multistate partnerships: navigating various state taxation...

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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. 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. Multistate Partnerships: Navigating Various State Taxation Rules of Corporate Partners THURSDAY, OCTOBER 19, 2017, 1:00-2:50 pm Eastern FOR LIVE PROGRAM ONLY

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Page 1: Multistate Partnerships: Navigating Various State Taxation ...media.straffordpub.com/products/multistate... · 10/19/2017  · business of the partnership if its receipts in NY, if

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.

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.

Multistate Partnerships: Navigating Various

State Taxation Rules of Corporate Partners

THURSDAY, OCTOBER 19, 2017, 1:00-2:50 pm Eastern

FOR LIVE PROGRAM ONLY

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Tips for Optimal Quality

Sound Quality

When listening via your computer speakers, please note that the quality

of your sound will vary depending on the speed and quality of your internet

connection.

If the sound quality is not satisfactory, please e-mail [email protected]

immediately so we can address the problem.

FOR LIVE PROGRAM ONLY

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Oct. 19, 2017

Multistate Partnerships

Dennis Rimkunas, Partner

Jones Day, New York

[email protected]

Michael J. (Mike) Wynne, Partner

Jones Day, Chicago

[email protected]

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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.

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Advanced Multistate Taxation of

Partnerships and Individual Partners October 19, 2017

Dennis Rimkunas Michael Wynne

Partner, Jones Day Partner, Jones Day

[email protected] [email protected]

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How We Define “Pass-through” Entities

• Partnerships – General Partnerships

– Limited Partnerships

– Joint Ventures

– Alliances

– Private Equity Funds

– Hedge Funds

• Multi-member LLCs taxed as partnerships

• SMLLCs (“disregarded entities”)

• S corporations

• Specialized Entities: RICs, REITs, REMICs, Cooperatives and Some

Trusts

(Note: we will reference “PTEs” and “partners”)

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State Conformity Overview

The issue of federal-state conformity actually raises separate

questions:

1. Is it relevant, i.e. what tax is at issue?

2. Is it material for Due Process (Nexus) purposes?

3. Characterization: Does the state’s tax law follow the federal

characterization of the PTE under the “check-the-box” rules?

4. Pass-through Treatment: Does the state’s tax law follow the

federal tax treatment of income of “partnerships” and disregarded

entities”?

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#1 Relevance

Federal characterization is usually not relevant to:

• State registrations and filing fees

• Non-Income Taxes:

– Most Sales and Use Taxes

– Some Franchise / Privilege Taxes

– Excise Taxes (“sin taxes” – tobacco, alcohol, etc.)

– Property Taxes

– Real Estate Transfer Taxes

– Employment Taxes

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#2 Material

Does the pertinent statute define the terms:

“partnership”

“corporation”

“person”

“taxpayer”

If the federal characterization is not expressly followed in the

definitions, is there another provision in the statute or a regulation that

ties the definitions to the federal regime?

Is it necessary to identify the nature of the relevant person for due

process analysis under the statute.

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#3 Characterization

• Most states respect entity characterization under federal “check-the-

box” regulations

– An LLC that is a disregarded entity for federal tax is a disregarded entity for

state tax purposes

• Separate “S” Elections (NY, NJ)

• Some Notable (Income Tax) Exceptions:

– MA (large S corporations and SMLLCs are taxable as S Corp if owned by S Corp)

– NH (all PTEs taxed at entity level, even sole proprietorships)

– RI (corporate-owned SMLLC is taxed as a C Corp)

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#4 Pass-Through Treatment

• Most States Also Follow Federal Pass-through Treatment

– No tax on the PTE, but tax on the partners:

• Some Notable Exceptions and Variations:

– Entity-level taxes (CA, IL, NH, ME, MI, OH, OK, TN, TX)

– Don’t forget local jurisdictions (Phili, DC, NYC)

– Entity-level capital stock and fees (NY, PA, others)

– Withholding/estimated tax/partner consent rules (many)

– Composite filing rules (many)

• Some States Also Provide Exemption for Investment Partnerships

and Their Partners

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Nexus Issues Affecting Partnerships and Partners

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Constitutional Framework

• Due Process Clause

– Two requirements: (1) Taxpayer must have sufficient “minimum contacts”

with the taxing state and 2) income must have a “rational relationship” to

intrastate values of the enterprise

– Concern is the “fundamental fairness of government activity” (Quill Corp.

