Tag: Tax

The Proposed Political Subdivision Regulations: A Puzzling Reference Impacts Legal Framework of Official Legal Signals

Treasury recently issued proposed regulations that tell us whether an entity is a “political subdivision” that can issue tax-exempt bonds on its own behalf. One requirement is that an entity must serve a “governmental purpose” to be a political subdivision. The proposed regulations say that an entity is only organized for a governmental purpose if the entity operates “in a manner that provides a significant public benefit with no more than incidental benefit to private persons.” As support for this statement, the proposed regulations contain this citation: “Cf., Rev. Rul. 90–74 (1990–2 CB 34).”

This year marks the 90th anniversary of The Bluebook: A Uniform System of Citation, and last year, the 20th edition of the text was published. The Bluebook is written by law review editors at several top-tier law schools.  Depending on your perspective, it is either what it purports to be (a uniform system of citation) or a loathsome testament to the “reflex desire of every profession to convince the laity of the inscrutable rigor of its methods.”[1]  (Or both.)  There have been several pretenders to the throne, including the Maroonbook, created at the University of Chicago law school years ago, which has faded away, and the ALWD Citation Manual, created by teachers of legal writing in law school as a more user-friendly alternative. The ALWD manual has been adopted by a few jurisdictions, but the Bluebook still reigns. Each text provides for the usage of “citation signals” that introduce the citation and explain its relevance to the point that the author is making; the “Cf.” signal in the proposed political subdivision regulations is an example.

The signal “cf.” is an abbreviation for the Latin word “confer,” which translates to “compare.” It depends on which edition of The Bluebook you’re reading, but the 18th Edition (we work on a shoestring budget here at The Public Finance Tax Blog), like most modern editions, says this about the “cf.” signal: “Cited authority supports a proposition different from the main proposition but sufficiently analogous to lend support. . . The citation’s relevance will usually be clear to the reader only if it is explained.” Among the signals that an author can use to show that the cited authority supports the position the author asserts, “cf.” is the weakest.

But because the proposed political subdivision regulations offer no other support for the position that an entity cannot provide more than incidental private benefits and remain a political subdivision, one can only believe that Treasury must have meant something entirely different and that, at long last, the lowly “cf.” signal might be taking on new prominence.

And now, members of the legal citation community are scrambling to react to what could be a revolution in citation signal usage.

“Just as Darwin had his finches and Mendel had his peas, we now have these proposed regulations from Treasury,” said one editor of ALWD.  “I guess ‘cataclysm’ is probably too strong of a word to describe it,” she told The Public Finance Tax Blog. “But oh yeah, we definitely noticed.”

She told us that “we at ALWD consider ourselves more describers of ‘what is’ in legal citation practice, rather than dispensers of ‘what ought to be’ like those silverspoons over at The Bluebook.”[2]

“The fact is,” the ALWD editor continued, “the meaning of ‘cf.’ has changed many times over the years, [3] and we may be witnessing the latest evolution of the phrase here. Who says that a government agency can’t be on the cutting edge of social change in important areas like citation policy?”

“It’s certainly true that ‘cf.’ has always been the signal that gives courts and lawyers the hardest time to understand,”[4] another editor told us. “But who says that regulations – particularly tax regulations – are supposed to be easy to understand?”

Over at The Bluebook, the editors were a bit less perturbed. “Look, we make the rules here,” said one editor, swatting away a fair trade soy latte offered up by a cowering 2L line-slugger. “We are mindful of the actual – I SAID NO FOAM! GET IT RIGHT, OR WE’RE CANCELING THE 5-HOUR BLUEBOOK EXAM FOR TOMORROW – usage  of these terms, though,” she said, “and we’re obviously going to resist changing our minds based on a single usage, even if it comes from the federal government.”

“In the past, we’ve resisted changing our minds based on some of the more fatuous uses of the cf. signal,[5] so we want to wait and see whether this is some kind of joke or mistake or just a passing fad, using ‘cf.’ to introduce the sole source of authority for a proposition.” She continued, “but it appears that this might be a good-faith attempt to finally give ‘cf.’ the rightful place it deserves instead of leaving it buried at the bottom of the pile of citation signals that show support.”

“But we’ve really got our hands full with preparations for the 21st edition, and dealing with those maniacs over at Baby Blue ripping off our work to worry about this, though. And no, all you weisenheimers; cf. does not stand for ‘couldn’t find,’ and no you’re not funny.”

It’s obviously easy to criticize the furor over the potential elevation of the status of the lowly “cf.” signal to something more as a tempest in the world’s nerdiest teapot. It’s not as though these mundane citation signal questions are literally[6] a matter of life and death.[7]

Calls to Judge Richard Posner, eminent judge of the U.S. Court of Appeals for the Seventh Circuit, and a frequent critic of the inanity of the world of legal citation, were left unreturned, although I think I heard the crackling of a bonfire in the background.

Article By John W. Hutchinson of Squire Patton Boggs (US) LLP
© Copyright 2016 Squire Patton Boggs (US) LLP

[1] Richard Posner, The Bluebook Blues, 120 Yale L. J. 850, 860-61 (2011).

[2] Cf. (not really) Ian Gallacher, Cite Unseen: How Neutral Citation and America’s Law Schools Can Cure our Strange Devotion to Bibliographical Orthodoxy and the Constriction of Open and Equal Access to the Law, 70 Alb. L. Rev. 491, 500, at n. 48 (2007) (citing Alex Glashausser, Citation and Representation, 55 Vand. L. Rev. 59, 78 (2002), as “praising the ALWD Manual as a populist instrument that promulgates citation rules predicated upon a consensus among legal professionals, rather than “the judgment of student editors at elite law schools”).

[3] Ira P. Robbins, Semiotics, Analogical Legal Reasoning, and the Cf. Citation: Getting our Signals Uncrossed, 48 Duke L.J. 1043, 1050 (March 1999) (“The authors of The Bluebook altered its definition – albeit subtly – almost every time the manual was printed between 1947 and 1996.”)

[4] See A. Darby Dickerson, An Un-uniform System of Citation: Surviving with the new Bluebook (Including Compendia of State and Federal Court Rules Concerning Citation Form), 26 Stetson L. Rev. 53, 221, at n. 90 (1996) (citing Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930, 938 n.14 (2d Cir. 1984); Palmigiano v. Houle, 618 F.2d 877, 881 n.5 (1st Cir. 1980); Doleman v. Muncy, 579 F.2d 1258, 1264 (4th Cir. 1978); Gates v. Henderson, 568 F.2d 830, 837-38 (2d Cir. 1977); Local 194, Retail, Wholesale & Dep’t Store Union v. Standard Brands, Inc., 540 F.2d 864, 867 n.4 (7th Cir. 1976); Givens v. United States, 644 A.2d 1373, 1376 (D.C. App. 1994) (Mack, S.J., dissenting); Connell v. Francisco, 89a P.2d 831, 838 (Wash. 1995) (Utter, J., dissenting); see also Givens, 644 A.2d at 1374 n.3 (concerning the “but cf.” signal)). Dickerson goes on: “As one reviewer observed: ‘The introductory signals approved by the Bluebook have been the source of dispositive judicial debate. A single “cf.” signal in a Supreme Court decision fostered extensive scrutiny among the circuits, and, with singular irony, the Bluebook was the source of ultimate authority in settling the legal questions raised in the cases.’ Peter Phillips, Book Note, 32 N.Y.L. SCH. L. REV. 199, 199-200 (1987) (reviewing the Fourteenth Edition) (footnotes omitted). The case at issue was Stone v. Powell, 428 U.S. 465, 494 n.36 (1976). See Phillips, supra, at 200 n.8.”

