Presenting a live 90-minute webinar with interactive Q&A Navigating Multi-State Tax Issues With Pass-Through Entities Reconciling State Recognition Rules and Overcoming Complexities With the Taxation of S Corps and Partnerships WEDNESDAY, DECEMBER 10, 2014 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Mary C. Alexander, Attorney, Sutherland Asbill & Brennan , Washington, D.C. Madison J. Barnett, Attorney, Sutherland Asbill & Brennan , Atlanta Ted W. Friedman, Attorney, Sutherland Asbill & Brennan , Washington, D.C. J. Sims Rhyne, III, Esq., Bradley Arant Boult Cummings , Birmingham, Ala. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 . NOTE: If you are seeking CPE credit, you must listen via your computer — phone listening is no longer permitted.
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NAVIGATING MULTI-STATE TAX ISSUES WITH PASS-THROUGH ENTITIES M A R Y C . A L E X A N D E R , S U T H E R L A N D A S B I L L & B R E N N A N L L P M A D I S O N J . B A R N E T T , S U T H E R L A N D A S B I L L & B R E N N A N L L P T E D W . F R I E D M A N , S U T H E R L A N D A S B I L L & B R E N N A N L L P J . S I M S R H Y N E , I I I , B R A D L E Y A R A N T B O U L T C U M M I N G S L L P 5
OUTLINE • Introduction and overview • State conformity to federal treatment of pass- through entities (“PTEs”) • Jurisdiction to tax (nexus) PTEs and their owners • Mechanisms for reaching income of nonresident owners of PTEs • Apportionment of PTE income 6
STATE CONFORMITY TO FEDERAL TREATMENT OF PTEs 7
STATE CONFORMITY TO FEDERAL TREATMENT OF PTEs • Check-the-box (CTB) regulations overview • CTB application to state income taxes • CTB application to other state taxes • State conformity, partial conformity and non- conformity • S corp. elections 8
CTB REGULATIONS OVERVIEW • IRS issued regs. in 1996 that took effect on Jan. 1, 1997 • Default classifications • Domestic eligible entity: • Single owner: Disregarded as an entity separate from its owner (“DRE”); treated as a division of its owner • Two or more members: Partnership • Foreign eligible entity: • A partnership if it has two or more members and at least one member does not have limited liability • An association if all members have limited liability • Disregarded as an entity separate from its owner if it has a single owner that does not have limited liability • Default classification retained until election to change is made 9
CTB REGULATIONS OVERVIEW • CTB election necessary when an eligible entity chooses to be classified as something other than its default classification (or wants to change its classification) • CTB election options: • Single owner: Corporation or DRE • Two or more members: Corporation or partnership • File Federal Form 8832, Entity Classification Election 10
CTB APPLICATION TO STATE INCOME TAXES • State adoption of CTB regulations • Intended to simplify tax compliance and administration • 25 or so states conformed in 1997; almost all comply now… but there are exceptions (discussed later) • State conformity is not as straight forward as it seems • States have conformed in a variety of ways: • Conformity statutes • Bulletins • States have varied in addressing the application of the CTB classification for all entities (some only address for certain entities, i.e., LLCs) 11
CTB APPLICATION TO OTHER STATE TAXES • CTB regulations formulated for federal income tax purposes • Some states apply CTB to non-income taxes • Varying treatment of CTB for sales and use tax purposes 12
STATE CONFORMITY, PARTIAL CONFORMITY AND NON-CONFORMITY • Conformity • Alaska. Instructions for Forms 6000 and 6020, 2013 Alaska Corporation Net Income Tax Return • Arkansas. Ark. Code §§ 4-32-1313, 26-51-802(a) • Partial conformity and non-conformity • Pennsylvania. 72 Pa. Stat. Ann. § 7601(a) • Rhode Island. R.I. Gen. Laws §§ 7-16-73(b), 44-11-2.2(a)(1); see Bulletin, “Q & A on Rhode Island Income Tax Changes Affecting Pass-through Entities Including: Partnerships and Limited Liability Companies (LLCs) with Nonresident Partners or Members; Trusts with Nonresident Beneficiaries; and S Corporations with Nonresident Shareholders,” (R.I. Div. of Taxation Dec. 28, 2004) • Tennessee. Notice No. 13- 16 (Tenn. Dep’t of Revenue Nov. 2013) 13
S CORPORATION ELECTIONS • State approaches vary • Most states recognize federal S corp. election • Some states have additional requirements • Some states require a separate S corp. election • Some states allow a federal S corp. to opt out for state purposes • Some states do not follow federal S. corp. scheme • State consequences vary 14
JURISDICTION TO TAX PTEs AND THEIR OWNERS 15
JURISDICTION TO TAX PTEs AND THEIR OWNERS • Jurisdiction (nexus) overview • Constitutional nexus • Nonresident partner nexus • LLC member nexus 16
JURISDICTION (NEXUS) OVERVIEW • Can a state tax a nonresident partner or member? • Before a state can tax a nonresident owner of a PTE that is doing business within its borders, it must be determined whether the state has jurisdiction over the nonresident • States have varying statutory standards for determining whether a nonresident partner or member has nexus • Colorado. 1 CCR 201-2: 39-22-301.1(2)(b), (c)(v) • Kentucky. Ky. Rev. Stat. § 141.010(25)(e), (26) • Statutory standards are subject to U.S. Constitutional limitations 17
CONSTITUTIONAL NEXUS • States are limited in their ability to tax or impose a tax collection obligation on an out-of-state person or entity • Due Process Clause nexus • Commerce Clause nexus 18
NONRESIDENT PARTNER NEXUS • States generally assert that a partner in a partnership having property or personnel in the state has nexus based on its ownership interest in the partnership • Must determine whether the nonresident partner has sufficient contacts with a state • Is the partner’s activity sufficient to be considered to be doing business in the state? • Does the nonresident partner have sufficient contacts with the state to satisfy U.S. Constitutional nexus standards? 19
NONRESIDENT PARTNER NEXUS • Aggregate theory v. entity theory • Aggregate theory • Activities of the partnership attributed to partners • Partners considered to be conducting the business of the partnership • Entity theory • Partnership treated as an entity, distinct from partners • Partnership interest treated like an ownership interest in a corporation 20
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