(1992))

– A state may not subject to tax a nonresident on its ownership of stock in a

domestic corporation under the DPC (Shaffer v. Heitner (1977))

• Commerce Clause

– Four Part Test: (1) Substantial Nexus, (2) Fairly Apportioned, (3)

Nondiscrimination, (4) Fairly Related (Complete Auto (1977))

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General Rule

General Rule: The Majority of states consider a person’s interest in a partnership

that is doing business in the state sufficient to create nexus for the person.

General agency principles apply:

A partner is an agent for the partnership;

A partnership is an agent for its partners.

What about control:

Does it matter what voting rights a partner has or how diluted the vote is?

Does it matter if the partnership interest is limited rather than general?

Does it matter if the person is a member rather than a managing member

of an LLC?

Does the general rule work the other way around:

Does a partner pursuing its own business in state create nexus for the

partnership?

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How Have the Cases Come Out?

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Ancillary Nexus Issue #1 – “Nexus Only”

• Key Issue: Some states require (or allow) combined/consolidated

returns only for corporate affiliates that have nexus with the state

(“nexus-only” filings). See Iowa Code Sec. 422.37(2). Does an out-

of-state partner qualify as a “nexus” member solely on the basis of

the activities of in-state PTE?

• Example: A and C are eligible, but is B by virtue of PTE?

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Ancillary Nexus Issue #1 – “Nexus Only”

• Considerations:

– Yes, but only if the Partner B is taxable in the state by virtue of the PTE’s

activities? So, does this mean that a 2% GP may be an eligible member

but a 2% LP may not? What impact could this have on the return?

– No, if Partner B is only a passive limited partner because a corporate

shareholder would not be taxable by virtue of its subsidiary’s nexus?

– No, if the state consolidated return statute can be strictly construed to only

include the corporate member (Partner B) based on its own individual

activities?

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Ancillary Nexus Issue #2 – Throw-Back, Throw-Out, Joyce/Finnegan

• Situation 1: Should a corporate

partner’s sales to a destination

state where it has no

independent nexus be thrown

back if the PTE has nexus in the

state but it does not?

• Situation 2: Should a PTE’s

sales to a destination state

where it has no independent

nexus be thrown back if the

corporate partner has nexus in

the destination state but it does

not?

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Ancillary Nexus Issue #2 – Throw-Back, Throw-Out, Joyce/Finnegan

• Considerations:

– No throwback in either case in states that attribute the activities of the PTE

to the partner (e.g., the partner has nexus in the state)?

– No throwback only in Situation 1 because a partner can have nexus in the

state by virtue of the PTE but a PTE cannot have nexus in a state by virtue

of a partner?

– Does it matter if the state adopts Joyce or Finnegan?

• In Joyce states, a PTE’s sales (Situation 2) may be subject to throwback despite

the fact that the partner has nexus because each entity’s factors are calculated

independent of the others.

• Does it matter if the PTE can be an eligible “member” of a unitary group as

opposed to just corporations being eligible members?

– What is the right answer from a policy perspective?

– Should you evaluate a “nexus” position to prevent throwback?

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Ancillary Nexus Issue #3–PL 86-272

• Key Issue: – PL 86-272 generally precludes a state from imposing an income tax on an

entity whose activities within the state are limited to solicitation of sales of

TPP and ancillary activities. Should the activities of an in-state PTE that

exceed PL 86-272 subject the out-of-state partner to tax?

• Considerations: – Similar considerations as throw-back – who is the taxpayer?

– MA: if a foreign corporate partner is unitary with its in-state partnership, the

activities of the partners are deemed to be the activities of the partner for

determining whether the income if the partner is precluded under 86-272

(830 CMR 63.39.1(8)(a))

– Does PL 86-272 apply to the income derived from the PTE? Or does PL

86-272 apply to the corporate partner as the taxpayer under the corporate

income tax?

