On June 11, 2018, Senate Bill 8991 was introduced by New York Senate Majority Leader John Flanagan. The Bill would decouple from the federal treatment of Global Intangible Low-Taxed Income (GILTI).
The IRS intends to issue regulations pertaining to states’ attempts to subvert the state and local tax deduction cap.
- The Tax Cuts and Jobs Act imposed a $10,000 ($5,000 for married individuals filing separately) limit on state and local tax deductions for federal income tax purposes.
- Certain states, including New York, New Jersey, and Connecticut, have enacted legislation to allow taxpayers to claim a federal tax deduction in excess of the SALT cap.
- The pending regulations will emphasize that federal income tax substance-over-form principles, not state laws, dictate the characterization of the charitable contributions.
The New York City Department of Finance recently announced the availability of penalty abatements for certain taxpayers that have underpaid business taxes due to the inclusion of Section 965 income.
NYC Finance Memorandum No. 18-4 (PDF) describes tax considerations and late payment penalty relief for NYC taxpayers affected by Section 965 and subject to the General Corporation Tax (GCT), the Banking Corporation Tax (BTX), and the Unincorporated Business Tax (UBT).
Like many states and localities, New York City does not provide for the deferred payment of NYC tax attributable to net Section 965 income. Therefore, S corporations and unincorporated businesses taxed under the GCT, BTX and UBT may see substantial increases in their NYC tax liability. Memorandum No. 18-4 indicates that penalty abatements are available to certain taxpayers that receive bills from the NYC Department of Finance that include an underpayment penalty attributed to net Section 965 income.
Section 965 Background
NYC Finance Memorandum No. 18-4 addresses changes caused by Federal Public Law 115-97, known as the Tax Cuts and Jobs Act (TCJA), which was signed into law on December 22, 2017. The TCJA introduced a new Internal Revenue Code provision, Section 965, which imposes a one-time transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States.
The TCJA allows certain taxpayers to make an election under Section 965(h) to pay the transition tax in installments over an eight-year period. This election does not, however, defer recognition of Section 965 income, which must be included on a taxpayer’s federal return for the last taxable year beginning before January 1, 2018.
New York State Notice on Section 965 Income
Many states and localities do not provide for the deferral of Section 965 income or repayment. In April, the New York State Department of Taxation and Finance issued Notice N-18-4 (PDF) indicating that in the case of S corporation shareholders, individual taxpayers are required to pay the additional New York tax generated by Section 965 income in the tax year it is recognized and included in federal adjusted gross income. Rhode Island and several other states have issued similar guidance.
“Transition tax—enough about how it works; here is what doesn’t work” (April 9, 2018)
The New York Legislature passed its 2018-2019 Fiscal Year budget on March 30, 2018, which is expected to be signed into law by Governor Cuomo. The Legislature responded to the Tax Cuts and Jobs Act (TCJA) passed by the United States Congress late last year by excluding IRC § 965 repatriated income from New York taxable income. However, the final budget failed to address other TCJA provisions, such as the tax on global intangible low-taxed income (GILTI) and the interest expense limitation under IRC § 163(j). Thus, New York will conform to these federal tax changes.
The New York State Department of Taxation and Finance issued an advisory opinion determining that non-US unauthorized life insurance companies’ premiums were not includable in the New York State insurance franchise tax apportionment factor. The Department reasoned that the apportionment statute requires a life insurance company to report its premiums on a basis “consistent with” the Insurance Law filing requirements for authorized insurers. The applicable Insurance Law statute: (1) does not apply to unauthorized insurers; and (2) requires (authorized) non-US insurers to report only their US business and assets. Therefore, the Department concluded that a non-US unauthorized life insurance company’s premiums were neither “New York premiums” nor “total premiums” (the premium factor numerator and denominator, respectively). Notably, the Department relied on Insurance Law filing requirements to determine the insurance companies’ tax treatment. N.Y. Advisory Opinion TSB-A-17(2)C (Oct. 4, 2017).
The New York State Supreme Court, Appellate Division, affirmed the New York City Tax Appeals Tribunal’s (Tribunal) determination that certain real estate transactions were subject to the New York City Real Property Transfer Tax (RPTT) under the step transaction doctrine.
The taxpayer and a nonparty owned, respectively, 45% and 55% tenant-in-common interests in New York City real estate. They contributed their tenant-in-common interests to a newly formed LLC in exchange for 45% and 55% LLC membership interests, respectively. On the same day, the taxpayer transferred its 45% LLC membership interest to the nonparty in exchange for cash and debt relief.
In the Tribunal proceeding, the taxpayer argued that the contribution of the 45% tenant-in-common interest to the LLC was exempt from RPTT as a “mere change of form of ownership” and the transfer of the 45% LLC membership interest was exempt as a transfer of a noncontrolling interest in an entity that owns real property. However, the Tribunal applied the step transaction doctrine to characterize these transactions as a taxable transfer of the 45% tenant-in-common interest in exchange for cash and debt relief. The Tribunal found that the contribution agreement contained provisions more typical of a sale than the formation of a joint venture. The Tribunal noted, in part, that the taxpayer was released under its obligations under the mortgage on the property and received back its collateral while the nonparty was not released and had to provide a replacement letter of credit. The nonparty’s obligation to close also was conditioned on the LLC’s interest in the property being insured while the taxpayer’s obligation to close was not.
