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Weekly UpdatesTEI's technical committees have had a busy spring, preparing comments on issues as diverse as a federal law to provide a uniform standard for taxing out-of-state workers, Alabama's add-back statute, and the reduction of the paperwork burden in Canada. The Institute also commented on efforts to revise the Uniform Division of Income for Tax Purposes Act (UDITPA) and to update Canadian bulletins and circulars. Comments were filed on the proposed cafeteria plan regulations and recent changes in the procedures for employment tax obligations.
TEI President Robert McDonough noted that the submissions demonstrated the breadth and depth of TEI's interests. "Our committees work hard all year round," he stated, "but the past few months have been especially busy."
Mobile Workforce Act
TEI has urged Congress to enact the Mobile Workforce State Income Tax Fairness and Simplification Act of 2007. In comments filed with the House Judiciary Subcommittee on Commercial and Administrative Law, the Institute said Congress should exercise its authority under the Commerce Clause to limit States' ability to tax the employees present in the state for only short periods of time. The proposed legislation (H.R. 3359) limits state or local taxation of the compensation of any employee who performs duties in more than one state to the employees' residence state and any state in which the employee is physically present performing duties for more than 60 days.
In its May 13, 2008, comments, the Institute explained that employers "have a direct stake in the development of fair and uniform rules governing nonresident taxation and withholding, regardless of whether they are large multinational corporations or small businesses that pursue opportunities outside their home State." Employees also have an interest in the enactment of the legislation, "not only to minimize their exposure to unfair taxation but to bring a measure of certainty to an area of the tax law that can impede economic growth and efficiency."
"H.R. 3359 represents a balanced approach toward ameliorating employer and employee uncertainty in respect of individual State income taxation and withholding for individuals temporarily present in another State while discharging their employment responsibilities and preserving the States' ability to impose taxes commensurate with the benefits accorded nonresidents," the organization said.
"Given the current various taxing regimes that are designed to address the specific needs of individual States," TEI concluded, "the likelihood of a solution to this problem by the States is not very high. A federal legislative solution is required. H.R. 3359 addresses the current concerns regarding the taxation of nonresident individuals."
TEI's letter on H.R. 3359 is reprinted in this issue, beginning on page 209.
Alabama's Add-Back Statute
On April 29, TEI filed an amicus brief in VFJ Ventures, Inc. v. Surtees, asking the Alabama Supreme Court to determine that royalties paid by VFJ to its subsidiaries were deductible pursuant to the "unreasonable" exception to the Alabama add-back statute.
In Alabama and several other states, the computation of "taxable income" begins with federal taxable income but then requires various additions and subtractions peculiar to each state's taxing regime. After these adjustments are made, the state applies its unique apportionment and allocation formulae to determine its respective share of taxable income. States vary considerably in the type and extent of adjustments made to federal taxable income.
Alabama, like many other states, requires corporate taxpayers to "add back" otherwise deductible interest and intangible expenses paid to or incurred with respect to related members. Add-back is not required, however, if the corporation establishes that the adjustments are unreasonable. It was under this statute that Alabama's Court of Civil Appeals rejected the findings of the circuit court and denied VFJ a deduction for the arm's-length royalties paid to it subsidiaries, Lee and Wrangler.
In its brief, TEI noted that the court misapprehended the "unreasonableness" exception to the Alabama add-back statute. "Denying the deduction in Alabama is unreasonable," the organization said, "since it would effectively result in Alabama's taxing income that is rightfully attributable to another jurisdiction"
The Institute also argued that the court failed to recognize that under the analytical framework of the U.S. Supreme Court's decision in Complete Auto Transit, Inc. v. Brady, the Alabama statute unconstitutionally discriminates against interstate commerce.
The brief is reprinted in this issue, beginning at page 213.
Canadian Paperwork Reduction
In response to an invitation from the Canadian Department of Finance, TEI submitted recommendations for reducing the paperwork burden imposed on businesses. In November 2007, the Canadian government committed to reducing the paperwork burden of businesses by 20 percent. As part of the initiative, Canada Revenue Agency and Finance have catalogued the requirements imposed by the tax system, including the Income Tax Act and the Excise Tax Act, to establish a baseline for measuring potential paperwork reductions.