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Ancillary Nexus Issue #3–PL 86-272

• Example: Arizona Dept. of Rev. v. Central Newspapers (11/3/09):

• Partners = no AZ nexus; Parent has AZ nexus

• Ponderay = AZ nexus but protected by 86-272

• Parent elected to file as part of consolidated AZ

return, including Partners

• Agreement that Ponderay distributive share was

business income included in AZ return

• Issue: whether Ponderay’s sales are excluded

from the consolidated return sales factor

numerator on the basis of 86-272?

• Holding: AZ may include Ponderay’s sales in the Partners’ sales factor

numerator because the taxpayer is the Parent and its activities exceeded 86-

272. 86-272 does not make certain income tax-exempt – it prevents a state

from exercising taxing jurisdiction over a corporate partner.

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Ancillary Nexus Issue #4– Nexus Based on Receipts – New York Example

• In NY, a corporation is subject to tax if it has receipts of $1 million or more in a

tax year from NY activities

• Generally, there will be nexus:

– for a general corporate partner, or limited corporate partner that is engaged, directly or

indirectly, in the participation in or the domination or control of all or any portion of the

business of the partnership if its receipts in NY, if any, when combined with the

receipts in NY of the partnership total at least $1 million;

– for an LLC corporate member that is engaged, directly or indirectly, in the participation

in or the domination or control of all or any portion of the business of the LLC if its

receipts in NY, if any, when combined with the receipts in NY of the LLC total at least

$1 million. (regardless of any limitations in the operating agreement)

– exception for portfolio investment partnerships

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Ancillary Nexus Issue #4– Nexus Based on Receipts – New York Example

• LLC has $1,250,000 of receipts in NY. Member A has no receipts in NY. A is

subject to tax

• P has two general corporate partners: Partner A owns 60% and Partner B

owns 40%. Partnership has $600,000 of receipts in NY. Separately, Partner A

has $700,000 of receipts in NY and Partner B has $450,000 of receipts in

NY. For purposes of determining nexus only, both corporate partners A and B

would be treated as having $600,000 of receipts in NY from P. Combined with

their own receipts, both general corporate partners exceed $1 million in

receipts in NY ($1,300,000 for Partner A and $1,050,000 for Partner B).

Therefore, both general corporate partners are subject to tax.

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Ancillary Nexus Issue #4– Nexus Based on Receipts – New York Example

• LLC has $750,000 of receipts in NY. Separately, Member A has $500,000 of

receipts in NY and Member B has $300,000 of receipts in NY. The LLC’s

operating agreement imposes limitations on both Member A’s and Member

B’s participation in the management of the LLC.

• Member A is not engaged, directly or indirectly, in the participation in or the

domination or control of all or any portion of the business activities or affairs of

the LLC. Member B is indirectly engaged in the control of the business

activities of the LLC.

• Member A, but not Member B, would be treated as having $750,000 of

receipts in NY from the LLC. Combined with its own receipts, Member A

exceeds $1 million in receipts in NY ($1,050,000). Therefore, Member A is

subject to tax.

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Division of the Tax Base – Apportionment

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Multistate Taxation: Compliance & Planning Considerations

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Central Tax Base Issue

• Key Question:

– Once the partner is taxable and the amount and character of the PTE’s tax

base has been determined, what method is used to “divide” the partner’s

tax base among the states to accomplish fair apportionment?

• Different Approaches:

1. Partner Level (Unitary) Method

2. Partnership Level (Non-Unitary) Method

3. Business/Nonbusiness Income Classifications

4. Methods for Special Issues

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Flow-Through Entities Apportionment and Corporate Partners

• Approaches used by states

– Partnership/Entity Level Approach - Corporate partner includes only its

share of the income/loss of pass through entity as apportioned by the

entity, but does not include its share of property, payroll and sales.

• Should any K-1 line items be reflected in factor if business income?

– Partner/Aggregate Level Approach = “Flow-up of factors”

• Corporate partners combine their percentage share of the pass-

through entity’s apportionment factors with their own apportionment

factors

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Entity vs. Aggregate Calculation of Apportionment Factor

• California

– If partners are unitary with partnership, then partnership’s factors flow-up to

the unitary partner(s).