The Appellate Division affirmed the Tribunal’s application of the step transaction doctrine. The Appellate Division also held that even if the step transaction did not apply, the taxpayer’s contribution to the LLC did not constitute a “mere change of form of ownership” because the taxpayer no longer held a 45% direct or indirect interest in the real property at the conclusion of the same-day transactions. GKK 2 Herald LLC v. N.Y.C. Tax App. Trib., No. 82/16 4074 (N.Y. App. Div., 1st Dep’t Oct. 10, 2017).
The New York State Supreme Court, Appellate Division, affirmed the New York City Tax Appeals Tribunal’s (Tribunal) decision that Aetna’s subsidiary health maintenance organizations (HMOs) were subject to the New York City General Corporation Tax (GCT) for 2005 and 2006. The Appellate Division determined that the Tribunal’s reasoning was not arbitrary and capricious. The Tribunal reasoned that the GCT exemption for companies doing an insurance business in New York State did not apply because the HMOs were regulated almost entirely under New York’s Public Health Law, not the Insurance Law, and therefore were not doing an insurance business in the state. Aetna, Inc. v. N.Y.C. Tax App. Trib., No. 70/16-4533 (N.Y. App. Div., 1st Dep’t Oct. 19, 2017).
The New York State Tax Appeals Tribunal (Tribunal) held that the Department’s assessment of two non-admitted German insurance companies violated the United States-Germany Tax Treaty’s anti-discrimination clause and the US Constitution’s Foreign Commerce Clause.
The alien non-admitted non-life insurance companies had no premiums from sources in the United States. The insurance companies’ activities in New York and the United States were limited to holding interests in limited partnerships that owned real estate in New York and throughout the United States. The insurance companies did not challenge whether they had nexus with New York. An Administrative Law Judge (“ALJ”) previously determined that the insurance companies, as non-admitted non-life insurance corporations, were properly subject to insurance franchise tax, not premium tax. The ALJ also affirmed the Department’s alternative allocation method, which applied an entity theory and imposed tax only on the distributive share from the partnerships using the partnerships’ allocation factors. See previous coverage here.
The Tribunal affirmed the ALJ’s reasoning. However, the Tribunal ultimately reversed the ALJ’s final conclusion based on an argument that the insurance companies had not raised at the ALJ level. The Tribunal concluded that the Department’s assessment discriminated against the insurance companies based on their status as alien insurers, which violated the United States-Germany Tax Treaty and the Foreign Commerce Clause. Although treaties generally do not apply to state and local taxes, the anti-discrimination provision generally does apply.
The Tribunal compared the alien insurance companies’ treatment to the treatment of an otherwise similarly situated domestic, non-New York insurance company. The Tribunal determined that the Department’s assessment imposed a more burdensome tax treatment on the alien insurance companies. A crucial fact in these cases was that the alien insurance companies had zero premiums in the United States, and zero United States effectively connected income from premiums.
The Tribunal also briefly noted that, although it did not have to decide the issue, the Department’s assessment would impede the federal government from “speaking with one voice” in regulating foreign trade, which would violate the Foreign Commerce Clause. In re Bayerische Beamtenkranekenkasse AG, DTA No. 824762 (N.Y. Tax App. Trib. Sept. 11, 2017); In re Landschaftliche Brandkasse Hannover, DTA No. 825517 (N.Y. Tax App. Trib. Sept. 11, 2017).
The New York State Tax Appeals Tribunal released its precedential decision in Stewart’s Shops, affirming an Administrative Law Judge’s determination that payments by a corporation to its captive insurance company did not qualify as deductible insurance premiums because the arrangement did not constitute insurance for federal income tax purposes. (see prior coverage here).
The taxpayer owned and operated convenience stores and gas stations. It insured risk related to these operations with its captive insurance company, which it did not treat as an insurance company for federal tax purposes. The Tax Appeals Tribunal determined that because the transactions did not constitute “insurance” for federal income tax purposes—because they lacked risk shifting and risk distribution—the premiums were not deductible for New York State corporate franchise tax purposes. The Tax Appeals Tribunal also found that neither the 2009 nor 2014 amendments to New York’s captive insurance combination regime authorized the taxpayer to deduct its premiums in the tax years at issue (2006 through 2009). The outcome may have been different if the taxpayer had a parent holding company with multiple subsidiaries (including the captive) below it, as the arrangement may have qualified as insurance under federal tax law. In re Stewart’s Shops Corp., DTA No. 825745 (N.Y. Tax App. Trib. July 27, 2017).
In an Advisory Opinion, the New York Department of Taxation and Finance concluded that fees paid to a social club by non-members for certain activities (tennis lessons, children’s camp, basketball court use, etc.) are not subject to tax, although membership fees that provide access to the same activities are subject to tax. Membership fees are taxable under New York Tax Law § 1105(f) because members purchase ownership of the club, not directly for activities. However, the Opinion determined that the fees paid by non-members directly for specific activities would be taxable only if the nature of the activity or service was taxable. The Opinion then separately analyzed the activities in question and determined whether they themselves were taxable. TSB-A-17(5)S (NY Dep’t of Taxation & Finance Mar. 3, 2017).