[5] See, e.g., Peter Lushing, Book Review, 67 Colum. L. Rev. 599, 601 (1967) (providing a review of The Bluebook’s Eleventh Edition) (“Use cf. when you’ve wasted your time reading the case.”); Hohri v. United States, 793 F.2d 304, 312 n.4 (D.C. Cir. 1986) (Bork, J., joined by Scalia, Starr, Silberman, & Buckley, JJ., noting that the use of the cf. signal means that the cited authority is “probably inapposite”).

[6] Oxford English Dictionary, Third Ed., Sept. 2011, item I(1)(a), (b), but not (c). (available online at http://www.oed.com/view/Entry/109061?redirectedFrom=literally).

[7] Gallacher, supra n. 2 at 536, n. 38 (“At least one capital punishment appeal appears to have been decided based on the Supreme Court’s interpretation of a bibliographical signal, “cf.,” and the signal’s meaning in the context of the prisoner’s brief. Lambrix v. Singletary, 520 U.S. 518, 528-29 (1997).”). The language from the Lambrix opinion: “And it introduced that lone citation with a “cf.”–an introductory signal which shows authority that supports the point in dictum or by analogy, not one that “controls” or “dictates” the result.” 520 U.S. at 529.

IRS Expands Ability of Safe Harbor Plan Sponsors to Make Mid-Year Changes

The Internal Revenue Service (IRS) recently issued Notice 2016-16, which provides safe harbor 401(k) plan sponsors with increased flexibility to make mid-year plan changes.  Notice 2016-16 sets forth new rules for when and how safe harbor plan sponsors may amend their plans to make mid-year changes, a process which traditionally has been subject to significant restrictions.

Background

“Safe harbor” 401(k) plans are exempt from certain nondiscrimination tests (the actual deferral percentage (ADP) and actual contribution percentage (ACP) tests) that otherwise apply to employee elective deferrals and employer matching contributions.  In return for these exemptions, safe harbor plans must meet certain requirements, including required levels of contributions, the requirement that plan sponsors provide the so-called “safe harbor notice” to participants, and the requirement that plan provisions remain in effect for a 12-month period, subject to certain limited exceptions.

Historically, the IRS has limited the types of changes that a safe harbor plan sponsor may make mid-year due to the requirement that safe harbor plan provisions remain in effect for a 12-month period.  The 401(k) regulations provide that the following mid-year changes are prohibited, unless applicable regulatory conditions are met:

  • Adoption of a short plan year or any change to the plan year

  • Adoption of safe harbor status on or after the beginning of the plan year

  • The reduction or suspension of safe harbor contributions or changes from safe harbor plan status to non-safe harbor plan status

The IRS has occasionally published exceptions to the limitations on mid-year changes.  For example, plan sponsors were permitted to make mid-year changes to cover same-sex spouses following the Supreme Court of the United States’ decision in United States v. Windsor in 2013.

Aside from these limited exceptions, safe harbor plan sponsors were generally not permitted to make mid-year changes.  This led to some difficulties for plan sponsors, particularly in situations where events outside the plan sponsor’s control might ordinarily cause a plan sponsor to want to make a mid-year plan change.

Permissible Mid-Year Changes

Notice 2016-16 clarifies that certain changes to safe harbor plans made on or after January 29, 2016, including changes that alter the content of a plan’s required safe harbor notice, do not violate the safe harbor qualification requirements simply because they occur mid-year.  A “mid-year change” for this purpose includes (1) a change that is first effective during a plan year, but not effective at the beginning of a plan year, or (2) a change that is effective retroactive to the beginning of the plan year, but adopted after the beginning of the plan year.

Mid-year changes that alter the plan’s required safe harbor notice content must meet two additional requirements:

  1. The plan sponsor must provide an updated safe harbor notice that describes the mid-year change and its effective date must be provided to each employee required to receive a safe harbor notice within a reasonable period before the effective date of the change.  The timing requirement is deemed satisfied if the notice is provided at least 30 days, and no more than 90 days, before the effective date of the change.

  2. Each employee required to be provided a safe harbor notice must also have a reasonable opportunity (including a reasonable time after receipt of the updated notice) before the effective date of the mid-year change to change the employee’s cash or deferred election.  Again, this timing requirement is deemed satisfied if the election period is at least 30 days.

Mid-year changes that do not alter the content of the required safe harbor notice do not require the issuance of a special safe harbor notice or a new election opportunity.

Prohibited Mid-Year Changes

Certain mid-year changes remain prohibited, including:

  • A mid-year change to increase the number of years of service that an employee must accrue to be vested in the employee’s account balance under a qualified automatic contribution arrangement (QACA) safe harbor plan

  • A mid-year change to reduce the number of employees eligible to receive safe harbor contributions

  • A mid-year change to the type of safe harbor plan, such as changing from a traditional 401(k) safe harbor plan to a QACA

  • A mid-year change to modify or add a matching contribution formula, or the definition of compensation used to determine matching contributions if the change increases the amount of matching contributions

  • A mid-year change to permit discretionary matching contributions

In addition, mid-year changes that are already subject to conditions under the 401(k) and 401(m) regulations (including changes to the plan year, the adoption of safe harbor status mid-plan year, and the reduction or suspension of safe harbor contributions, as described above) are still prohibited, unless applicable regulatory conditions are met.  These changes are also not subject to the special notice and election opportunity requirements.

Conclusion

Notice 2016-16 fundamentally changes the rules regarding mid-year changes to safe harbor 401(k) plans.  Prior to Notice 2016-16, mid-year changes were assumed to be impermissible, subject to the limited exceptions described above.  Going forward, however, mid-year changes that are not specifically prohibited are permitted, so long as the notice requirements, where applicable, are met, and other regulatory requirements are not violated.

Notice 2016-16 should prove particularly helpful for safe harbor plan sponsors that have struggled with the limitations imposed on safe harbor plans by the inability to make mid-year changes when non-safe harbor plans would do so (for example, if a record-keeper changes administrative procedures or other events outside the plan sponsor’s control require mid-year changes).  However, safe harbor plan sponsors wishing to make mid-year changes will still need to consult with advisors to determine whether a proposed amendment is permissible, or whether the amendment is subject to additional regulatory requirements.  In addition, plan sponsors wishing to make a mid-year change that would alter the plan’s required safe harbor notice content must assume the additional cost of issuing a special safe harbor notice and must plan ahead to make sure the supplemental notice is delivered on time.

The IRS is also requesting comment on additional guidance that may be needed with respect to mid-year changes to safe-harbor plans, and specifically as to whether additional guidance is needed to address mid-year changes relating to plan sponsors involved in mergers and acquisitions or to plans that include an eligible automatic contribution arrangement under Section 414(w) of the Internal Revenue Code.  Comments may be submitted in writing not later than April 28, 2016.

Article By Jeffrey M. Holdvogt, Stephen Pavlick, PC & Sarah G. Raaii of McDermott Will & Emery
© 2016 McDermott Will & Emery

January 2016 Tax Credits & Incentives Update

tax man liftingwiderHMB Tip of the Month:  As provided in two of the cases highlighted in this monthly update, a taxpayer that meets all of the criteria of a statutory tax credit (in which funding is available) may be successful in court when it faces a challenge to its eligibility to the credit from the jurisdiction that administers the credit.  If a taxpayer faces such a challenge and the denial of the credit is material to the taxpayer, a taxpayer should explore its options with a trusted consultant.

