May 20, 2011
NAREIT Comments to MTC on Insurance Proposal Tied to Taxing Pass-Through Entities
By way of background, a committee of the Multistate Tax Commission (MTC), an organization of state governments that develops model state statutes, recently approved a draft model statute "regarding partnership or pass-through entity income that is ultimately realized by an entity that is not subject to income tax". According to the MTC, the genesis of this proposal was the perception that insurance companies, which pay a “premiums tax,” but not income tax, were competing unfairly with other entities by earning business income not subject to corporate income tax through pass-through entities.
Issues: Meaning of "Subject to Income Tax" and Treatments of REITs
The draft model statute would impose entity-level state income tax on a "pass-through entity" more than 50% owned by an insurance company or any other entity that a state considers "not subject to income tax." Further, the proposal would define a "pass-through entity" to include a REIT.
While REITs, of course, are subject to income tax (in states with income-based tax structures) and are not pass-through entities, the MTC proposal is written in an imprecise manner which could be construed as imposing an entity-level state income tax on any partnership or any REIT owned more than 50% by another entity not "subject to income tax" in that same state. In short, depending on how "subject to income tax" is interpreted, an Operating Partnership in an UPREIT structure that owned properties in State A could be subject to income tax in State A if more than 50% is owned by a REIT that is not considered as being "subject to income tax" in State A. A similar result could occur for a REIT more than 50% owned by another entity not "subject to income tax" in the same state (such as an operating partnership or another REIT).
On May 16, 2011, the MTC held a public hearing concerning this proposal. Dara Bernstein spoke on behalf of NAREIT and strongly urged that the statute be narrowly tailored to achieve its objective (in other words, to the concern that insurance companies were escaping tax on their investments in pass-through entities) without affecting non-abusive or legitimate real estate investments. Further, the MTC’s concern that insurance companies might own captive REITs already should be addressed by its existing model captive REIT statute that adds back the dividends paid deduction for a REIT more than 50% owned by a corporation. NAREIT also submitted the following comment letter.
A representative from the insurance industry spoke and suggested that the draft had not been sufficiently investigated. This witness raised some additional issues as well concerning potential discrimination against insurance company-owned pass-through entities, and noted the comparatively large tax burden borne by insurance companies.
The next step in the process is for the MTC hearing officer to prepare a hearing officer's report with a recommendation to the MTC's Executive Committee. The recommendation could be for one of a number of options, for example, either to adopt, reject, or revise the current draft. The Executive Committee next meets in July, and thereafter in December. The hearing officer stated that he planned to keep the record open for an additional 10 days, until May 26. He indicated that it was unlikely that he would submit a hearing officer's report in time for the Executive Committee to consider the draft proposal at its July meeting.
After the hearing, the hearing officer suggested that NAREIT consider sending in draft statutory language for him to evaluate in the context of modifying the draft, and NAREIT is planning to do so. If you would like to provide comments regarding this submission, please contact Dara Bernstein at email@example.com prior to close of business, Monday, May, 23, 2011.
Michigan Legislature Enacts Legislation Replacing Michigan Business Tax with Corporate Income Tax; Governor's Signature Expected
The Michigan legislature presented House Bills 4361 and 4362 to Governor Rick Snyder (R) on May 17, 2011.
Multistate Tax Commission (MTC) Uniformity Committee Schedules May 13 Teleconference to Discuss Action on Model Captive REIT Add-Back Statute
The MTC's Uniformity Committee will meet by teleconference on Thursday, May 13, 2010 at 1:30 p.m. Eastern Time to discuss, among other things, action on the model captive REIT add-back statute mentioned in the last SALT Report. Click here for the teleconference agenda, dial-in information, and materials.