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State Taxation of Pass-Through Entities: General Principles (Portfolio 1500)

Product Code: TPOR44
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State Taxation of Pass-Through Entities: General Principles considers the principle state tax issues that should be addressed in structuring a business in pass-through form. Rather than attempting to catalogue each of the specific state tax rules applicable to pass-through entities and their participants, this Portfolio, written by Prentiss Willson, Esq., Ernst & Young LLP, and Mark Windfeld–Hansen, Esq., Cooley Godward Kronish LLP, identifies important issues and differences in the approaches taken by the states that can aid the reader in structuring the entity in the most tax-advantaged manner.  As such, the Portfolio describes and compares the following: 

  • State tax provisions applicable to the most commonly used pass-through entities (e.g., partnerships, “S” corporations, limited liability companies, real estate investment trusts, mutual funds).
  • The different types of participants in such entities.
  • Jurisdictional issues presented by nonresident and corporate participants.
  • The application of state allocation and apportionment rules to pass-through entities and their participants.
  • Various mechanisms used by the states to increase compliance with filing and tax payment obligations. 

State Taxation of Pass-Through Entities: General Principles also discusses the taxation of nonresident investors, shareholders, and interest holders of other pass-through entities, including Real Estate Investment Trusts (REITs), Regulated Investment Companies (RICs), Real Estate Mortgage Investment Conduits (REMICs), and Trusts. 

State Taxation of Pass-Through Entities: General Principles allows you to benefit from: 

  • Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area.
  • Invaluable practice documents including tables, charts and lists.
  • Plain-English guidance from world-class experts.
  • Real-world and in-depth analysis that lets you explore various options.
  • Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
  • Alternative approaches to both common and unique tax scenarios.

This Portfolio is part of the Premier State Tax Library, a comprehensive series, which covers major state tax transactions and issues with expert, in-depth analysis, and offers commentary on a wide range of multi-state and state-specific taxation topics, including Sales and Use, Corporate Income, Individual Income, Property, Gross Receipts, Limitations on States' Authorities to Tax, Credits and Incentives, Electronic Commerce, Mergers and Acquisitions, Procedure and Administration, Special Industries, and more.

 

