Presenting a live 110-minute teleconference with interactive Q&A State Income Tax Base Calculation: Complex Issues in Income Modification Reporting for Multi-State Companies to Minimize Tax and Maximize Deductions WEDNES DAY, DECEMBER 18, 2013 1pm East ern | 12pm Cent ral | 11am Mount ain | 10am Pacific Today’s faculty features: John Daly, Tax Manager, WithumSmith+Brown , Princet on, N.J. Jeffrey Reed, At t orney, Mayer Brown , New Y ork The audio port ion of t he conference may be accessed via t he t elephone or by using your comput er's speakers. Please refer t o t he inst ruct ions emailed t o regist rant s for addit ional informat ion. If you have any quest ions, please cont act Customer Service at 1-800-926-7926 ext. 10 .
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State Income Tax Base Calculation: Complex Issues in Income Modification Dec. 18, 2013 Jeffrey S . Reed, Mayer Brown John Daly, WS +B jreed@ mayerbrown.com jdaly@ withum.com
Today’s Program Introduction and Overview S lide 7 – S lide 9 [Jef f rey Reed] Conformity and Non-Conformity to the Federal Income Tax S lide 10 – S lide 17 Base [Jef f rey Reed] S tate S tatutes Designed to Curb S tate Tax Planning S lide 18 – S lide 21 [Jef f rey Reed] Apport ionable or Allocable Income S lide 22 – S lide 28 [Jef f rey Reed] Types of Report ing S lide 29 – S lide 34 [Jef f rey Reed] Apport ionment Issues S lides 35 - S lides 79 [John Daly]
Calculating the State Income Tax Base Strafford Publications December 18, 2013 Jeffrey S Reed (212) 506-2104 jreed @mayerbrown.com Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe-Brussels LLP both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.
Introduction • Overview of State Income Tax Computation • Conformity and Non-Conformity to the Federal Income Tax Base • State Statutes Designed to Curb State Tax Planning • Combined Reporting • Apportionable and Allocable Income • Partnerships and Apportionment 8
Overview of State Income Tax Computation • Typical approach – Start with federal income tax base. – Make state modifications to the base. – Determine what income is apportionable / allocable. • States with a gross receipts base – Ohio, Washington and Texas • Statutory construction – State tax law can “depart from Federal tax law.” – States can “take a different path from that of the Federal government” with respect to taxation. 9
Conformity and Non-Conformity to the Federal Income Tax Base
Federal Income Tax Base • Different Approaches – Incorporate by reference (Federal Income Tax Base for the taxable year). – Static base (federal income tax code as of a certain year). • Generally, conformity is to income only – No conformity to parts of the IRC unrelated to “income,” for example withholding. 11
Dividends • Different approaches. – Exclude all dividends from the tax base (Kentucky). – All dividends from subsidiaries excludable (New York). – Foreign source dividends excluded (Georgia). • Litigation – Some states limit the DRD to income already taxed in the state or only to dividends received by corporations taxable in the state. – Farmer Brothers (California). 12
Deductions Related to Income Excluded from the Tax Base • Examples – FL disallows expenses attributable to foreign source dividends. – GA disallows expenses relating to federal obligations. – New York disallows interest deductions attributable to subsidiary capital. 13
Net Operating Losses • Varying approaches – Some states do not let you carry back a loss. – Some states allow a carryforward that differs from the federal carryforward. • Types of conformity – Conformity based on amount (NOL = line from 1120 form). – “In the same manner” as the NOL deduction. 14
Net Operating Losses – Change in Ownership • IRC 381 + 382 provide rules for transferring tax attributes in a transaction. – Some states conform to these sections. – Other states do not allow NOLs to transfer in, for example, a merger. (e.g., in Massachusetts case law states that the NOLs of the corporation absorbed in the merger are lost but the NOLs of the surviving corporation are retained); Macy’s East v. Commissioner . – North Carolina (NELs and Libson Shops/ COBE doctrine). – Net operating losses sustained by a “taxpayer” can be carried forward. Conflicting litigation. 15
Consolidated Return Regulations • Range of issues – Deferred intercompany transactions – Inventory adjustments – Disposition of stock of a subsidiary – Basis adjustments – related to 338(h)(10) conformity – Charitable Contribution Deductions + MA FMR case • State Group Different than Federal Group – What if only one of the two relevant group members is in the state? 16
Slide Intentionally Left Blank
State Statutes Designed to Curb State Tax Planning
State Statutes Designed to Curb State Tax Planning • Overview – Intercompany deductions – Intangible Holding Company Structures – REIT Structures – Captive Insurance Company Structures – 80/20 Planning 19
Addback Statutes • These statutes require that taxpayers “add back” to income expense deductions relating to certain expenses paid to a “related member.” – In many states intangible expenses only. – In some states interest expenses or management expenses. • Exceptions: – Subject to Tax – Conduit – Reasonableness – Foreign Country with Treaty 20
Captive REIT Statutes • Background • Approaches – Combine the REIT and the recipient of the dividends. – Deny the DPD. – Eliminate the DRD. – May attempt to assert nexus over the dividend recipient. 21
Apportionable or Allocable Income
Basic Distinction • Apportionable Income – Apportioned using the state’s apportionment formula. • Allocable Income – Attributed to source of income. 23
Business Income or Nonbusiness Income • Business income – Apportionable – In some states all income is business income within constitutional limits. – UDITPA: “income arising from transactions and activity in the regular course of the taxpayer’s trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer’s regular trade or business operations.” • Nonbusiness income - allocable 24
Business Income – Cessation of a Business • Overview of Fact Pattern • Case Law – Transactional Test – Arose in Regular Course of the Taxpayer’s Trade or Business (frequent, regular). – Functional Test – Property Sold used in the Taxpayer’s Trade or Business. • Recent Trends – Arizona First Data case. 25
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