Not a Lexis+ subscriber? Try it out for free.

Tax Law

Sutherland Legal Alert: The Multistate Tax Commission Takes Action on Proposal to Tax Pass-Through Entities Owned by Affiliates Not Subject to Corporate Income Tax

By Jeffrey M. Serether, Maria P. Eberle, and Michael L. Colavito, Jr.

On March 10, 2011, the Executive Committee of the Multistate Tax Commission (MTC) voted to submit to public hearings the model statute that would subject to corporate income tax a pass-through entity owned by an entity that is not subject to corporate income tax (Model Statute). The Model Statute could result in a tax increase for insurance companies and others not subject to an adopting state's corporate income tax.

Background

As reported in Sutherland's SALT Shaker (February 18, 2011), the Model Statute, previously approved by the MTC's Uniformity Committee, provides for a partnership or disregarded entity to be taxed by a state, as if it was a corporation subject to tax in that state, if 50% or more of the capital interests or profits interest in the pass-through entity is owned, directly or indirectly, by an entity that is not subject to that state's corporate income tax. If the Model Statute applies, only the net income that passes through to the income tax-exempt entity would be subject to tax. The Model Statute also provides that a real estate investment trust (REIT) is included within the phrase "partnership or disregarded entity."

Executive Committee Action

Prior to taking its vote, the Executive Committee heard a summary of the history and content of the Model Statute from MTC Counsel Sheldon Laskin. Among other comments, Mr. Laskin discussed tax equity concerns expressed by members of the Uniformity Committee when comparing a pass-through entity owned by an entity that is not subject to a state's corporate income tax (e.g., an insurance company) with a pass-through entity owned by an entity that is subject to a state's corporate income tax.

The insurance industry representative, speaking on behalf of various trade associations, requested that the Executive Committee terminate this project. Alternatively, if termination is not an acceptable option, industry requested that, before the Model Statute is submitted to public hearings, the Executive Committee either send the Model Statute back to the Uniformity Committee for further study or establish a public participation working group. One concern raised by industry is the potential for harmful retaliatory tax consequences if the Model Statute is enacted. In addition, the industry argued that there is no tax equity issue here in that studies have shown that premium-based taxes result in the insurance industry having a higher effective state tax rate than the effective state tax rate imposed on other industries under a corporate income tax.

Notwithstanding the efforts of industry, the Executive Committee passed the motion to adopt the recommendation of the Uniformity Committee and directed that public hearings be held on the Model Statute.

Sutherland Observation: While most states subject insurance companies to state premium taxes (and not to state corporate income taxes) there are some states that do subject insurance companies to corporate income tax. In those states, the Model Statute fails to address the interplay between the "corporate" income taxation of the pass-through entity and the corporate income taxation of the insurance company on the same income. In addition, the Model Statute does not address retaliatory tax issues that may arise in an insurance company's non-domiciliary states. Finally, while the original target of this MTC project was the insurance industry, the Model Statute allows a state to apply the pass-through entity taxation concept to industries, other than the insurance industry, whose members are not subject to the state's corporate income tax.

Next Steps

The Model Statute will now become the subject of public hearings. The MTC expressed its desire that members of the insurance industry who participated in the process to date will continue to participate during the public hearing process. The MTC intends to reach out to all who have participated, and to those who it believes should participate (e.g., insurance company regulators), as the public hearing process progresses.

If you have any questions about this Legal Alert, please feel free to contact any of the attorneys listed below or the Sutherland attorney with whom you regularly work.

Michele Borens 202.383.0936 michele.borens@sutherland.com
Jeffrey A. Friedman 202.383.0718 jeff.friedman@sutherland.com
Stephen P. Kranz 202.383.0267 steve.kranz@sutherland.com
Marc A. Simonetti 212.389.5015 marc.simonetti@sutherland.com
Eric S. Tresh 404.853.8579 eric.tresh@sutherland.com
W. Scott Wright 404.853.8374 scott.wright@sutherland.com
Jeffrey M. Serether 212.389.5053 jeffrey.serether@sutherland.com
Jonathan A. Feldman 404.853.8189 jonathan.feldman@sutherland.com
Pilar Mata 202.383.0116 pilar.mata@sutherland.com
Michele L. Pielsticker 916.498.3311 michele.pielsticker@sutherland.com
Diann L. Smith 202.383.0884 diann.smith@sutherland.com
Marlys A. Bergstrom 404.853.8177 marlys.bergstrom@sutherland.com
Andrew D. Appleby 212.389.5042 andrew.appleby@sutherland.com
Zachary T. Atkins 404.853.8312 zachary.atkins@sutherland.com
Madison J. Barnett 404.853.8191 madison.barnett@sutherland.com
Michael L. Colavito 202.383.0870 mike.colavito@sutherland.com
Miranda K. Davis 404.853.8242 miranda.davis@sutherland.com
Maria P. Eberle 212.389.5054 maria.eberle@sutherland.com
Seth A. Fersko 212.389.5049 seth.fersko@sutherland.com
Lisbeth A. Freeman 202.383.0251 beth.freeman@sutherland.com
Charles C. Kearns 202.383.0864 charlie.kearns@sutherland.com
Jessica L. Kerner 212.389.5009 jessica.kerner@sutherland.com
David A. Pope 212.389.5048 david.pope@sutherland.com
Melissa J. Smith 202.383.0840 melissa.smith@sutherland.com
Maria M. Todorova 404.853.8214 maria.todorova@sutherland.com
Mark W. Yopp 212.389.5028 mark.yopp@sutherland.com

© 2011 Sutherland Asbill & Brennan LLP. All Rights Reserved.
This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult independent
counsel before making any decisions or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Sutherland and the recipient.

...

Discover the features and benefits of LexisNexis® Tax Center

For quality Tax & Accounting research resources, visit the LexisNexis® Store

For more information about LexisNexis products and solutions connect with us through our corporate site.