Draft Model Law for State Partnership Audits Nearly Done

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Che Odom

Work on a model statute regarding the way states audit complex business partnerships may nearly be complete.

That’s according to the groups that have been working over the last year and a half to develop a response to a centralized federal partnership audit regime created by the federal Bipartisan Budget Act of 2015. The law took effect Jan. 1.

“We think we are in the final states of the model,” Helen Hecht, general counsel to the Multistate Tax Commission (MTC), said during a panel discussion hosted in Washington by the Federal Bar Association.

Much of the work that remains amounts to little more than proofreading and editing for consistency of terms, according to tax practitioners working on the model statute. The model act should be ready in plenty of time for the first audits under the new federal regime, which wouldn’t be until 2020.

The practitioners, known as the “interested parties,” come from several groups. Those organizations include the Council On State Taxation (COST), Tax Executives Institute Inc., the Institute for Professionals in Taxation, the American Institute of CPAs, and a task force of the American Bar Association tax section’s State and Local Tax Committee.

When the model is complete, the MTC will consider whether to formally adopt and endorse it to states, Hecht said. However, many states have already been looking at the drafts of the model act as the work has progressed, and some states, including California, have already begun to move on the issues, she said.

The interested parties, most of which consist of tax professionals representing businesses, hope that state lawmakers hold off on adopting laws until their model statute is available. They say the statute would promote uniformity across states and predictability for taxpayers, making compliance easier.

“We feel very confident that we are getting real close,” Nikki E. Dobay, senior tax counsel at COST, said during an MTC conference call March 8. “And we feel this is a good product.”

Addressing Questions

The federal auditing approach replaces a partner-by-partner audit system with a centralized audit approach that, in general, assesses and collects tax at the partnership level.

However, the 2015 Bipartisan Budget Act and Internal Revenue Service regulations have generated a host of questions and concerns over the flow-through impact at the state level.

Drafters of the model statute are attempting to sufficiently address those questions for states and taxpayers.

Draft Details

The working model provides states with standardized definitions specific to partnership audits, Dobay said during the Federal Bar Association panel. These terms include imputed underpayments, the state partnership adjustment report, and financial determination date, which triggers the filing of a state return and payment.

Under the working draft, states are provided with two approaches when addressing a partnership that is under federal audit.

In the first approach, the partnership would pay the tax, in much the way they would a federal imputed underpayment, with certain limitations, Dobay said.

In the second approach, adjustments are passed through to the partners who each pay the associated state tax on their adjustments through amended returns, with the exception of those partners who filed as part of a composite return, Pilar Mata, tax counsel at the Tax Executives Institute, said during the panel.

When it comes to designating a partnership representative at the state level, the default rule would be to use the federal representative, Pilar said.

The model rule also addresses tiered partners, which can involve a complicated web of hundreds of holdings companies, partnerships, and other businesses.

To contact the reporter on this story: Che Odom in Washington at codom@bloombergtax.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

Copyright © 2018 Tax Management Inc. All Rights Reserved.

Request Daily Tax Report: State