– If partner(s) are not unitary, then no flow-up

– If partner(s) and partnership are not unitary, but the income is considered

business income, then partners must apportion partnership income

separately from their other business income.

– California's regulation regarding the treatment of partnership income does

not distinguish between a limited and general partnership interest. Because

partnership law prohibits a limited partner from exercising a management

role with respect to a limited partnership, absent a unitary relationship

between the general and limited partner, unity between the limited

partnership and its limited partners on the basis of strong centralized

management is unlikely. However, combination may be a consideration if

the partnership and the limited partner share operational ties.

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Illinois: Five Different Apportionment Methods

Apportionment Issues

• Non-Unitary Partnership (No Factor Flow Up) − IITA Sec. 305 (a) and (b)

• Unitary Partnership (Factor Flow Up) − 86 Ill. Admin. Code 100.3380(d)

• Partnership Complete Member of Unitary Group

– 86 Ill. Admin. Code 100.3380(d)(4)

• Investment Partnership under General Rule − IITA Sec. 305(c-5)

• Investment Partnership Income Treated as Business Income − IITA Sec.

305(c-5)

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Entity vs. Aggregate Calculation of Apportionment Factor

Illinois

• A partnership is required to use combined reporting when engaged in a unitary business with one of

its partners. If unitary, the partner's distributive share of the business income and apportionment

factors of the partnership must be included in that partner's business income and apportionment

factors. If the partner had no other activities in Illinois, the partner would apportion the sum of it

income plus its share of the partnership income to Illinois using the partnership Illinois sales factors

and the partnership everywhere sales factors. In determining the business income of the partnership,

transactions between the unitary partner, or members of its unitary business group, and the

partnership are not eliminated. However, all transactions between the unitary business group and

the partnership are eliminated for purposes of computing the apportionment factors of the partner and

of any other member of the unitary business group. Ill. Admin. Code tit. 86, § 100.3380(d). However,

this rule does not apply:

– 1. to shares of income from partnerships whose business activity outside the United States is 80

percent or more of its total business activity;

– 2. where the partnership has a different apportionment method than the corporate partner; or

– 3. where the partnership is not in the same general line of business or a step in a vertically

structured enterprise with the corporate partner. Ill. Admin. Code tit. 86, § 100.3380(c).

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Entity vs. Aggregate Calculation of Apportionment Factor

• Florida (Fla. Admin. Code Ann. r. 12C-1.015(10))

– Partnership factors flow through to the corporate partners

– Apportionment occurs at the partner level

– Compliance reporting considerations for tiered partnerships

• Massachusetts (Mass. Regs. Code tit. 830, § 63.38.1)

– Partnership factors flow through to corporate partners, if partnership and

corporate partners are engaged in “related business activities.”

– If they are not engaged in related business activities, corporate partners

separately account for partnership income and apportion it using only the

partnership’s factors.

– If corporation owns less than 50% of LP, presumed not to be doing

business in Massachusetts, and apportionment is at partnership level

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Entity vs. Aggregate Calculation of Apportionment Factor

• New Jersey (NJ Admin. Code tit.18, §18:7-7.6(g)(3))

– Partnership factors flow through to corporate partners, if the partnership

and partners are unitary

– If not unitary, apportion partnership income at the partnership level and

report distributive share of apportioned taxable income without regard to

the partners’ separate apportionment factors

– Note BIS, LP decision

• Interplay with w/h

• Oklahoma (Okla. Admin. Code §710:50-17- 51(15)(A))

– Partnership factors do not flow through to the corporate partners. Income is

apportioned at the partnership level and allocated to the state by the

corporate partners.

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Illinois – Tiered Partnership Structure

• If a partnership and a partner are engaged in a unitary business and the partnership is a partner in

a second partnership, the partner's share of the first partnership's share of the base income

apportioned to Illinois by the second partnership must be included in the partner's Illinois net

income. This treatment applies if the partner is not engaged in a unitary business with the second

partnership. However, if the partner is engaged in a unitary business with the second partnership,

the partner's share of the first partnership's share of the business income and apportionment

factors of the second partnership must be included in the partner's business income and

apportionment factors.