Recent Announcements of Credit/Incentives Applications and Packages

Massachusetts– Global business giant General Electric Co. announced January 13 that it is relocating its corporate headquarters from Connecticut to Massachusetts as part of a deal that includes a $145 million state and local tax incentive package.  GE will begin relocating its Fairfield, Connecticut, corporate headquarters to Boston this summer and expects to complete the move by 2018.

Connecticut’s Governor Malloy offered an incentive package to GE in August 2015, but it apparently was not enough to persuade the company to stay.  The move will bring 800 jobs to Boston, specifically to the Seaport District.  Massachusetts offered up to $120 million through state grants and other programs, and the city offered up to $25 million in property tax relief.

Additional incentives include $1 million in grants for workforce training; up to $5 million for an innovation center to forge connections between GE, research institutions, and the higher education community; commitment to existing local transportation improvements in the Seaport District; appointment of a joint relocation team to ease the transition for employees moving to Boston; and assistance for eligible employees looking to buy homes in Boston.

Legislative, Regulative and Gubernatorial Update

Alaska- Alaska Governor Walker released legislation (HB 246 and HB 247) on January 19 detailing his proposal to end many of the state’s oil tax credits and establish a low-interest loan program to support exploration and production.  Jerry Burnett, deputy commissioner of the Alaska Department of Revenue, said current oil prices and production levels have forced a reconsideration of how the state encourages oil industry investment. “We can end up paying 55 to 65 percent of the project during development and 85 percent of exploration [costs],” he said. “It’s a fairly generous program. It seemed like a good idea when oil was $100 a barrel.”  With oil prices currently at around $27 per barrel, the Walker administration wants to pivot away from tax credits — many of which the state repurchases from companies — and instead focus on creating a loan program to back companies developing petroleum resources.

Illinois–   Several bills were introduced in the Illinois House on January 27.

HB 4545 creates the Manufacturing Job Destination Tax Credit Act and amends the Illinois Income Tax Act. It provides for a credit of 25% of the Illinois labor expenditures made by a manufacturing company in order to foster job creation and retention in Illinois. The Department of Revenue is authorized to award a tax credit to taxpayer-employers who apply for the credit and meet the certain Illinois labor expenditure requirements. The bill sets minimum requirements and procedures for certifying a taxpayer as an “accredited manufacturer” and for awarding the credit.

HB 4544 would amend the Illinois Income Tax Act to authorize a credit to taxpayers for 10% of stipends or salaries paid to qualified college interns. The credit is limited to stipends and salaries paid to 5 interns each year, and limits total credits to $3,000 for all years combined. The bill provides that the credit may not reduce the taxpayer’s liability to less than zero and may not be carried forward or back.

Finally, HB 4546 would amend the Service Occupation Tax Act and the Retailers’ Occupation Tax Act to provide that, by March 1, 2017, and by March 1 of each year thereafter, each business located in an enterprise zone may apply with the Department of Commerce and Economic Opportunity for a rebate in an amount not to exceed 1% of the amount of tax paid by the business under the Acts during the previous calendar year for the purchase of tangible personal property from a retailer or serviceman located in Illinois. The legislation provides that the Department of Commerce and Economic Opportunity shall pay the rebates from moneys appropriated for that purpose.

Indiana– SB 125 introduced on January 5 would resurrect a program that has struggled to maintain political support since it was proposed in 2005. The bill would allow a refundable credit for qualified in-state production expenditures of at least $50,000. The program would be open to producers of films, television programs, audio recordings and music videos, advertisements, and other media for marketing or commercial use. It excludes obscene content and television coverage of news and athletic events.

For expenditures of less than $6 million, the credit would be equal to 35 percent of those expenses, or 40 percent of expenditures in an economically distressed location. For qualified production expenditures of at least $6 million, the Indiana Economic Development Corporation would be tasked with setting the credit level, which could not exceed 15 percent. Those credits would also need to be preapproved by the agency.

The bill takes a broad approach to defining expenditures but excludes wages, salaries, and benefits paid to directors, producers, screenwriters, and actors who do not live in Indiana. The program would be capped at $2.5 million annually and sunset at the end of 2019. It also includes clawback provisions preventing taxpayers from claiming unused credits and requiring them to repay any credits that have already been claimed if they fail to satisfy the bill’s conditions.

Maryland- On January 27, Maryland Governor Hogan proposed a series of education-focused legislative proposals including an education tax credit. The proposed tax credit would be provided to private citizens, businesses, and nonprofits that make donations to public and non-public schools to support basic education needs such as books, supplies, technology, academic tutoring, tuition assistance, and special needs services. The credit would also target the promotion of pre-K programs and enrollment. The credit would be awarded through the Department of Commerce with the total level of credits phased in over three years to $15 million in fiscal year 2018.

Massachusetts– On January 27, Massachusetts Governor introduced legislation (H 3978) which would restore the film tax credit to the structure when the credit was introduced in 2005 and use the revenue generated to increase the annual cap on the low-income housing tax credit by $5 million, and to phase-in over four years the use of single-factor apportionment for all corporate taxpayers who do business in more than one state.

New Jersey– Governor Christie conditionally vetoed on January 11 two Senate bills that would have renewed the recently expired film tax credit program.  The vetoed Senate bills, S 779 and S 1952, would have renewed the recently expired film tax credit program, funding the program at $60 million annually for seven years.  The film tax credit program that expired in 2015 allowed production companies to claim up to a 20 percent tax credit on expenses.

In his veto message, Christie called the bills expensive and said they offer “a dubious return for the State in the form of jobs and economic impact, and that I believe we should consider, if at all, during the upcoming budget negotiation process.”

Senate Democrats issued a joint statement claiming that Christie supports tax credits for big companies “but when it comes to an industry that helps small local businesses he looks the other way.” The senators said that by not reauthorizing the film tax credit program, Christie is starving the film industry in New Jersey and making the state uncompetitive with neighboring states.

New Jersey– L. 2016, S2880, effective 01/19/2016, provides up to $25 million in Economic Redevelopment and Growth Grant (ERG) tax credits to Rutgers, the State University of New Jersey, for eligible projects including buildings and structures, open space with improvements, and transportation facilities. The law also raises the ERG program cap from $600 million to $625 million.

New Jersey– L. 2016, S3182, effective 01/19/2016, permits a 2-year extension for a developer of a “qualified residential project” or “qualified business facility” to submit documentation to the New Jersey Economic Development Authority supporting its credit amount under the Urban Transit Hub Tax Credit program. The law also provides an additional two years for developers to submit information on the credit amount certified for any tax period, the failure of which subjects the amount to forfeiture. In addition, the law permits a one-year extension for a developer of a qualified residential project to submit documentation of having received a temporary certificate of occupancy to receive tax credits under the Economic Redevelopment and Growth Grant program. The deadline for a business to submit documentation that it met the capital investment and employment requirements under the Grow New Jersey Assistance Program (for a credit applications made before July 1, 2014), is extended to July 28, 2018.

New Jersey– L. 2016, S3232, effective 01/11/2016, allows certain businesses that have previously been approved for a grant under the Business Employment Incentive Program (BEIP) to direct the New Jersey Economic Development Authority to convert the grant to a tax credit. The law provides an alternative means to satisfy the backlog of unpaid grant obligations, approved before the phase out of the BEIP, due to fiscal constraints. Requests to convert grants to tax credits must be made within 180 days of the law’s enactment. The law also establishes a priority for issuing the tax credits favoring older outstanding grant obligations.

