June 3, 2014
D.C. Council Advances Legislation to Lower Corporate Tax Rate and Exempt Certain Passive Entities from the Unincorporated Business Tax
On May 28, the D.C. Council held a legislative hearing at which it approved budget-related legislation. Among other things, this legislation would do the following if enacted: 1) amend D.C. Code § 47-1808.03(a) to reduce the tax rate on unincorporated businesses from 9.975% to 9.4% for taxable years beginning after December 31, 2014; 2) amend D.C. Code § 47-1810.02 to adopt a single sales factor for apportionment of business income in lieu of the current formula of property, payroll and twice the sales factor for years beginning after December 31, 2014; and, 3) amend D.C. Code § 47-1808.01 by, among other things, exempting from the unincorporated business tax (UBT) a “trade or business which arises solely by reason of the purchase, holding, sale of or the entering, maintaining or terminating positions in stocks, securities or commodities for the taxpayer’s own account.” The amendment specifically excludes from this exemption a taxpayer that owns a non-listed REIT or a non-listed partnership interest. Thus, a partnership or limited liability company that owns a non-listed REIT or non-listed partnership interest would continue to be subject to the D.C. UBT.
The next step for this legislation is approval at a subsequent meeting of the D.C. Council. If approved again, the bill will be sent to the Mayor, who may: 1) let it become effective without his signing it; 2) approve it; or, 3) veto it. If vetoed, the D.C. Council can override with a two-thirds vote. Following the Mayor’s approval or the Council’s override of a veto, the legislation must be approved by Congress in order to become law.
California Assembly Passes Amendment to “Change of Ownership” Test under Proposition 13
On May 29, by an over two-thirds bipartisan vote, the California Assembly passed A.B. 2372, which would amend the rules regarding when a “change in ownership” occurs in connection with property tax reassessments.
By way of background, Proposition 13, approved by California voters in the 1970s, caps property tax increases for original owners and prevents reassessment of property unless there has been a “change in ownership.” For business entities that own California real property, California law defines a “change in ownership” as occurring only if one purchaser acquires at least a 50% interest in a property-owning entity. A.B. 2372 would change this rule to require reassessment when 90% of the interests in a property-owning entity are transferred over a three-year period. A.B. 2372 would exempt transfers of, among other things, “stock or interests of a publicly traded corporation or a publicly traded partnership in the regular course of a trading activity on an established securities market unless shares are acquired as part of a merger, acquisition, private equity buyout, transfer of partnership shares or any other means by which a change of ownership would otherwise occur.”
A.B. 2372 is supported by a number of business organizations, including the California Business Properties Association (CBPA), of which NAREIT is also a member, the California Business Roundtable and the California Chamber of Commerce. Following the Assembly’s vote last week, CBPA emphasized in a news alert its staunch support of Proposition 13, along with the need to update implementation language to ensure that Proposition 13’s original goals continue to be met. The California Taxpayers Association (Cal-Tax), of which NAREIT also is a member, is opposed to the bill.
A.B. 2372 now moves to the Senate for consideration where it may be amended further. NAREIT understands that the bill's supporters are interested in receiving suggestions from the public for improving the bill.
Tennessee Department of Revenue Addresses Disregarded Entities Owned by REITs and Requests Industry Input
The Tennessee Department of Revenue (DOR) recently issued a revenue ruling (Revenue Ruling) to a taxpayer, which, while not yet public, will likely be published in the near future. The ruling requests guidance on how to calculate the Tennessee excise (income) tax for entities owned by REITs that are disregarded entities for federal income tax purposes, but are regarded as separate taxpayers for Tennessee excise and franchise tax purposes. Such entities could include single member limited liability companies (SMLLCs) qualified REIT subsidiaries, disregarded partnerships, etc., to the extent that their federally regarded owner is a REIT.
The Revenue Ruling effectively concludes that REIT-owned (federally) disregarded entities that file separate Tennessee excise and franchise tax returns are not eligible for a dividends paid deduction (DPD) when determining their pro forma, federal taxable income starting point for Tennessee excise tax purposes. The state concludes that in order to be eligible for a DPD for Tennessee excise tax purposes, the entity would need to be able to qualify separately as a REIT for federal income tax purposes when tested on a pro forma, stand-alone basis. The ruling goes on to conclude that because the disregarded entity does not have 100 shareholders, it does not meet the requirements to be a REIT. Note that this ruling, as presently drafted, would apply to any disregarded entity that is a Tennessee taxpayer and whose single member is a REIT – regardless of whether or not the REIT is publicly traded, captive or non-publicly traded, non-captive, as those terms are defined by Tennessee law.
NAREIT understands that the DOR may be open to considering a change to its historic policy that a REIT-owned SMLLC (which is disregarded for federal income tax purposes) is a separate Tennessee taxpayer. Since the enactment of its franchise and excise tax reform in the late 1990s, the DOR has been of the opinion that a SMLLC cannot be disregarded if it is owned by a REIT, even though the statutes direct that a federally disregarded SMLLC whose single member is a corporation shall be disregarded for Tennessee franchise and excise tax purposes.
A change to this policy would allow a SMLLC to be disregarded as an entity separate from the REIT; thus, the REIT would be the Tennessee taxpayer and eligible for the DPD so long as the REIT does not qualify as a “captive REIT” for Tennessee franchise and excise tax purposes. While a change in this policy would not affect the underlying analysis of the aforementioned ruling, it would lessen the impact of the ruling to apply only to those REIT-owned disregarded entities that are not SMLLCs.
Although this possible change in policy would most certainly be beneficial from an excise tax perspective to all affected taxpayers, consideration should be given to the fact that such a policy change could, for certain REIT-owned SMLLCs, cause an increase to the franchise tax liability for some entities since the REIT could be subject to the franchise tax on its apportioned net worth rather than the SMLLC’s being subject to the franchise tax on its apportioned net worth. Please contact Dara Bernstein (email@example.com) if you would like to provide comments. NAREIT will continue to monitor this legislation.