Detailed Analysis

1500.01. INTRODUCTION

A. Growth in Use of Pass–Through Form

B. Importance of State Tax Considerations

C. Underdeveloped State of Law

D. Topics Covered by Portfolio

1500.02. PARTNERSHIPS

1500.03. TREATMENT OF PARTNERSHIP ENTITY

A. Federal Conduit Treatment Generally Recognized

B. Taxes Imposed on Partnerships

C. Obligation of Partnership to File Partnership Return

1. Business Conducted in State

2. State Where Partner Resides

1500.04. TAXATION OF DISTRIBUTIVE SHARES OF PARTNERS

Introductory Material

A. Treatment Depends on Type of Partner

1500.05. CORPORATE PARTNERS

A. Jurisdiction to Tax

1. General Rule

2. Special Rule for Certain Limited Partners

3. Special Rule for Foreign Partners of Investment Partnerships

B. Allocation and Apportionment of Distributive Share

C. Summary of UDITPA Rules

D. Application of UDITPA Rules to Partnerships

1. Business vs. Nonbusiness Income Determination

2. Unity Between Partner and Partnership

3. Inclusion of Partnership Factors in Partner's Apportionment Formula

4. Source of Nonbusiness Income

1500.06. NONRESIDENT PARTNERS

A. Jurisdiction to Tax Distributive Share

B. Limitation to Sources Within State

1. Constitutional Restraints

2. Sourcing of Income from Partnerships

3. Investment Partnerships

C. Composite Returns

D. Measures to Enforce Nonresident Filing and Payment of Taxes

E. Failure to File Return

1500.07. RESIDENT PARTNERS

A. Entire Distributive Share Taxable

B. Credits for Taxes Paid to Other States

1500.08. TAXATION OF DISPOSITION OF PARTNERSHIP INTEREST

Introductory Material

A. Corporate Partners

1. Situs of Nonbusiness Gain or Loss on Disposition of Interest

2. Gain on Sale of Partnership Interest As Business Income

B. Nonresident Partners

1. Normal Situs Rule for Gain or Loss on Disposition of Interest

2. Business Situs Exception

C. Resident Partners

1500.09. S CORPORATIONS

1500.10. TREATMENT OF S CORPORATION ENTITY

A. Federal Conduit Treatment Generally Observed

B. Entity–Level Taxes

C. Election Requirements

D. Return Filing Obligations

E. Additional Requirements to Enforce Shareholder Compliance

F. Planning Considerations

1500.11. TAXATION OF NONRESIDENT S CORPORATION SHAREHOLDERS

Introductory Material

A. Jurisdiction to Tax

1. General Source Rules for Corporate Distributions

2. Jurisdictional Rules for Nonresident S Corporation Shareholders

B. Determination of Income Subject to Tax

C. Nonresident Shareholders' Basis in Stock

D. Tax Credits

E. Composite Returns

1500.12. TAXATION OF RESIDENT S CORPORATION SHAREHOLDERS

A. Income Subject to Tax

B. Tax Credits

1. Credits for Taxes Paid by Shareholders to Other States

2. Credits for Taxes Paid by S Corporations to Other States

3. Residents' Basis in Stock

1500.13. LIMITED LIABILITY COMPANIES

Introductory Material

A. Continuity of Life

B. Centralization of Management

C. Free Transferability of Interests

D. Two Member Requirement

E. State Tax Treatment

1500.14. OTHER PASS–THROUGH ENTITIES

Introductory Material

A. Real Estate Investment Trusts (REITs)

1. Tax Treatment of Entity

2. Taxation of Nonresident Investors

3. Taxation of Resident Shareholders

B. Regulated Investment Companies (RICs)

1. Tax Treatment of Entity

2. Taxation of Nonresident Shareholders

3. Taxation of Resident Shareholders

C. Real Estate Mortgage Investment Conduits (REMICs)

1. Tax Treatment of Entity

2. Taxation of Interest Holders

D. Trusts

Working Papers

Item Description Sheet

Worksheet 1 State Nonresident Withholding and Composite Return Requirements for Pass-Through Entities

Bibliography

Bibliography

Prentiss Willson, Jr.
Mr. Willson received his A.B. degree from Occidental College in 1965 and his J.D. degree from Harvard Law School in 1968. After teaching political science at Miles College (1968–1970), he became associated with Morrison & Foerster in 1970 and a partner in 1976. In 1998, Mr. Willson became a partner with Ernst & Young, and the firm's National Director of Practice and Procedure.   Mr. Willson is a member of the Executive Committee of the Tax Section of the California Bar and a former Chairman of the San Francisco Barristers Club Tax Section. He has appeared as a frequent panelist at continuing education programs throughout the country, has taught for nearly ten years at the Golden Gate University Graduate School of Taxation, and more recently at Stanford Law School. He is a frequent lecturer at programs sponsored by the California C.P.A. Foundation, Tax Executives Institute, CEB, PLE, etc. He has written and lectured extensively in the areas of real estate and partnership tax matters, co–authored (with Franklin C. Latcham) a section of the book California Taxes, and co–authored (with Thomas H. Steele) three chapters of the book Tax Aspects of California Partnerships. He has also edited a quarterly column on Subchapter S taxation in the Journal of Partnership Taxation.  
Mark Windfeld-Hansen
Mr. Windfeld–Hansen is a 1978 graduate of Amherst College (Summa Cum Laude, Phi Beta Kappa) and a 1982 graduate of Yale Law School. He became an associate in the Tax Department of Morrisen & Foerster in 1984, a partner in 1990, and co–chairman of the Morrison & Foerster Tax Department in 1993. In 1994, he left Morrison & Foerster to become the tax partner for Venture Law Group, a firm specializing in providing transactional legal and tax services for emerging technology companies.Mr. Windfeld–Hansen specializes in advising clients with respect to federal and state tax issues in structuring business transactions and tax aspects of executive compensation. He speaks regularly on partnership and state and local tax matters for continuing education programs sponsored by such organizations as the California Society of CPAs, the California State Bar Tax Section, and the Council on State Taxation. He teaches the California Society of CPAs' course on Taxation of Partnerships and authored the text for that course. In addition to his transactional tax work, Mr. Windfeld–Hansen also regularly represents clients in controversies and litigation involving state tax matters.