Tax Law

D.C. Enacts Combined Reporting, Sort Of: Other Provisions Included as Attempts to Raise Revenue


This summer the District of Columbia’s chief financial officer projected revenue decreases of hundreds of millions of dollars a year for the next four years, making it apparent that the D.C. budget would face substantial budget gaps for the foreseeable future. In reaction, at the end of August the D.C. City Council passed emergency legislation intending to address this problem, and in doing so may have generated substantial problems for many corporate taxpayers.
 
The emergency legislation, deemed the “Fiscal Year 2010 Budget Support Emergency Act of 2009” 1 includes several provisions intended to raise revenue, such as a decoupling from some of the discharge of indebtedness income provisions of the American Recovery and Reinvestment Act of 2009, an increase in the D.C. sales tax rate to 6 percent, and the authorization of a tax amnesty for periods before December 31, 2009 (which has yet to be implemented). However, the legislation’s two most significant provisions are a modification to the statute disallowing related party expense deductions, and a mandate of sorts that would require corporate taxpayers to begin combined reporting in 2011.
 
Related Party Expense Disallowance

In 2004, D.C. enacted a statute disallowing taxpayers’ deductions for certain payments to related parties. However, due to its original placement within the code, and its wording after revisions, the statute has been plagued by questions of applicability to corporate and other business entities.2 Additionally, the current wording of the statute only specifically disallows related party payments for royalties.
 
The enacted legislation repeals the current statute, D.C. Code § 47-1803.03(a)(19), and replaces it with a more clearly worded statute in Section 47-1803.03(d). The new statute specifically disallows deductions for interest and intangible expenses paid to related entities, as well as royalties. Importantly, the legislation makes this provision applicable to tax years beginning after December 31, 2008.
 
Combined Reporting
 
The most sweeping change contained in the legislation is a mandate that “[b]eginning after December 31, 2010, all corporations taxable in the District of Columbia shall determine their income apportionable or allocable to the District of Columbia by reference to the income and apportionment factors of all commonly controlled corporations organized within the United States with which they are engaged in a unitary business.” However, the bill lacks any guidance or explanation as to what D.C. considers a unitary business, how the report is to be computed mechanically, or how tax attributes will be affected by the combined report. In short, the legislation makes a mandate, but provides no instructions for taxpayers to follow.
 
It is important to note that the provision is not effective for another fifteen months. The saving grace for taxpayers is that this provision was enacted in a piece of emergency legislation. The emergency legislation expires after 90 days. Thus, unless the legislation is made permanent before November of this year, the combined reporting provisions (as well as the other measures in the bill) would sunset before the year ends, well before the effective date. However, given the current state of fiscal affairs, it is very likely that the City Council will approve a permanent version of the legislation, and may choose to incorporate some guidance regarding the combined reporting scheme in that permanent legislation.
 
Pepper Perspective
 
It is often said that those who do not learn from the past are doomed to repeat it. The history of legislative tax change in D.C., as well as tax administration, has been spotty at best. One need only look to the checkered history of the addback statute to see the proof of this statement. Further, the administration has been plagued by questionable positions it has taken vis-à-vis taxpayers as well as some corruption scandals that have been well documented in the mainstream media. As noted, it is highly likely, given the financial situation of D.C., that some form of combined legislation will be enacted. The regulations (or statutes) necessary to implement such a change will likely come in fits and starts. As a result, tax directors of public corporations are likely to have some difficulty in calculating their deferred tax liabilities. Thus, businesses that do a significant amount of their business in D.C. must pay close attention to this coming legislation.
 
Endnotes
 
1. District Bill # 18-0409, Act # 18-0187 (enacted Aug. 26, 2009), available at http://www.dccouncil.
washington.dc.us/images/00001/20090819131730.pdf.
2. For example, the original statute was placed in the code sections only applicable to individuals, estates, and trusts. Further, upon revising the statute, the provision was made applicable to corporate entities, but framed in terms of authorizing a deduction, unless the related payment met certain disqualifying standards.
 
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This article is republished with permission of Pepper Hamilton, LLP. Further duplication without the permission of Pepper Hamilton, LLP is prohibited. All rights reserved.