In response to the Bipartisan Budget Act of 2015, which allowed the Internal Revenue Service to conduct audits and make assessments at the partnership level, the Multistate Tax Commission (MTC) Uniformity Committee formed a work group to study the new federal audit process and make recommendations to states about statutes that assess the state taxes that would result from federal partnership audit adjustments. The MTC work group consulted closely with other tax advocacy groups to create a model statute.
The work group developed a draft model rule for sourcing income of investment partnerships. The draft rule, stated below, is intended to:
- Be generally consistent with state sourcing and other pass-through tax principles,
- Create a safe harbor that is not susceptible to abuse, and,
- Designate certain investment income derived from certain partnerships which, if characterized properly at the partnership level would, if earned directly by the partners, be treated by states as taxable in an individual partner’s state of residency. Note that to accomplish this, the partnership and the income need to be properly defined and qualified. (MTC draft rule)
During the work group’s recent update to the Uniformity Committee, the members presented details of the direction the group is pursuing, as they conclude their work on investment partnerships. The work group members intend to focus next on developing basic sourcing rules involving income from complex partnership structures, with examples of how the rules would impact tax in a state. The impact would vary depending on at which level in a complex tiered structure the income results in revenue recognition. To analyze the different impacts, the work group will apply sourcing rules under several scenarios to compare the tax impact at the various tiers in a complex partnership group structure. The group will report its findings on complex sourcing rules to the Uniformity Committee in September.
If you’re a member of a complex group investment partnership, contact one of the Ryan experts listed below today. Ryan can assist you in identifying how the new rules may impact you or your business.
TECHNICAL INFORMATION CONTACTS:
Brian Stromen
Principal
Ryan
763.445.4200
brian.stromen@ryan.com
Mary Bernard
Manager
Ryan
401.272.3363
mary.bernard@ryan.com
The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at info@ryan.com.