• If the partnership is a partner in a second partnership and one of its partners is engaged in a

unitary business with the second partnership, that partner must include in its business income and

apportionment factors its share of the partnership's share of the second partnership's business

income and apportionment factors. (See Example later in this deck)

• Generally, when a corporation's activities and its partnership's activities are not considered to be in

a unitary group, the partnership allocates its nonbusiness income and apportions its business

income which is then added to the corporation's other business income apportioned to Illinois and

nonbusiness income allocated to the state. The Illinois income is calculated at the partnership level

and merely reflects the partner's share of the partnership income as post–apportionment income or

loss.

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Business/Non-Business Income

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Business v. Non-Business Income

• Transactional Test

– Income arising from transactions and activity in the regular course of the

taxpayer's trade or business

• Functional Test

– 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

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Transactional Test

• Identify transactions and activity occurring in the regular trade or

business

– Generally, all transactions that are dependent upon or contribute to the

operations

• Three standard tests:

– Frequency and regularity of transactions

– Former business practices

– Subsequent use of proceeds (reinvestment or distribution)

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Functional Test

• Identify whether the transaction is an integral part of the taxpayer’s

trade or business

– Focus on whether property was used in trade or business

– Frequency is generally irrelevant

– In the case of a disposition of assets, state may look at whether the

disposition itself is an integral part of the business operations (e.g., IA, AL,

TN, NC, IL, PA)

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Business v. Non-Business Income

• Minnesota

– Firstar Corp v. Commr. Rev.

– Capital gain from sale of office building was nonbusiness income

– Applied transactional test

• Infrequent: Taxpayer had not previously sold commercial property

• Subsequent use of proceeds: Not reinvested in the ongoing business

operations – treated as dividend to shareholders

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Business v. Non-Business Income

• California

– Jim Beam Brands Co v. FTB

• Gain from the sale of a unitary subsidiary is business income

• Applied functional test

• Gain was business income because the property while owned by

taxpayer was used to produce business income

• Court rejected argument that disposition of property is not an integral

part of the business

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Business v. Non-Business Income

• Is business/non-business income

• Determination made at:

– The partnership level?

– The partner level?

• Not much guidance; only a handful of states have addressed in public

guidance

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#3 – Business / Nonbusiness Issues

• Key Issue:

– In some states, if a “business/nonbusiness income” regime exists, and the

distributive share is determined to be nonbusiness income, such income is

allocated to the appropriate state, instead of apportioned (e.g., to the state

of domicile or other sourcing rules applicable to nonbusiness income).

• Considerations:

– Do the allocation rules look to the partner or partnership? For example, if

dividend income is allocable to domicile, do you look to the partner’s or the

partnership’s commercial domicile?

– What is the impact if it is non-business income as opposed to business

income?

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#3 – Business / Nonbusiness Issues

• At what level is the business income determination made-

partner or partnership level:

– Most states have no guidance.

– Exceptions:

• Partnership Level: AL, CA, IL

• Partner Level: AZ, PA

• If non-business income, the question is to which state is the

income sourced?

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Entity vs. Aggregate Business/ Nonbusiness Determination

• For corporate partners is the business/nonbusiness income

determination made at the partnership level or partner level?

– Majority of states have not addressed

• Arizona & Illinois

– Requires partner level determination

– Arizona Corporation Tax Ruling No 94-2 (4/4/1994)

– Illinois Admin. Code tit. 86, §§ 100.3500(a)(3), 100.3500(b)(1)

• Alabama

– Requires partnership level determination. Alabama Supreme Court ruled

gain from the sale of partnership assets was not business income to the

corporate partners because such sales were not in the regular course of

the partnership’s trade or business.

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Withholding and Composite Returns

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Withholding Regimes

• General Rule: withholding at the source is generally required for

PTEs with nonresident partners.

