax . • So, DRE for income tax, but NOT for net worth or sales/use, etc. taxes • Minority say CTB applies to many (perhaps ALL?) taxes . – Missouri -- Alabama -- Wisconsin 11
State Conformity (Or Not) To Federal Treatment Of Pass-Through Entities (Cont.) • A few examples of non-conformity: – Colorado • Corporate income tax – disregard single-member LLC (SMLLC) and impose corporate income tax on non-resident member – District of Columbia • Follows CTB for corporate income tax but still imposes ― unincorporated business tax ‖ (UBT) on partnerships and LLCs not treated as corporations • But, rates are the same … – Corp. rate = 9.975% – UBT rate = 9.975% 12
State Conformity (Or Not) To Federal Treatment Of Pass-Through Entities (Cont.) • Interesting examples of non-conformity – Louisiana • CTB does not govern classification of LLCs, for Louisiana franchise (net worth) tax purposes. – Michigan • A long and tortured history – First SBT, then MBT, now CIT – Kmart case – Three separate tax bulletins – NOW – MBT repealed by new CIT » (But, be careful if you elected to remain in the MBT) 13
State Conformity (Or Not) To Federal Treatment Of Pass-Through Entities (Cont.) • Additional examples of non-conformity – Pennsylvania • Income tax - Follows CTB • Capital stock/foreign franchise tax – LPs exempt – LLCs taxable • Can create some terrible results 14
State Conformity (Or Not) To Federal Treatment Of Pass-Through Entities (Cont.) • More examples of non-conformity – Tennessee • Follows CTB, BUT … • Only SMLLCs that are federal DREs AND have a corporation or a business trust as their sole member are disregarded, for Tennessee excise tax purposes. – Tax rates » Excise tax (net income) = 6.5% » Franchise tax (net worth) = 0.25% 15
State Conformity (Or Not) To Federal Treatment Of Pass-Through Entities (Cont.) • Major example of non-conformity – Texas • Franchise tax on ―taxable margins‖ (2009) • Most pass-through entities are now taxable . – Except … » General partnerships owned entirely by natural persons, » Certain passive investment partnerships » Special rule for REITs, and » Certain family limited partnerships. – Combined reporting – Recent constitutional challenges ( Allcat , Nestle’ ) 16
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Carolyn Joy Lee, Jones Day Will Thistle II, Bradley Arant Boult Cummings NEXUS IMPLICATIONS
Nexus: Recent Statutory/Regulatory Guidance Most of the recent statutory and regulatory guidance provides that ownership in an in-state pass-through entity establishes taxable nexus for nonresident partners/members. Examples: • Michigan: Sec. 206.621(1) (eff. Jan. 1, 2012) • California: Cal. Rev. & Tax Code Sec. 23101(b) (eff. Jan. 1, 2011) • Colorado : 1 CCR 201-2:39-22-301.1(2)(v) (eff. April 30, 2010) • Kentucky: Rev. Stat. Ann. Sec. 141.010(25) (2006) 19
Nexus: Judicial Developments Similarly, most of the recent court and administrative rulings have concluded that non- resident owners of interests in in-state pass-through entities had taxable nexus in their states. Examples: • Pennsylvania – Marshall v. Commonwealth (2012) • Non-resident individual limited partner in Connecticut LP owning a building in Pittsburgh was taxable on COD income; court only addressed Due Process argument, Commerce Clause position was deemed waived. • Kentucky – Revenue Cabinet v. Asworth Corp . (2010) • Court of Appeals held that a corporate limited partner had nexus in KY; Kentucky Supreme Court denied review but “unpublished” the opinion. • Iowa – Policy Letter 10240041 (2010) • Idaho LLC had nexus in Iowa even without physical presence; any non-resident members receiving more than $1,000 of income from LLC had filing obligations. • New York – Matter of Shell Gas Gathering Corp. #2 (2010) NY Tax Tribunal ruled corporate members of LLC that held general partner interests • in in-state partnership were subject to NY income tax; frighteningly broad rationale. 20
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