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Georgia has become the third state to introduce legislation arising out of the new federal partnership audit regime.
Filed Feb. 7, and sponsored by Reps. David Knight (R), Brett Harrell (R) and Bruce Williamson (R), H.B. 283 largely tracks the new law governing federal audits of partnership entities. Enacted through the Bipartisan Budget Act of 2015 (Pub. L. No. 114-74), the federal regime provides for assessment and adjustments at the partnership entity level—rather than among individual partners—absent an election that would transfer liability to the partners.
Arizona was the first state to enact legislation largely following the federal regime in May 2016. However, many expect future amendments to the statute. Montana lawmakers introduced a bill in December 2016, but the House Taxation Committee tabled the proposal Feb. 3.
Georgia’s Internal Revenue Code conformity bill comes amid an appeal from several practitioners for states to adopt a “wait and see” approach as federal officials work through technical corrections legislation and implementing regulations.
“There is simply too much uncertainty surrounding the proposed—and now withdrawn—regulations, and the technical corrections bill that everyone agrees is critical,” Bruce P. Ely, a tax partner with Bradley Arant Boult Cummings LLP, told Bloomberg BNA.
Ely further noted there is a rumor that the federal legislation’s effective date may need to be pushed back a year. The new regime is presently set to take effect for tax years after Dec. 31, 2017.
In early December, technical changes were introduced in the Tax Technical Corrections Act (H.R. 6439, S. 3506) to clean up what many consider a complex regime. While the measure didn’t pass, many federal lawmakers have anticipated it will push through this year—potentially incorporated within another legislative package.
On Jan. 18, the Internal Revenue Service released proposed rules (REG-136118-15) outlining the agency’s plans to administer the new partnership audit law—which President Donald Trump subsequently ordered withdrawn on Jan. 20. It’s unclear when the IRS will reissue the regulations.
With both legislative and regulatory efforts stalled at the federal level, many have urged states not to move forward with legislation this year.
“I’m hoping that a new coalition of business associations, law firms and the Georgia CPA Society will form quickly to convince the bill sponsors to delay consideration of that portion of their conformity bill until next year, when the dust has hopefully settled in Washington,” said Ely, who is co-chair of a task force of the American Bar Association tax section’s State and Local Tax Committee that has regularly called for states to decelerate legislative efforts. The task force includes members from the Council On State Taxation and Tax Executives Institute Inc.
The ABA task force has partnered with an American Institute of CPAs’ work group on a project analyzing the state implications from the federal law. The AICPA work group has echoed the “wait and see” advice.
Nikki Dobay, senior tax counsel with COST, told Bloomberg BNA that states appear to be wary over delaying conformity legislation because they don’t want to be caught off guard when the new federal regime takes effect and risk losing revenue.
“The states see the big dollar amount that the federal government put on this issue,” she said. “They don’t want to be leaving dollars on the table.”
Dobay presented before a panel of staff members from the California Legislature and the Franchise Tax Board last week, requesting they hold off on conformity legislation for now. California will need legislation if it wants to audit and impose tax at the partnership level, and Franchise Tax Board officials said they don’t want to be caught without that authority when the new federal rules take effect, because the state could lose a significant amount of revenue.
An impetus for the new federal regime was lost collection opportunities for underpaid taxes from partnerships, which have been subject to record-low rates of federal audits that are resource-intensive and time-consuming. According to the congressional Joint Committee on Taxation, the modified audit rules will raise an estimated $9.3 billion in additional revenue over 10 years.
As revenue departments are analyzing the issue, “they want to know that they’ll be able to collect the tax if there’s an assessment on a partnership at the federal level,” said Dobay.
Dobay said that some states may also be nervous about passing legislation conforming to the federal regime after Jan. 1, 2018—the federal effective date as of now—with an effective date that’s retroactive to Jan. 1, 2018.
However, she explained that while COST opposes retroactive tax legislation, conformity legislation in this situation will only impose a procedural change—and taxpayers will be on notice, given the federal law and the fact that audits aren’t expected to be completed under the new rules until 2020.
So while a state’s conformity law may be facially retroactive, it won’t be retroactive in practice.
“These are really prospective changes even if they get passed after that 1/1/18 date, assuming that doesn’t change at the federal level,” Dobay said. “Nothing is going to happen until years down the line. That 1/1/18 date is a trigger, but no audit is going to happen until, best case, 2020, because returns won’t be filed for the 2018 tax year until 2019.”
The Georgia bill comes on the heels of the Montana proposal that met with some opposition.
Rep. Zachary Brown (D), sponsor of the Montana bill, told Bloomberg BNA that proponents of the measure in the Legislature are going to consider a study bill “that would require an interim committee to track the issue leading up to the 2019 session.” However, some practitioners have suggested another iteration of the bill could come forward in 2017.
During a Jan. 31 teleconference of the Multistate Tax Commission’s partnership work group, MTC General Counsel Helen Hecht presented a memorandum comparing the work group’s updated issues list with Montana’s proposed conformity legislation. Some attendees voiced concern over Montana’s bill not specifically addressing the role of the federal partnership representative.
Under the federal regime, a “partnership representative” has sole authority to act on the partnership’s behalf during audit and adjustment proceedings. The partnership and all partners are bound by any actions and decisions made.
Ely said that “one positive difference” between the Montana bill and the Georgia bill is that the latter addresses the partnership representatives. However, he noted that there appear to be variations between the federal rules and the Georgia proposal that “need to be ironed out.”
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Text of H.B. 283 is at http://src.bna.com/l5U.
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