Virginia– The Virginia Department of Historic Resources has amended regulations 17 VAC §§ 10‐30‐10 through 10‐30‐160, effective February 10, 2016. The numerous amendments relating to the historic rehabilitation tax credit include the requirement to provide certain information on the “Evaluation of Significance” on the Historic Preservation Certification Application. The requirement for an independent audit reporting and review procedures is increased to $500,000 or greater, and for projects with rehabilitation expenses of less than $500,000 an agreed upon procedures engagement report by an independent accountant must be used. The fee structure for processing rehabilitation certification requests has been revised, and the fees charged by the Department for reviewing rehabilitation certification requests have also been increased. The entitlement to the credit has been changed from January 1, 1997 to January 1, 2003; consequently, the section on projects begun before 1997 has been updated to reflect the new 2003 date. The amendments also added or modified certain definitions.

Washington– With the backing of unions, HB 2638 was introduced on January 18 which would require Boeing to keep its in-state employment levels near a 2013 baseline for the company to claim the full value of a reduced business and occupation (B&O) tax rate and the B&O tax credit for aerospace product expenditures.

The legislation, similar to the failed HB 2147 from 2015, is a reaction to what labor and other critics say is the loss of thousands of Boeing jobs in Washington since lawmakers in 2013 extended the aerospace industry tax incentives from 2024 to 2040.

HB 2147 was reintroduced in this session, but HB 2638 is the proposal proponents intend to pursue this year. HB 2638 would set a baseline of 83,295 in-state employees, roughly the same as the company’s 2013 Washington workforce. After Boeing’s workforce falls 4,000 below that level — which has already happened — the value of the tax incentives would be cut in half. If Boeing’s workforce falls to 5,000 fewer than the baseline, the company would pay normal B&O tax rates and lose the ability to claim the tax credit.  HB 2638 is less incremental than HB 2147, which would have increased the B&O tax rate closer to normal by 2.5 percent for every 250 employees below the baseline.

Case Law

California– In a case in which Ryan U.S. Tax Services, LLC (Ryan), a tax advisory and site selection firm, challenged the validity of a regulation concerning contingent fee practitioners advising taxpayers who submit applications for the California Competes Tax Credit, the California Superior Court, Sacramento County, has said that it will grant Ryan’s petition and request for declaratory relief. Cal. Rev. & Tax. Cd. § 17059.2 and Cal. Rev. & Tax. Cd. § 23689 (sometimes hereinafter referred to as the statutes) each set forth 11 factors on which the Governor’s Office of Business and Economic Development (GO-Biz) is to allocate the credit.  GO-Biz also adopted regulations to implement the credit program, including the application process for tax credit allocation. Cal. Code Regs. 10 § 8030(b)(10) requires applicants for tax credits to provide certain information on the tax form, including the name of any consultant providing services related to the credit application, the consultant’s fee structure and cost of services, and whether payment to the consultant is influenced by whether a credit is awarded.

Moreover, Cal. Code Regs. 10 § 8030(g)(2)(H) provides that GO-Biz will evaluate any other information requested in the application, including but not limited to the reasonableness of the fee arrangement between the applicant and any consultant and it further provides that any contingent fee arrangement must result in a fee that is no more than a reasonable hourly rate for services. Ryan contended, among other things, that the regulation is inconsistent with the statutes because it expands the qualifications for tax credit applicants, that is, it adds to the exclusive list of 11 qualifying factors in the statutes a new factor, the amount of consultant fees paid by tax credit applicants. GO-Biz argued that the legislature delegated to it broad authority to fill in the details of the tax credit program, and while the statutes do not explicitly list consultant fees as a consideration, they fall within the scope of the factor that authorizes GO-Biz to consider the extent to which the anticipated tax benefit to the state exceeds the projected benefit to the taxpayer from the tax credit (Cal. Rev. & Tax. Cd. § 17059.2(a)(2)(K); Cal. Rev. & Tax. Cd. § 23689(a)(2)(K)) by ensuring that tax credits are used for job creation and are not unnecessarily diverted to unreasonable consultant fees.

The court agreed with Ryan that the regulation was invalid. Limiting consultant fees does not preserve tax credits or ensure that tax credits will be used to create new, good-paying jobs. The statutes provide the 11 factors to be used in allocating credits. The cost of a consultant’s services is a matter between the taxpayer and the consultant. Even if the statutes are construed as allowing GO-Biz to consider whether consultant fee arrangements are reasonable, the court found that the regulation’s de facto ban on contingent fee arrangements to be arbitrary and not reasonably necessary to carry out the purposes of the statutes because it effectively disqualifies businesses that have contingent fee arrangements with their consultants from receiving the credit. The court will enter judgment in the case after a formal judgment is prepared, approved, and signed. (Ryan U.S. Tax Services, LLC v. State of California, Cal. Super. Ct. (Sacramento County), Dkt. No. 34-2014-00167988, 01/07/2016.)

Kansas– The Kansas Department of Revenue ruled that a third party cannot furnish electric service or enter into a solar power purchase agreement (PPA) with a Kansas homeowner, as the Retail Electric Suppliers Act (RESA) prohibits the furnishing of electric service by any person or company other than the certified public utility for a particular territory, and so it was moot whether the charges a non-utility billed to a Kansas customer were taxable. The Department declined to speculate about the potential answer should the Kansas Legislature sometime authorize non-utilities to enter into PPAs, but the company was encouraged to resubmit the question if it is not directly answered by the legislation should such PPA agreements be legalized. (Kansas Opinion Letter No. O-2016-001, , 01/25/2016 .)

Kentucky– The U.S. District Court for the Eastern District of Kentucky has ruled that a Noah’s Ark-themed tourist attraction cannot be denied sales tax incentives by Kentucky on grounds that the project advanced religion in violation of First Amendment protection from state establishment of religion. The Court found that the religious-based theme park met the neutral criteria for the tax incentives and, therefore, the state could not deny the incentives for Establishment Clause reasons. In addition, in denying the tax incentives, the state violated the Free Exercise Clause of the First Amendment. Consequently, the Court enjoined the state of Kentucky and its Tourism, Arts, and Heritage Cabinet from applying the Tourism Development Act in a way that excludes Ark Encounter from the program based on its religious purpose and message or based on its desire to utilize any exception in Title VII of the Civil Rights Act for which it qualifies concerning the hiring of its personnel.Ark Encounter, LLC, et al. v. Parkinson, et al., U.S. Dist. Ct. (E.D. KY), Dkt. No. 15-13-GFVT, 01/25/2016.

Article By Jennifer Zimmerman of Horwood Marcus & Berk Chartered
© Horwood Marcus & Berk Chartered 2016. All Rights Reserved.

January 2016 Tax Credits & Incentives Update

tax man liftingwiderHMB Tip of the Month:  As provided in two of the cases highlighted in this monthly update, a taxpayer that meets all of the criteria of a statutory tax credit (in which funding is available) may be successful in court when it faces a challenge to its eligibility to the credit from the jurisdiction that administers the credit.  If a taxpayer faces such a challenge and the denial of the credit is material to the taxpayer, a taxpayer should explore its options with a trusted consultant.

Recent Announcements of Credit/Incentives Applications and Packages

Massachusetts– Global business giant General Electric Co. announced January 13 that it is relocating its corporate headquarters from Connecticut to Massachusetts as part of a deal that includes a $145 million state and local tax incentive package.  GE will begin relocating its Fairfield, Connecticut, corporate headquarters to Boston this summer and expects to complete the move by 2018.