– Typically pay at the highest individual or corporate tax rate (multiplied by

the owner’s distributive share of income attributable to the state)

• Typical Exemptions:

– Partner provides an exemption certificate certifying it will file/pay tax

individually

– Partner is tax-exempt

– Partner files as part of a composite return

– PTE is a specialized entity (e.g., investment partnership)

– Partner is not a nonresident

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Withholding Challenges

• Some states have threshold based on income or tax

– May be applied to the entity or to a specific owner

– Ex. MI- Requires PTEs with Michigan-sourced business income of over

$200,000 to withhold on behalf of owners that are PTEs or corporations

– Other states thresholds very low

• Some rates impose rate differentials that become complex with tiered

structures

– Lower tier may have to look to upper tier

– Ex. MI- requires withholding for both PTE and corporate owners at the full

6% corporate. If the PTE knows the ultimate owner of the upper- tier PTE

is a non-resident individual, it may instead withhold at the individual rate,

currently 4.25%.

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Withholding Challenges

• In some states, withholding may not be compulsory

– May depend on type of owner, i.e. trust, corporation

– May depend on type of PTE

– May exempt certain type of entities

• Sometimes voluntary at option of PTE and/or owners

• Also it may make sense to withhold

– May eliminate need to disclose taxpayer sensitive information.

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Withholding Elections

• Some states allow owners to explicitly elect out of withholding.

– Waiver usually required

– May be perpetual or required to be renewed

– Keep part of books and records

– May need to provide to state

• Why elect not to withhold?

– Owner has losses in state and no tax will be due

– Owner already making estimated tax payments

– Prefer to file composite return

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Withholding Risks

• Conflict between state reporting requirements and legal requirements

for the PTE

– Ex. S corporations

– Distributions made to owners must be made on a basis proportionate to

ownership, otherwise the S-corpora tion runs the risk of inadvertent

termination of its S-election under 2 scenarios:

• Owners are residents of multiple states and participation in

withholding is limited to non-residents. Disproportionate distributions

can result in termination of the S-corporation election.

• When the PTE is owned by different types of entities under different

withholding regime.

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Composite Regimes

• Typical Conditions:

– Requirement of an election/consent to participate is common (some

require consent to be submitted, some require it to be executed and

available but not filed, some require an annual filing)

– Limitation of composite returns to individual partners (no corporate or PTE

partners but some allow trust members to participate)

– Preclusion of composite returns if the partner has in-state income from

other sources

– Agreement that PTE is authorized to resolve any audit/pay deficiency

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Recent Developments – Partnership Audit Regulations

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IRS Partnership Audit Rules

• Default Regime: IRS makes adjustments at partnership level and collects from

the partnership

– Qualifying partnerships (100 or fewer K-1s) may elect out by filing an

annual election and providing information about their partners

– A partnership may elect to amend K-1s and have the partners pay the

additional tax (avoids shifting liability between current and former partners)

• Imputed underpayment is assessed in adjustment year, not the year

under review

• Partnership Representative – sole authority to act on behalf of the

partnership

• Effective 2018

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IRS Partnership Audit Rules – State Tax

• Most states do not tax partnerships and have no mechanisms for reporting changes at the

partnership level

– Audit Rules are procedural and will not be automatically by states that conform to the

IRS

• Multistate apportionment – How to apportion additional tax, partnership’s or partner’s

factors? What year’s apportionment – reviewed or assessed?

• Nexus – Nonresident partners; what if partnership moved or is not in the state?

• Statute of Limitations– Statutory periods vary among states, and may vary from

partnerships to partners

• Representative – same as for the IRS or different?

• Election out – same as for the IRS or different? Composite returns?

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IRS Partnership Audit Rules – Recent Developments

• New and Proposed Legislation

– Arizona (enacted in 2016)

• If partnership pays, within 90 days of final determination, partnership

must pay AZ tax on any increase in income derived from AZ sources

at highest individual rate

• If partners pay, partnership has 90 days to furnish statement to

partners, and partners have 60 days to file amended returns

– Proposed legislation in Montana (similar to AZ (tabled)), Georgia (provided

for separate representative (withdrawn))

– MTC – Model Statute

• Biggest concern: Lack of Uniformity

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QUESTIONS?

58

Michael J. Wynne Jones Day, 77 West Wacker, Chicago, IL 60601

(312) 269-1515

[email protected]

Dennis Rimkunas Jones Day, 250 Vesey Street, New York, NY 10021

(212) 326-3412

[email protected]