TEI's May 5, 2008, recommendations for reducing the income tax paperwork include:
* Eliminating the requirement to issue T3s (Statement of Trust Income Allocations and Designations) and T5s (Statement of Investment Income) to corporations;
* Eliminating the requirements under Regulations 105 and 102 to withhold on amounts payable to non-residents where the payee is not subject to tax in Canada;
* Eliminating the requirement to file two requests for certificates of compliance on a disposition of depreciable real estate; and
* Eliminating the requirement to provide a detailed list of dividends on Form T2SCH3 (Dividends Received, Taxable Dividends Paid, and Part IV Tax Calculation).
The Institute also suggested that, for Large File taxpayers subject to regular audits, CRA and Finance should consider eliminating the requirement to file all detailed schedules.
In the excise tax area, TEI recommended that CRA and Finance--
* Consider eliminating a proposed requirement for Financial Institutions (FIs) to file the new GST/HST annual information schedule;
* Simplify the compliance process for determining the excise tax on insurance premiums by having the taxpayers that benefit from an exemption file an annual letter claiming the exemption; and
* Establish a single point of contact for all account-related issues, especially for Large File taxpayers.
TEI's comments are reprinted in this issue, beginning on page 225.
UDITPA Revision
TEI recently filed comments with the National Conference of Commissioners on Uniform State Laws (NCCUSL) expressing significant concerns about NCCUSUs project to revise the Uniform Division of Income for Tax Purposes Act.
In a letter filed with NCCUSL on May 13, TEI stated that experience teaches that projects to promote state and local tax uniformity--whether initiated by NCCUSL, the Multistate Tax Commission, Federation of Tax Administrators, or ad hoc groups of interested parties--have limited success. "The uniformity landscape is strewn with the remnants of incomplete or failed uniformity efforts," the Institute said, "because of a multiplicity of factors, including state economic and budgetary pressures, geographic and demographic considerations, interstate or transnational competitive concerns, and concerns of state sovereignty."
Against this background, TEI expressed significant doubts about the viability of this project. The Institute recommended that NCCUSL suspend its effort to revise UDITPA until after such a review.
TEI's letter is reprinted on page 217.
Cafeteria Plan Regulations
In April 21 comments on the Internal Revenue Service's proposed cafeteria plan regulations, TEI criticized the section 125 regulations as overbroad. Noting that section 125 is not the exclusive means of avoiding the constructive receipt doctrine, the Institute explained that the statute applies only to elections between cash and qualified benefits, not to elections between cash and nonqualified benefits, including employee working conditions or reimbursable expenses. TEI recommended conforming the proposed regulation to the preamble, which states that "except for an election made through a cafeteria plan that satisfies section 125 or another Code section (such as section 132(f)(4)), any opportunity to elect among taxable and nontaxable benefits results in inclusion of the taxable benefit regardless of what benefit is elected and when the election is made."
TEI also called the proposed plan disqualification rule "unduly harsh," recommending that the final rules establish (i) a participant-by-participant test for operational failures, similar to the regulations under section 409A; and (ii) a voluntary correction program for cafeteria plans similar to the Employee Plans Compliance Resolution System (EPCRS).
TEI offered two recommendations relating to the rules proscribing deferral of compensation. First, the regulations should provide a definition for deferred compensation to clarify when benefits defer compensation or operate to defer compensation. The proposed regulations do not define the term deferred compensation or provide guidance on what it means to defer compensation.
Second, the timing of the cash-out rule for paid time off should be revised. "Most employers will be unable to determine and pay the proper amount of unused leave as of the last day of the plan year, especially if the plan year is a calendar year," the Institute explained. TEI recommended that employers be permitted to pay the balance of unused leave with the first payroll period following the end of the year, but no later than, say, 15 days following the end of the plan year.
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