Connecticut’s Governor Malloy offered an incentive package to GE in August 2015, but it apparently was not enough to persuade the company to stay.  The move will bring 800 jobs to Boston, specifically to the Seaport District.  Massachusetts offered up to $120 million through state grants and other programs, and the city offered up to $25 million in property tax relief.

Additional incentives include $1 million in grants for workforce training; up to $5 million for an innovation center to forge connections between GE, research institutions, and the higher education community; commitment to existing local transportation improvements in the Seaport District; appointment of a joint relocation team to ease the transition for employees moving to Boston; and assistance for eligible employees looking to buy homes in Boston.

Legislative, Regulative and Gubernatorial Update

Alaska- Alaska Governor Walker released legislation (HB 246 and HB 247) on January 19 detailing his proposal to end many of the state’s oil tax credits and establish a low-interest loan program to support exploration and production.  Jerry Burnett, deputy commissioner of the Alaska Department of Revenue, said current oil prices and production levels have forced a reconsideration of how the state encourages oil industry investment. “We can end up paying 55 to 65 percent of the project during development and 85 percent of exploration [costs],” he said. “It’s a fairly generous program. It seemed like a good idea when oil was $100 a barrel.”  With oil prices currently at around $27 per barrel, the Walker administration wants to pivot away from tax credits — many of which the state repurchases from companies — and instead focus on creating a loan program to back companies developing petroleum resources.

Illinois–   Several bills were introduced in the Illinois House on January 27.

HB 4545 creates the Manufacturing Job Destination Tax Credit Act and amends the Illinois Income Tax Act. It provides for a credit of 25% of the Illinois labor expenditures made by a manufacturing company in order to foster job creation and retention in Illinois. The Department of Revenue is authorized to award a tax credit to taxpayer-employers who apply for the credit and meet the certain Illinois labor expenditure requirements. The bill sets minimum requirements and procedures for certifying a taxpayer as an “accredited manufacturer” and for awarding the credit.

HB 4544 would amend the Illinois Income Tax Act to authorize a credit to taxpayers for 10% of stipends or salaries paid to qualified college interns. The credit is limited to stipends and salaries paid to 5 interns each year, and limits total credits to $3,000 for all years combined. The bill provides that the credit may not reduce the taxpayer’s liability to less than zero and may not be carried forward or back.

Finally, HB 4546 would amend the Service Occupation Tax Act and the Retailers’ Occupation Tax Act to provide that, by March 1, 2017, and by March 1 of each year thereafter, each business located in an enterprise zone may apply with the Department of Commerce and Economic Opportunity for a rebate in an amount not to exceed 1% of the amount of tax paid by the business under the Acts during the previous calendar year for the purchase of tangible personal property from a retailer or serviceman located in Illinois. The legislation provides that the Department of Commerce and Economic Opportunity shall pay the rebates from moneys appropriated for that purpose.

Indiana– SB 125 introduced on January 5 would resurrect a program that has struggled to maintain political support since it was proposed in 2005. The bill would allow a refundable credit for qualified in-state production expenditures of at least $50,000. The program would be open to producers of films, television programs, audio recordings and music videos, advertisements, and other media for marketing or commercial use. It excludes obscene content and television coverage of news and athletic events.

For expenditures of less than $6 million, the credit would be equal to 35 percent of those expenses, or 40 percent of expenditures in an economically distressed location. For qualified production expenditures of at least $6 million, the Indiana Economic Development Corporation would be tasked with setting the credit level, which could not exceed 15 percent. Those credits would also need to be preapproved by the agency.

The bill takes a broad approach to defining expenditures but excludes wages, salaries, and benefits paid to directors, producers, screenwriters, and actors who do not live in Indiana. The program would be capped at $2.5 million annually and sunset at the end of 2019. It also includes clawback provisions preventing taxpayers from claiming unused credits and requiring them to repay any credits that have already been claimed if they fail to satisfy the bill’s conditions.

Maryland- On January 27, Maryland Governor Hogan proposed a series of education-focused legislative proposals including an education tax credit. The proposed tax credit would be provided to private citizens, businesses, and nonprofits that make donations to public and non-public schools to support basic education needs such as books, supplies, technology, academic tutoring, tuition assistance, and special needs services. The credit would also target the promotion of pre-K programs and enrollment. The credit would be awarded through the Department of Commerce with the total level of credits phased in over three years to $15 million in fiscal year 2018.

Massachusetts– On January 27, Massachusetts Governor introduced legislation (H 3978) which would restore the film tax credit to the structure when the credit was introduced in 2005 and use the revenue generated to increase the annual cap on the low-income housing tax credit by $5 million, and to phase-in over four years the use of single-factor apportionment for all corporate taxpayers who do business in more than one state.

New Jersey– Governor Christie conditionally vetoed on January 11 two Senate bills that would have renewed the recently expired film tax credit program.  The vetoed Senate bills, S 779 and S 1952, would have renewed the recently expired film tax credit program, funding the program at $60 million annually for seven years.  The film tax credit program that expired in 2015 allowed production companies to claim up to a 20 percent tax credit on expenses.

In his veto message, Christie called the bills expensive and said they offer “a dubious return for the State in the form of jobs and economic impact, and that I believe we should consider, if at all, during the upcoming budget negotiation process.”

Senate Democrats issued a joint statement claiming that Christie supports tax credits for big companies “but when it comes to an industry that helps small local businesses he looks the other way.” The senators said that by not reauthorizing the film tax credit program, Christie is starving the film industry in New Jersey and making the state uncompetitive with neighboring states.

New Jersey– L. 2016, S2880, effective 01/19/2016, provides up to $25 million in Economic Redevelopment and Growth Grant (ERG) tax credits to Rutgers, the State University of New Jersey, for eligible projects including buildings and structures, open space with improvements, and transportation facilities. The law also raises the ERG program cap from $600 million to $625 million.

New Jersey– L. 2016, S3182, effective 01/19/2016, permits a 2-year extension for a developer of a “qualified residential project” or “qualified business facility” to submit documentation to the New Jersey Economic Development Authority supporting its credit amount under the Urban Transit Hub Tax Credit program. The law also provides an additional two years for developers to submit information on the credit amount certified for any tax period, the failure of which subjects the amount to forfeiture. In addition, the law permits a one-year extension for a developer of a qualified residential project to submit documentation of having received a temporary certificate of occupancy to receive tax credits under the Economic Redevelopment and Growth Grant program. The deadline for a business to submit documentation that it met the capital investment and employment requirements under the Grow New Jersey Assistance Program (for a credit applications made before July 1, 2014), is extended to July 28, 2018.

New Jersey– L. 2016, S3232, effective 01/11/2016, allows certain businesses that have previously been approved for a grant under the Business Employment Incentive Program (BEIP) to direct the New Jersey Economic Development Authority to convert the grant to a tax credit. The law provides an alternative means to satisfy the backlog of unpaid grant obligations, approved before the phase out of the BEIP, due to fiscal constraints. Requests to convert grants to tax credits must be made within 180 days of the law’s enactment. The law also establishes a priority for issuing the tax credits favoring older outstanding grant obligations.

Virginia– The Virginia Department of Historic Resources has amended regulations 17 VAC §§ 10‐30‐10 through 10‐30‐160, effective February 10, 2016. The numerous amendments relating to the historic rehabilitation tax credit include the requirement to provide certain information on the “Evaluation of Significance” on the Historic Preservation Certification Application. The requirement for an independent audit reporting and review procedures is increased to $500,000 or greater, and for projects with rehabilitation expenses of less than $500,000 an agreed upon procedures engagement report by an independent accountant must be used. The fee structure for processing rehabilitation certification requests has been revised, and the fees charged by the Department for reviewing rehabilitation certification requests have also been increased. The entitlement to the credit has been changed from January 1, 1997 to January 1, 2003; consequently, the section on projects begun before 1997 has been updated to reflect the new 2003 date. The amendments also added or modified certain definitions.

