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By Tripp Baltz
An effort to promote a proposed model state statute for conforming with new Internal Revenue Service partnership audit and assessment rules is taking on a sense of urgency as 2018 state legislative sessions loom.
“We only have a few months,” Bruce Ely, a partner at Bradley Arant Boult Cummings LLP in Birmingham, said during an Oct. 3 panel session at a Western States Association of Tax Administrators conference. “Most everybody’s going to start meeting in January.” The new partnership audit rules, part of the Bipartisan Budget Act of 2015, take effect Jan. 1, 2018.
“This is the time,” said Ely, co-chair of an American Bar Association tax section’s State and Local Tax Committee task force studying the state implications of the new federal partnership audit rules.
“We need your input over the next few weeks. Your legislators are cranking up now,” he told WSATA conference attendees in Missoula, Mont.
The ABA SALT task force is among a coalition of groups calling themselves “the interested parties,” which have proposed a model uniform statute and regulation for reporting adjustments to federal taxable income and federal partnership audit adjustments. The other members include the Council On State Taxation (COST), the Tax Executives Institute Inc., the Institute for Professionals in Taxation, and the American Institute of CPAs.
The coalition recently updated its proposal to better align it with new sections of the Internal Revenue Code that prescribe the partnership audit and assessment rules. The proposed model is designed to promote uniformity among state laws conforming to the new rules, thereby aiding multistate entities with compliance.
“Tell us what’s workable and what’s unworkable,” Nikki Dobay, senior tax counsel with COST, urged state tax administrators during the session. “We are interested in moving this forward to be a big kumbaya moment and provide uniformity for this issue going forward.”
Ely said multistate companies “don’t want a California conforming law and a New Jersey version.” Having a reasonable uniform set of rules to comply with will be “simple for all” and perhaps increase compliance, therefore increasing revenue for states. “Everyone’s going to have theirs, we know that, but if we can keep the general concept the same across the states, it’s a win-win solution for taxpayers and states.”
A partnership work group of the Multistate Tax Commission’s Uniformity Committee recently decided to use the proposal from the interested parties as the starting point for a MTC model act.
“We’re using it as the basis for our discussion,” said John Valentine, chairman of the MTC’s Executive Committee and the Utah State Tax Commission.
“We’re working on it as fast as we can, and we need to have this input now.” The work group has set up a website to receive comments on the draft, he said.
Valentine told Bloomberg BNA the MTC’s process makes it impossible for the commission’s executive committee to act on the model before the 2018 legislative sessions begin.
The Internal Revenue Service’s proposed regulations (REG-136118-15, RIN:1545-BN77), which will carry out the regime, generally provide for assessment and adjustments at the entity level, rather than among individual partners. They have generated rampant questions and concerns over the flow-through impact at the state level.
Once a model statute is agreed upon, states will need help convincing lawmakers to enact it, Gene Walborn, deputy director of the Montana Department of Revenue, told the panelists. “Once this hits the Montana Society of CPAs, they’re going to want changes,” he said. “If you want a uniform statute, we need your help to say, ‘This is a uniform statute, don’t change it.’”
Dobay said the interested parties are committed to work together to “get the same thing through all the states.”
Ely said the grassroots effort to pass the laws will involve state CPA societies, state bar association tax sections, chambers of commerce, and others. “We all have to come together,” he said, adding that he is working with the Alabama Department of Revenue on a bill draft to be considered early in 2018. “I don’t know how it’s going to go in an election year,” he said. “If there’s any friction, then it will be 2019" before conforming laws move forward.
The new partnership audit regime presents an opportunity for states to “come up with a more uniform set of rules” on reporting adjustments. “I think this is going to convince states that don’t have a composite withholding requirement to go ahead and do that,” he said. “Wouldn’t it be nice to have a uniform RAR statute?”
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