miller nash llp | Winter 2011 brought to you by the tax law practice team NW Tax Wire ™ Worker Classification Continues to Be in the Spotlight enhanced information-sharing and regarding a new Voluntary Classifica- other collaboration to “help reduce tion Settlement Program (the “VCSP”) the incidence of misclassification of to allow employers to voluntarily reclas- by Ryan R. Nisle employees as independent contractors, sify workers as employees in order to ryan.nisle@millernash.com help reduce the tax gap, and improve obtain a degree of employment tax and 503.205.2521 compliance with federal labor laws.” Per audit relief. the MOU, the DOL will share certain Previously, the IRS offered limited wage-and-hour investigation data with relief for worker reclassification under the IRS so that the IRS can determine Section 3509 (providing for reduced by Merril A. Keane employment tax compliance. The IRS tax rates for employers meeting certain merril.keane@millernash.com may also share DOL information with 503.205.2556 criteria), or through the Classification authorized state and municipal taxing Settlement Program for employers September saw a flurry of activity agencies, and will also provide annual under IRS audit. The VCSP allows from the Internal Revenue Service (the data to the DOL regarding trends in employers that are not currently under “IRS”) and Department of Labor (the worker misclassification. examination by the IRS to voluntarily “DOL”) regarding worker classification. In addition, the DOL announced apply to the IRS to reclassify workers While it is no secret that worker clas- that it has signed or will be signing as employees for future tax periods sification is an area of focus for the IRS memorandums of understanding with in order to obtain a reduction in past and DOL, September’s activity in this the following states: Connecticut, employment taxes for misclassified area highlights the complexity and risk Hawaii, Illinois, Maryland, Massachu- employees, as well as audit relief. related to worker relationships. setts, Minnesota, Missouri, Montana, (continued on page 6) New York, Utah, and Washington. IRS / DOL Memorandum of Under- standing IRS Voluntary Classification Settle- inside this issue On September 19, 2011, the IRS ment Program 2 iTax: (re)Expanding the and DOL entered into a Memorandum Paradigm for State Tax Just a day after signing the MOU, of Understanding (the “MOU”) on Professionals the IRS issued Announcement 2011-64 3 Tax Hawks: What Constitutes “Charitable” for Purposes Oregon Property Tax Appeals Deadline Approaches of Oregon’s Property Tax Exemption? It’s that time of year again (and we don’t mean the holiday season). For most 5 OCTA One Year Later taxpayers, the deadline to appeal your Oregon property tax is December 31 (this year, January 2, 2012, since the 31st falls on a Saturday). In the current economic environment, the real market value of many pieces of real property has dropped below the property’s “maximum assessed value.” The tax rolls may not reflect the true value of the property. In that case, it may make sense to appeal the value to the local Board of Property Tax Appeals. Please contact Valerie Sasaki or Ryan Nisle at 503.224.5858 for additional information. www.millernash.com
iTax: (re)Expanding the Paradigm for State Tax Professionals (“CFCs”). Subpart F income is incor- declaring what year’s earnings are be- porated into the ratio that California ing distributed. To allow preferential uses to determine what part of a CFC’s ordering of dividends between tax years by Valerie H. Sasaki income is subject to inclusion in the would allow potentially indefinite tax valerie.sasaki@millernash.com California tax base. avoidance by ignoring consideration 503.205.2510 of earnings attributable to untaxed Through its tax year ending on There are only so many hours in a excluded income until all included September 30, 1988, Apple filed all its given day. Thus, experienced state tax income had been exhausted.” worldwide entities on the same Califor- professionals tend to focus their energy So what? nia combined report. Apple first made on staying on top of developments in a water’s-edge election on its California Many of the companies that we the 11,000+ domestic state and local corporation excise tax return for the tax work with do not have an organizational taxing jurisdictions that fall within our year ending September 30, 1989. This chart and intercompany dividend ac- job descriptions. The California Court included only the income of its unitary counting as complicated on a national/ of Appeal’s opinion in Apple, Inc. v. domestic entities and partial income of international basis as that of Apple, Franchise Tax Board has caused some of its CFCs. Apple received and repatri- Inc. But the Apple decision (and the us to rethink that paradigm. ated substantial foreign CFC dividends resulting hubbub in the state and local Apple, Inc. involved the California in 1989. It took the position that the continuing education world) is a good tax treatment of repatriated reminder that we all need to dividends that Apple’s sub- remember to look beyond the “. . . we all need to remember to look sidiaries paid to it in 1989. U.S. territorial borders when beyond the U.S. territorial borders when The specific question was evaluating tax filings. Here what method Apple should evaluating tax filings.” are a few quick snapshots use to account for the divi- of how we have seen these dends’ source. The Franchise issues come up in the Pacific Tax Board (the “FTB”) argued that Apple dividends were paid from CFC retained Northwest: should be required to use a last-in-first- earnings accrued over the period that Idaho out (“LIFO”) proration of income. This Apple had filed on a worldwide basis would treat dividends as having come Unlike California, Idaho is not ex- with California, and that Apple thus first from the current year’s earnings plicitly disconnected from the Internal had paid California tax on the earnings. and then from the sequential most Revenue Code. The Idaho Corporate Apple argued that California Tax and recent prior year’s earnings. Apple Income Tax Return starts with fed- Revenue Code Section 25106 allowed argued that the dividends should be eral taxable income after net operating it to transfer dividends without tax subject to preferential ordering rules losses. Idaho, however, allows corpo- consequences. and be deemed to be paid first out of rate taxpayers to make a water’s-edge The FTB argued that the dividends income that was taxed in prior years, election. This means that the activity of were paid out of excluded income and thus reducing Apple’s income subject to unitary group members outside of the should be deductible instead under California tax. United States is disregarded for Idaho Tax and Revenue Code Section 24402, tax purposes. The income of foreign As many of our readers know, the which provides that a recipient corpora- affiliates may be excluded if a taxpayer state of California has declined to adopt tion may deduct from its gross income elects a water’s-edge status. Similarly, federal taxable income—or the Internal dividends that were declared from the denominator of a corporate taxpay- Revenue Code—as the basis of its income already included in the Califor- er’s property, payroll, and sales factors corporate tax regime. California also al- nia corporate franchise tax base of the must include only the domestic factor lows taxpayers to adopt a “water’s edge” payor corporation. information. combined report. This includes only The Court of Appeal held that the Taxpayers that elect to not make a the income and attributes of domestic FTB’s application of the LIFO ordering water’s-edge election are considered entities and a portion of the income of rules was appropriate because “it deters worldwide filers. These taxpayers may certain controlled foreign subsidiaries abuse by preventing a corporation from (continued on page 4) 2 | miller nash llp | NW Tax Wire
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