Washington– With the backing of unions, HB 2638 was introduced on January 18 which would require Boeing to keep its in-state employment levels near a 2013 baseline for the company to claim the full value of a reduced business and occupation (B&O) tax rate and the B&O tax credit for aerospace product expenditures.

The legislation, similar to the failed HB 2147 from 2015, is a reaction to what labor and other critics say is the loss of thousands of Boeing jobs in Washington since lawmakers in 2013 extended the aerospace industry tax incentives from 2024 to 2040.

HB 2147 was reintroduced in this session, but HB 2638 is the proposal proponents intend to pursue this year. HB 2638 would set a baseline of 83,295 in-state employees, roughly the same as the company’s 2013 Washington workforce. After Boeing’s workforce falls 4,000 below that level — which has already happened — the value of the tax incentives would be cut in half. If Boeing’s workforce falls to 5,000 fewer than the baseline, the company would pay normal B&O tax rates and lose the ability to claim the tax credit.  HB 2638 is less incremental than HB 2147, which would have increased the B&O tax rate closer to normal by 2.5 percent for every 250 employees below the baseline.

Case Law

California– In a case in which Ryan U.S. Tax Services, LLC (Ryan), a tax advisory and site selection firm, challenged the validity of a regulation concerning contingent fee practitioners advising taxpayers who submit applications for the California Competes Tax Credit, the California Superior Court, Sacramento County, has said that it will grant Ryan’s petition and request for declaratory relief. Cal. Rev. & Tax. Cd. § 17059.2 and Cal. Rev. & Tax. Cd. § 23689 (sometimes hereinafter referred to as the statutes) each set forth 11 factors on which the Governor’s Office of Business and Economic Development (GO-Biz) is to allocate the credit.  GO-Biz also adopted regulations to implement the credit program, including the application process for tax credit allocation. Cal. Code Regs. 10 § 8030(b)(10) requires applicants for tax credits to provide certain information on the tax form, including the name of any consultant providing services related to the credit application, the consultant’s fee structure and cost of services, and whether payment to the consultant is influenced by whether a credit is awarded.

Moreover, Cal. Code Regs. 10 § 8030(g)(2)(H) provides that GO-Biz will evaluate any other information requested in the application, including but not limited to the reasonableness of the fee arrangement between the applicant and any consultant and it further provides that any contingent fee arrangement must result in a fee that is no more than a reasonable hourly rate for services. Ryan contended, among other things, that the regulation is inconsistent with the statutes because it expands the qualifications for tax credit applicants, that is, it adds to the exclusive list of 11 qualifying factors in the statutes a new factor, the amount of consultant fees paid by tax credit applicants. GO-Biz argued that the legislature delegated to it broad authority to fill in the details of the tax credit program, and while the statutes do not explicitly list consultant fees as a consideration, they fall within the scope of the factor that authorizes GO-Biz to consider the extent to which the anticipated tax benefit to the state exceeds the projected benefit to the taxpayer from the tax credit (Cal. Rev. & Tax. Cd. § 17059.2(a)(2)(K); Cal. Rev. & Tax. Cd. § 23689(a)(2)(K)) by ensuring that tax credits are used for job creation and are not unnecessarily diverted to unreasonable consultant fees.

The court agreed with Ryan that the regulation was invalid. Limiting consultant fees does not preserve tax credits or ensure that tax credits will be used to create new, good-paying jobs. The statutes provide the 11 factors to be used in allocating credits. The cost of a consultant’s services is a matter between the taxpayer and the consultant. Even if the statutes are construed as allowing GO-Biz to consider whether consultant fee arrangements are reasonable, the court found that the regulation’s de facto ban on contingent fee arrangements to be arbitrary and not reasonably necessary to carry out the purposes of the statutes because it effectively disqualifies businesses that have contingent fee arrangements with their consultants from receiving the credit. The court will enter judgment in the case after a formal judgment is prepared, approved, and signed. (Ryan U.S. Tax Services, LLC v. State of California, Cal. Super. Ct. (Sacramento County), Dkt. No. 34-2014-00167988, 01/07/2016.)

Kansas– The Kansas Department of Revenue ruled that a third party cannot furnish electric service or enter into a solar power purchase agreement (PPA) with a Kansas homeowner, as the Retail Electric Suppliers Act (RESA) prohibits the furnishing of electric service by any person or company other than the certified public utility for a particular territory, and so it was moot whether the charges a non-utility billed to a Kansas customer were taxable. The Department declined to speculate about the potential answer should the Kansas Legislature sometime authorize non-utilities to enter into PPAs, but the company was encouraged to resubmit the question if it is not directly answered by the legislation should such PPA agreements be legalized. (Kansas Opinion Letter No. O-2016-001, , 01/25/2016 .)

Kentucky– The U.S. District Court for the Eastern District of Kentucky has ruled that a Noah’s Ark-themed tourist attraction cannot be denied sales tax incentives by Kentucky on grounds that the project advanced religion in violation of First Amendment protection from state establishment of religion. The Court found that the religious-based theme park met the neutral criteria for the tax incentives and, therefore, the state could not deny the incentives for Establishment Clause reasons. In addition, in denying the tax incentives, the state violated the Free Exercise Clause of the First Amendment. Consequently, the Court enjoined the state of Kentucky and its Tourism, Arts, and Heritage Cabinet from applying the Tourism Development Act in a way that excludes Ark Encounter from the program based on its religious purpose and message or based on its desire to utilize any exception in Title VII of the Civil Rights Act for which it qualifies concerning the hiring of its personnel.Ark Encounter, LLC, et al. v. Parkinson, et al., U.S. Dist. Ct. (E.D. KY), Dkt. No. 15-13-GFVT, 01/25/2016.

Article By Jennifer Zimmerman of Horwood Marcus & Berk Chartered
© Horwood Marcus & Berk Chartered 2016. All Rights Reserved.

Tax Talk: When Reporting Gifts at Discounted Values, a Qualified Appraisal is Crucial

A common method for transferring wealth from one generation to the next involves contributing assets to a partnership or limited liability company, then transferring minority interests in the partnership or LLC to descendants or other family members.  Done correctly, the technique allows donors to reduce their taxable estates by making gifts at reduced values, because of discounts for lack of control and lack of marketability.  In so doing, the donor also effectively shifts the tax on any appreciation of the underlying assets to the younger generation.

In order to benefit from this estate planning technique, however, it is crucial that the gift is adequately disclosed on a gift tax return and its value backed by a qualified appraisal or a detailed description of the method used to determine the fair market value of the transferred partnership or LLC interest.  Unfortunately, we have encountered situations recently in which a gift was not supported by a qualified appraisal, leading the Internal Revenue Service to challenge the value claimed by the donor and to propose additional gift tax, penalties and interest.  Such challenges can lead to significant uncertainty, stress and legal expense—even if the donor’s valuation ultimately is sustained.

This article describes what constitutes a qualified appraisal and the information that is necessary if no appraisal is provided, and offers some practical advice for donors based on our recent experiences dealing with the IRS in audits and administrative appeals involving disputed gift tax valuations.

IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, requires donors to disclose whether the value of any gift reflects a valuation discount and, if so, to attach an explanation.  If the discount is for “lack of marketability, a minority interest, a fractional interest in real estate, blockage, market absorption, or for any other reason,” the explanation must show the amount of, and the basis for, the claimed discounts.  Moreover, in order for the statute of limitations to begin running with respect to a gift, the gift must be adequately disclosed on a return or statement for the year of the gift that includes all of the following:

  • A complete Form 709;

  • A description of the transferred property and the consideration, if any, received by the donor;

  • The identify of, and relationship between, the donor and each donee;

  • If the property is transferred in trust, the employer identification number of the trust and a brief description of its terms (or a copy of the trust);

  • A statement describing any position taken on the gift tax return that is contrary to any proposed, temporary or final Treasury regulations or IRS revenue rulings; and

  • Either a qualified appraisal or a detailed description of the method used to determine the fair market value of the gift.

While most of these requirements are straightforward, the last generally requires the donor to provide a more complete explanation.  Fortunately, the IRS has published regulations that describe what constitutes a qualified appraisal and what information must be provided in lieu of an appraisal.

With respect to the latter, the description of the method used to determine fair market value must include the financial data used to determine the value of the interest, any restrictions on the transferred property that were considered in determining its value, and a description of any discounts claimed in valuing the property.  If the transfer involves an interest in a non-publicly traded partnership (including an LLC), a description must be provided of any discount claimed in valuing the entity or any assets owned by the entity.  Further, if the value of the entity is based on the net value of its assets, a statement must be provided regarding the fair market value of 100% of the entity (determined without regard to any discounts in valuing the entity or any assets owned by the entity), the portion of the entity subject to the transfer, and the fair market value of the transferred interest as reported on the return.[1]

Donors and their counsel will rarely have the expertise needed to provide such a description.  While it may be relatively simple to provide some of the factual information, determining the appropriate actuarial factors and discount rates is a highly complex and specialized field.  Moreover, even if a donor or his or her counsel happened to have the relevant expertise, a description that is not prepared by an independent expert may be viewed suspiciously by the IRS because of a lack of impartiality.  Moreover, if the description (or the appraisal, for that matter) is prepared by the donor’s counsel, it may negate the attorney-client privilege, at least with respect to any work papers prepared by the attorney in connection with the description or appraisal.

For these reasons and others, we strongly recommend that donors obtain an appraisal from an independent, reputable valuation firm before claiming discounts with respect to a gift of a partnership or LLC interest.  The applicable Treasury regulations provide that the requirement described above will be satisfied if, in lieu of submitting a detailed description of the method used to determine the fair market value of the transferred interest, the donor submits an appraisal of the transferred property prepared by an appraiser who meets all of the following requirements:

  • The appraiser holds himself or herself out to the public as an appraiser or performs appraisals on a regular basis;

  • Because of the appraiser’s qualifications, as described in the appraisal that details the appraiser’s background, experience, education, and membership, if any, in professional appraisal associations, the appraiser is qualified to make appraisals of the type of property being valued; and

  • The appraiser is not the donor or the donee of the property or a member of the family of the donor or donee or any person employed by the donor, the donee or a member of the family of either.

Further, the appraisal itself must contain all of the following:

  • The date of the transfer, the date on which the transferred property was appraised, and the purpose of the appraisal;

  • A description of the property;

  • A description of the appraisal process employed;

  • A description of the assumptions, hypothetical conditions, and any limiting conditions and restrictions on the transferred property that affect the analyses, opinions and conclusions;

  • The information considered in determining the appraised value, including, in the case of an ownership interest in a business, all financial data used in determining the value of the interest that is sufficiently detailed to allow another person to replicate the process and arrive at the appraised value;

  • The appraisal procedures followed, and the reasoning that supports the analyses, opinions, and conclusions;

  • The valuation method used, the rationale for the valuation method and the procedure used in determining the fair market value of the asset transferred; and

  • The specific basis for the valuation, such as specific comparable sales or transactions, sales of similar interests, asset-based approaches, merger-acquisition transactions and the like.[2]

While there is no firm rule on when or how often appraisals must be obtained, appraisals that are more than a year old may be less reliable—particularly if there is good reason to believe that the value of the underlying assets has changed—and thus more vulnerable to challenge.

An appraisal that meets all of the requirements described above is not unassailable, of course, but if the IRS does choose to challenge a gift tax valuation that is supported by such an appraisal, the donor will be in a significantly stronger position in the resulting examination or proceeding than a donor who failed to obtain a qualified appraisal or opted to rely on a stale appraisal.

In sum, obtaining a qualified appraisal is a crucial step in any estate planning or gifting strategy that involves making gifts of assets valued at a discount.  Although donors may occasionally balk at the time and expense of preparing a reliable appraisal, it is almost certainly less time-consuming and costly than battling the IRS in an examination, administrative appeal or in litigation and should give donors confidence that their gifts are unlikely to be successfully challenged by the IRS.

Article By Ivan H. Gold of Schiff Hardin LLP
© 2015 Schiff Hardin LLP

[1] Treas. Reg. § 301.6501(c)-1(f)(2)(iv).

[2] Treas. Reg. § 301.6501(c)-1(f)(3).

In three weeks! Attend the 3rd Annual Bank & Capital Markets Tax Institute West – December 3-4 in San Diego

When: December 3-4, 2015
Where: The Westin San Diego, San Diego, California

Register today!

We are proud to announce that BTI West will be coming back for a third year! For 49 years the annual BTI East in Orlando has provided bank and tax professionals from financial institutions and accounting firms in-depth analysis and practical solutions to the most pressing issues facing the industry, and from now on professionals on the west coast can expect the same benefits on a regular basis.The tax landscape is continually changing; you need to know how these changes affect your organization and identify the most efficient and effective plan of action. At BTI West you will have access to the same exceptional content, networking opportunities and educational value that have made the annual BTI East the benchmark event for this industry.

In an industry that thrives on both coasts, we will continue to offer exceptional educational and networking opportunities to ALL of the hard-working banking and tax professionals across the country. Join us at the 2nd Annual Bank and Capital Markets Tax Institute WEST, where essential updates will be provided on key industry topics such as General Banking, Community Banking, GAAP, Tax and Regulatory Reporting, and much more.

The Bank Tax & Capital Markets Institute Conference – West will feature a full one-day program consisting of keynote presentation, deep-dive technical sessions, and peer exchange and networking time.

In three weeks! Attend the 3rd Annual Bank & Capital Markets Tax Institute West – December 3-4 in San Diego

When: December 3-4, 2015
Where: The Westin San Diego, San Diego, California

Register today!

We are proud to announce that BTI West will be coming back for a third year! For 49 years the annual BTI East in Orlando has provided bank and tax professionals from financial institutions and accounting firms in-depth analysis and practical solutions to the most pressing issues facing the industry, and from now on professionals on the west coast can expect the same benefits on a regular basis.The tax landscape is continually changing; you need to know how these changes affect your organization and identify the most efficient and effective plan of action. At BTI West you will have access to the same exceptional content, networking opportunities and educational value that have made the annual BTI East the benchmark event for this industry.

In an industry that thrives on both coasts, we will continue to offer exceptional educational and networking opportunities to ALL of the hard-working banking and tax professionals across the country. Join us at the 2nd Annual Bank and Capital Markets Tax Institute WEST, where essential updates will be provided on key industry topics such as General Banking, Community Banking, GAAP, Tax and Regulatory Reporting, and much more.

The Bank Tax & Capital Markets Institute Conference – West will feature a full one-day program consisting of keynote presentation, deep-dive technical sessions, and peer exchange and networking time.

