Articles Tagged with “corporate income tax”

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Whenever a new potential client comes to your office, it is good practice to run a quick check. Among the initial checks that should be made by a Florida tax attorney or other tax professional is to make sure the person you are speaking to is an officer of the corporation and the corporation is in good standing with its state of incorporation. On May 7, 2013, the United States Tax Court issued an opinion that can be used as a reminder for a tax lawyer or other professional in John C. Hom & Associates, Inc. v. Commissioner, 140 T.C. No 11 (May 7, 2013).
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The story starts with a company incorporating in California in 1986. The company had its rights and privileges to do business in California suspended in March, 2004 through April 13, 2012. On March 16, 2011, the IRS issued a notice of deficiency for over $200,000 in tax, penalties, and interest. On June 13, 2011, the petition was filed to challenge the assessment, and the IRS moved to dismiss the case because the corporation was suspended. The Taxpayer pointed out this fact and argued that, in addition, the notice had the wrong address to challenge the assessment on its face. Assuming the Taxpayer was suspended at the time of filing the Petition, and the IRS sent the notice to the wrong address, who wins?
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Many individual and corporate taxpayers are becoming annoyed with rising tax rates. For many wealthy Americans, income is taxed federally and by many states at the corporate level and then taxed again when the income is distributed to the shareholders of the corporation. Without even taking into account state and local taxes, most corporations are taxed a 35% rate and, with the recent tax increases, individuals are taxed at a rate over 40%. This has led to some creative tax planning in the recent years.

One recent development, as explained in more detail at CNBC.com, is a move by a number of corporations, namely private prisons, casinos, and billboards, to convert to a Real Estate Investment Trust (“REIT”). The REIT was developed as a vehicle for investors to pool money and share costs when investing in a diversified real estate portfolio. In short, a REIT is an investment pool in which a company (a trust) essentially manages the money of its investors and returns the profits to the investors. For more information about a REIT, please click here to learn about NNN, the REIT that once employed me.

The REIT has been around for decades and was largely used by only for real estate holdings. Recently, companies such as the Correction Corporation of America, a large prison company, has received the IRS’s blessing to be reclassified as a REIT. Other companies, such as Penn National Gaming, M Resort Spa and Casino, and Geo Group have also received the ok to be designated as a REIT.

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It is difficult to change the channel without hearing some development this week in the Boston Marathon explosion. This week in April, 2013 has been mostly a dark one. However, as we tend to in the face of crisis, our nation has shown its resolve and unity. While it can never replace the loss of life and the feeling of fear that stemmed from the incident, there have been some rays of sunshine. Among the acts of good faith to those struck by this horrible event are the IRS and the Massachusetts Department of Revenue. Each has shown some leniency for its respective filing deadlines.

With tax day marked as April 15, 2013, the IRS allowed for an extension as a result of the tragedy. Specifically, the IRS has allowed for a three-month filing and payment extension to Bostonians and others affected by the explosions. Consequently, no filings or payments will be due if completed by July 15, 2013. The three-month leniency applies to all individuals who are residents of Suffolk County, Massachusetts, including the City of Boston. The IRS also allowed an extension for victims and their families, first responders, and those who had preparers that were adversely affected.

Piggybacking on this idea was the Massachusetts Department of Revenue for state and local tax filings. Massachusetts announced that state and local tax payers have another week to file their returns. That means any person or business that has personal, business, or corporate income tax returns has at least until April 23, 2013 to file their returns.

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In 2012, West Virginia (home of MBNA) went after ConAgra Foods, Inc. ConAgra is a trademark holding company and wholly owned by a Nebraska subsidiary of CA foods. ConAgra held valuable trademarks and trade names from affiliated and unrelated entities such as Armour, Butterball, Healthy Choice, Kid Cuisine, Morton, and Swift, and licensed them back for a fee. With the recently decided KFC and MBNA on the back burner, West Virginia seemed destined to rule in the state’s favor on a seemingly similar transaction. Surprisingly, the West Virginia Supreme Court went the other direction.

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In 2011 a devastating taxpayer case in the SALT corporate income tax was decided. This slightly different spin on the case was introduced by a famous colonel and his chicken company. The company, known as Kentucky Fried Chicken, was incorporated in Delaware with a headquarters in Kentucky. KFC.jpgKFC licensed its valuable name to franchisors nationwide, including into Iowa. Slightly different than the related trademark license in the Geoffrey cases, KFC licensed its trademark to franchisor’s who independently owned KFC’s. Certainly the use of the KFC trademark in Iowa could not force Kentucky based KFC to pay Iowa income tax could it?

The Supreme Court of Iowa ruled that it could in 2010. Lacking physical presence, the court said KFC was economically present in Iowa because its trademarks were firmly rooted in Iowa. Further, the court opined that such intangibles were functionally equivalent of physical presence. The court concluded “the intangibles in Iowa” provided sufficient nexus. How an intangible trademark could be firmly rooted anywhere or be present in Iowa is beyond me. In its liberal reading of Quill the court stated that physical presence was limited to sales and use tax cases because the burdens of filing income tax are far less than that of a sales and use tax. Following the logic in this case, there is no telling how far states can go to tax foreign trademark holding companies.

About the author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law firm Moffa, Gainor, & Sutton, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, and Florida probate. Mr. Donnini is currently pursuing his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact him via email or phone listed on this page.

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From the days of Geoffrey through 2011, the states were largely victorious in corporate income tax nexus cases involving “foreign” holding companies. For example, Geoffrey itself lost in Louisiana (2008) (Bridges v. Geoffrey, Inc., 984 So. 2d 115 (La. Ct. App. 2008)), Massachusetts (2009) (Geoffrey, Inc. v. Comm’r of Revenue, 899 N.E. 2d 87 (Mass. 2009)), and Oklahoma (2005) (Geoffrey, Inc. v. Oklahoma Tax Comm’n, 132 P.3d 632 (Okla. Ct. App. 2005)). Other companies such as Lanco Inc in New Jersey (Lanco, Inc. v. Director, 908 A. 2d 176 (N.J. 2006)), Abercrombie & Fitch in North Carolina (A&F Trademarks, Inc. v. Tolson, 605 SE 2d 187 (N.C. App. 2004)), and The Classics Chicago, Inc. in Maryland (The Classics Chicago, Inc. v. Comptroller, 985 A 2d 593 (Md. Ct. Speical App. 2010)) all marked taxpayer losses.
In 2006, the Geoffrey concept was extended by the Supreme Court of West Virginia in Tax Commissioner v. MBNA America Bank, 640 SE 2d 226 (W. Va. 2006).

In MBNA, a credit card company with its headquarters in Delaware had no real or tangible property in West Virginia. For the two years of corporate income tax at issue, MBNA had gross receipts totaling over $18 million. The court concluded that while physical presence was required for sales and use tax purposes, it was not for corporate income tax purposes.
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With sparse logic and a few “authoritative law review” articles, the court opined that Quill was limited by the following language:

Although in our cases subsequent to Bellas Hess and concerning other types of taxes we have not adopted a similar bright-line, physical-presence requirement, our reasoning in those cases does not compel that we now reject the rule that Bellas Hess established in the area of sales and use taxes.

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