In 2013, Alabama passed H.B. 101, known as the Red Tape Reduction Act (the Act) and enacted Ala. Code §§ 41-22-5.1 and 41-22-5.2 to codify and enforce the provisions of the Act. Under the Act, within five years of July 1, 2013, each state agency is required to review all agency rules that existed on that date and determine whether each rule should be continued as is, amended, or repealed. In addition, any rule adopted after that date must be reviewed every five years.
With the 2018 deadline fast approaching, the Department of Revenue has recently issued a flurry of amendments and repeals. Among those agency rules repealed are Ala. Admin. Code rules 810-3-39-.04, governing incentives for consolidated returns; 810-3-39-.06, governing mechanics of consolidated filing; 810-3-38-.01, governing additional corporate deductions, 810-3-32-.03, governing unrelated business taxable income; 810-3-8-.13, governing recognition of gain by target corporations; 810-3.-8-.14, governing taxability of corporations on distributions; and 810-3-8-.16, governing gain or loss on property in complete liquidation. In all cases, the Department proposed repeal of these rules because the Department determined that the rules were superfluous to existing statutes.
In some cases, the Department’s determination was entirely correct. The content in the rules covering recognition of gain by a target corporation, taxability of corporations on distribution, and gain or loss on property in complete liquidation is stated nearly verbatim in Ala. Code § 40-18-8. The rule governing additional deductions allowed for corporations was termed duplicative of Ala. Code § 40-18-38, which was repealed on Dec. 31, 2000. “[The] code section was repealed as deadwood as part of the comprehensive legislation that essentially piggybacked the Alabama corporate income tax onto federal taxable income as the starting point,” said Bruce P. Ely, partner at the Birmingham office of Bradley Arant Boult Cummings LLP, Bloomberg State Tax Advisory Board member, and author of the Bloomberg Tax Pass-Through Entity Navigator and Alabama Corporate Income Tax Navigator (subscription required). However, the content in the other repealed rules is not quite as repetitive and unnecessary as the Department deemed it to be. Unlike the above rules, several of the repealed rules “may leave gaps in guidance for corporate taxpayers,” noted Ely.
Most of the provisions set out in the rule governing the mechanics of consolidated return filing, Ala. Admin. Code r. 810-3-39-.06, can be found in Ala. Code § 40-18-39, but the rule has specific guidance on attributional nexus, which outlines in detail how the throwback rule applies to Alabama affiliated groups. No such guidance exists in the statute. The rule governing incentives for consolidated returns parallels Ala. Code § 40-18-39 as well, but the statute does not contain the same guidance on applying estimated payments against the consolidated filing fee, carryover of incentives for an affiliated group, or retaining records in order to properly claim credits.
The rule governing unrelated taxable income, Ala. Admin. Code r. 810-3-32-.03, has an even greater disconnect with the existing statute. Ala. Code § 40-18-32 states that “[w]ith the exception of unrelated business taxable income determined in accordance with 26 U.S.C. § 512, the tax imposed by Section 40-18-31 shall not apply to the organizations referred to in 26 U.S.C. § 501(a),” which can be read to mean that unrelated business taxable income is subject to tax in Alabama. However, the rule has extensive content on definitions, exclusions, and apportionment provisions, which are not set forth in any statute.
Ala. Admin. Code r. 810-3-39-.06 has already been repealed with an effective repeal date of Dec. 4, 2017. The remaining rules referenced have effective repeal dates between Jan. 1, 2018, and Jan. 20, 2018.
As a result of efforts to comply with the Act, it seems as though the Department has left taxpayers with less guidance than the rules previously provided. Though they were determined to be superfluous to existing statutes, a deep dive reveals that the rules contained important and distinct details that gave taxpayers a clearer picture on important tax concepts like consolidated reporting and unrelated business taxable income. Without the ability to rely on the rules, taxpayers are left to piece together what they can from the existing statutory law, and they may find they are missing one too many pieces of the puzzle to support their position. Ely told Bloomberg Tax he is hopeful the Department will soon issue new regulatory guidance to fill in these gaps.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Was the Department of Revenue too hasty in repealing the rules discussed above or can taxpayers glean enough information from existing statutes on the relevant topics?
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