Chicago Mayor’s Tax-Heavy Budget Passes: Lease and Amusement Tax Implications

Last week the Chicago City Council approved Mayor Rahm Emanuel’s 2016 revenue ordinance as part of his tax-laden budget proposal. The revenue ordinance included noteworthy changes to the personal property lease transaction tax (lease tax) and amusement tax, both of which we have covered in-depth since the Department of Finance (Department) issued two rulings over the summer officially extending a nine percent tax to most services provided online. The portions of the revenue ordinance related to the lease tax were drafted in response to the concerns raised by the startup community. As discussed in more detail below, the lease tax amendments provide little relief for the vast majority of businesses dreading the January 1st effective date of the ruling. The amendments to the amusement tax provide no relief whatsoever.

Chicago Lease Tax Amendment

The changes to the Lease Tax Ordinance include: (1) a narrowly defined exemption for small businesses; (2) a reduction of the rate for cloud-based services where the customer accesses its own data; and (3) codification of the applicability of the Illinois mobile telecom sourcing rules. The amendments were touted by the mayor as addressing many of the concerns expressed by small businesses after the Department administratively interpreted the nine percent lease transaction tax to apply to most cloud-based services in June. In response to an outcry from the startup community, the Department subsequently delayed the effective date of the ruling to January 1, 2016. Unfortunately the mayor’s solution falls short of providing any significant relief and will not alleviate the concerns of the vast majority of customers and providers affected by the ruling.

Effective immediately upon publication, the lease transaction amendments approved yesterday will:

  1. Exempt “small new businesses” that are lessors or lessees of non-possessory computer leases from their respective lease transaction tax collection and payment obligations. For this purpose, “small new business” is a business that (1) holds a valid and current business license issued by the city or another jurisdiction; (2) during the most recent full calendar year prior to the annual tax year for which the exemption provided by this subsection is sought had under $25 million in gross receipts or sales, as the term “gross receipts or sales” is defined for federal income tax purposes; and (3) has been in operation for fewer than 60 months. For the purpose of calculating the $25 million limit, gross receipts or sales will be combined if they are received by members of a single unitary business group. This will exclude most subsidiaries from taking advantage of the “small new business” exemption.

  2. Reduce the rate from nine percent to 5.25 percent of the lease or rental price in the case of the non-possessory lease of a computer primarily for the purpose of allowing the customer to use the provider’s computer and software to input, modify or retrieve data or information that is supplied by the customer.

  3. Codify the use of the sourcing rules set forth in the Illinois Mobile Telecommunications Sourcing Conformity Act (35 ILCS 638, as amended) for the purpose of determining which customers and charges are subject to the lease transaction tax when the user accesses the provider’s computer via a mobile device. The lease transaction tax ruling issued in June prescribes the use of these rules, but the legislation adds clarity by codifying this regime. Generally these rules result in tax applying to Chicago residents and companies with primary business addresses in the city. Customers can provide evidence of complete or partial out-of-city use. If a provider has no information indicating Chicago use, it has no duty to collect tax. If the sourcing rules indicate that the tax applies, a taxable presumption is created unless the contrary is established by books, records or other documentary evidence.

The “relief” provided by the amendments is minimal as very few companies will qualify for the small business exemption and rate reduction. Because the amendments do not modify the actual imposition of the lease tax (instead they simply provide an exemption, reduce the rate for certain taxpayers and codify sourcing rules) the January 1, 2016, effective date of the lease tax ruling still appears to be in effect.

Chicago Amusement Tax Amendment

The changes to the Amusement Tax Ordinance merely codify the sourcing rules announced in the Department’s latest ruling. Specifically, the amendment provides that

“[i]n the case of amusements that are delivered electronically to mobile devices, as in the case of video streaming, audio streaming and on-line games, the rules set forth in the Illinois Mobile Telecommunications Sourcing Conformity Act, 35 ILCS 638, as amended, may be utilized for the purpose of determining which customers and charges are subject to the tax imposed by this chapter. If those rules indicate that the tax applies, it shall be presumed that the tax does apply unless the contrary is established by books, records or other documentary evidence.”

This change is significant because video streaming, audio streaming and on-line games were formerly not included in the imposition language of the Amusement Tax Ordinance.  The amendment illustrates that the City Council is well aware of and approves the Department’s recent ruling that explicitly imposes the tax on charges for video streaming, audio streaming, computer game subscriptions, and other forms of online entertainment.  The amusement tax ruling became effective September 1st and is currently being challenged in the Circuit Court of Cook County.

Article By Stephen P. Kranz, Catherine A. Battin & Eric Carstens of McDermott Will & Emery

© 2015 McDermott Will & Emery

Only three weeks away! Register for the 50th Annual Bank and Capital Markets Tax Institute East – November 4-6, 2015

When: November 4-6, 2015

Where: Hilton Orlando Lake Buena Visa, Orlando, FL

Register now!

For the past 49 years Bank and Capital Markets Tax Institute (BTI) has provided bank and tax professionals from financial institutions and accounting firms in-depth analysis and practical solutions to the most pressing issues facing the industry. With cutting-edge sessions, speakers and networking opportunities BTI is the must attend event for all forward-thinking tax professionals.

Now in its 50th year, BTI 2015 will continue to provide attendees with unmatched tools and resources to ensure that you continue to remain current on the ever-changing issues facing the industry. Essential updates will be provided on key industry topics such as General Banking, Community Banking, IRS Developments, GAAP, Tax and Regulatory Reporting, and much more.New to the program this year, we’ve added sessions on Regulatory Banking, Tax Process, Technology & Efficiency, and much more!

Who Should Attend?

Job Function

  • Accountant
  • Attorney (Tax)
  • Business Development
  • Comptroller
  • Consultant
  • Chief Financial Officer (CFO)
  • Internal Auditor
  • Partner/Senior Manager
  • Tax Advisor
  • Tax Officer/Specialist
  • Tax Research/Manager
  • Treasurer
  • Other Corporate Finance Management
  • Administrator (Government)
 Organizations

  • Commercial Bank
  • CPA Firm
  • Government
  • Investment Bank
  • Law Firm
  • Online Bank
  • Retail bank
  • Savings and Loans
  • Technology/Software Industry Provider
  • Consultant: Business/Finance
  • Consultant: Other
  • Academia/Non-Profit

BTI West is coming back for a 3rd year! Register for the Bank and Capital Markets Tax Institute West – December 3-4 in San Diego

When: December 3-4, 2015
Where: The Westin San Diego, San Diego, California

Register today!

We are proud to announce that BTI West will be coming back for a third year! For 49 years the annual BTI East in Orlando has provided bank and tax professionals from financial institutions and accounting firms in-depth analysis and practical solutions to the most pressing issues facing the industry, and from now on professionals on the west coast can expect the same benefits on a regular basis.The tax landscape is continually changing; you need to know how these changes affect your organization and identify the most efficient and effective plan of action. At BTI West you will have access to the same exceptional content, networking opportunities and educational value that have made the annual BTI East the benchmark event for this industry.

In an industry that thrives on both coasts, we will continue to offer exceptional educational and networking opportunities to ALL of the hard-working banking and tax professionals across the country. Join us at the 2nd Annual Bank and Capital Markets Tax Institute WEST, where essential updates will be provided on key industry topics such as General Banking, Community Banking, GAAP, Tax and Regulatory Reporting, and much more.

The Bank Tax & Capital Markets Institute Conference – West will feature a full one-day program consisting of keynote presentation, deep-dive technical sessions, and peer exchange and networking time.