timothy a. gustafson and nicole l. johnson, co-editors...

Morrison amp Foerster News Timothy A Gustafson and Nicole L Johnson Co-Editors Winter 2012

(Continued on page 2)

Should Filmmakers Be Content to Have Taxing Authorities Judge Their ContentBy Hollis L Hyans and Open Weaver BanksThe vast majority of states have enacted tax incentive programs for qualifying motion picture and television productions These tax incentives are available in many forms including income tax credits (typically transferable) sales tax exemptions hotel tax exemptions and cash rebates of qualified expenditures Although the features of each statersquos program vary the common purpose of these programs is to spur local economic growth by incentivizing the motion picture and television industries to locate their productions in the state offering an incentive program

So what happens when a production company meets all the eligibility requirements for a tax credit but cannot get past the statersquos censors As we learned recently in New Jersey the shooting location of the reality television series Jersey Shore tax credits might be revoked if the state decides that the television program makes the state look bad1 On September 26 2011 Governor Christie informed the New Jersey Economic Development Authority that he vetoed its award of $420000 in tax

InsightsState + Local Tax

3 Upcoming 2012 Speaking Engagements7 Individual Liability for Company Taxes ByMitchellANewmarkandRichardCCall

11 Potential Unity and Business Income in California ByEricJCoffillandTimothyAGustafson

16 Managing Withholding for a Mobile Workforce Special Treatment of Deferred Compensation and Stock Options

ByPaulHFrankelandDebraSHerman

20 Californias Property Tax Exclusion for Solar Energy Power PlantsWaiting to Sell Until New Years Day Might Produce a Huge Hangover

ByPeterBKanter

Inside This Month

New York

Craig B Fields cfieldsmofocom

Paul H Frankel pfrankelmofocom

Hollis L Hyans hhyansmofocom

Mitchell A Newmark mnewmarkmofocom

R Gregory Roberts rrobertsmofocom

Irwin M Slomka islomkamofocom

Open Weaver Banks obanksmofocom

Debra S Herman dhermanmofocom

Roberta Moseley Nero rneromofocom

Amy F Nogid anogidmofocom

Michael A Pearl mpearlmofocom

Richard C Call rcallmofocom

Nicole L Johnson njohnsonmofocom

Bee-Seon Keum bkeummofocom

Rebecca M Ulich rulichmofocom

Kara M Kraman kkramanmofocom

San Francisco

Thomas H Steele tsteelemofocom

Andres Vallejo avallejomofocom

Peter B Kanter pkantermofocom

James P Kratochvill jkratochvillmofocom

Scott M Reiber sreibermofocom

Kirsten Wolff kwolffmofocom

Sacramento

Eric J Coffill ecoffillmofocom

Carley A Roberts crobertsmofocom

Timothy A Gustafson tgustafsonmofocom

Jenny Choi jennychoimofocom

Washington DC

Linda A Arnsbarger arnsbargermofocom

Philip M Tatarowicz ptatarowiczmofocom

Denver

Thomas H Steele tsteelemofocom

Los Angeles

Gary W Maeder gmaedermofocom

State + Local Tax Group

2

State + Local Tax Insights Winter 2012

creditstotheproducersofJersey Shore2GovernorChristieexplainedldquoIhavenointerestinpolicingthecontentofsuchprojectshoweverasChiefExecutiveIamdutyboundtoensurethattaxpayersarenotfootinga$420000billforaprojectwhichdoesnothingmorethanperpetuatemisconceptionsabouttheStateanditscitizensrdquo3

State Review of Motion Picture and Television Production Content

WhileGovernorChristiersquosvetooftheJersey ShoretaxcreditsmadenationalnewsNewJerseyisnottheonlystatethatreviewsthecontentofproductionsbeforegrantingtaxincentivesIn2010theNew York TimesreportedthestatementsofMichiganrsquosFilmCommissionerinconnectionwiththedenialoftaxincentivesforthemotionpictureThe WomanNotingthefilmrsquossubjectmatterldquonamelyrealisticcannibalismthegruesomeandgraphicallyviolentdepictionsdescribedinthescreenplayandtheexplicitnatureofthescriptrdquotheMichiganFilmCommissionerstatedldquo[t]hisfilmisunlikelytopromotetourisminMichiganortopresentorreflectMichiganinapositivelightrdquo4SimilarlytheTexasFilmCommissionrefusedtopay$175millionintaxincentivestotheproducersofthemotionpictureMachetecitingastatelawthatallowsthestatetorefusetopayincentivesforcontentthatportraysTexasorTexansinanegativefashion5

TheproducersofJersey ShorecouldnothaveanticipatedthattheirtaxcreditswouldberevokedbecauseNewJerseyrsquosincentiveprogramliketheprogramsin

moststatesdoesnotdisqualifyproductionsthatmakethestatelookbadHoweverahandfulofstateslikeTexashaveenactedsuchcriteriaintotheirlawsorcreatedsimilarstandardsintheirapplicationreviewguidelines6UtahrsquosMotionPictureIncentiveFundapplicationinstructionsprovidethatthestateisnotrequiredtograntincentivestoprojectsthatincludeldquoinappropriatecontentrdquoorldquocontentthatportraysUtahorResidentsofUtahinanegativewayrdquo7

InWisconsinaproductionwillnotqualifyifitwillhurtthereputationofthestate8AproductionwithcontentthatportraysWestVirginiainaldquosignificantlyderogatorymannerrdquoisineligibleforWestVirginiafilmcredits9WyominglimitsthedefinitionofaldquoqualifiedproductionrdquotofilmedentertainmentthatwouldlikelyencouragemembersofthepublictovisitthestateofWyoming10SimilarlyKentuckyrsquosprogramrequiresadeterminationthattheproductionwillnotnegativelyimpactthetourismindustryoftheCommonwealthandPennsylvaniarsquosapplicationguidelinesindicatethatthePennsylvaniaFilmOfficemayconsiderwhethertheprojectwilltendtofosterapositiveimageofPennsylvania11

Themajorityofstatemotionpictureandtelevisionproductionincentiveprogramshavenotopenlyexpressedasimilarconcernaboutproductionsthatmayportray

astateinanegativefashionHoweverstatesnormallycarveoutbroadcategoriesofproductionsthatdonotqualifyfortaxincentivessuchasnewssportseventsawardprogramsandevendocumentariesandrealitytelevisionshows12Itisalsotypicalforincentiveprogramstocontainsomemannerofprohibitiononproductionsthatcontainsexuallyexplicitorobscenematerial13ByrequiringtaxincentiveapplicantstosubmitascriptscreenplayorsynopsisoftheproductionstatefilmcommissionschargedwithadministeringincentiveprogramsarealsoabletoreviewthecontentofproposedmotionpictureandtelevisionproductionsSomestateincentiveprogramsactuallyrequireproductioncompaniestosubmitacopyofthefinalversionoftheproductiontoqualifyfortaxincentives14

First Amendment Principles

AlthoughtheproducersofJersey ShoremayhavemorethanoneavenueforchallengingGovernorChristiersquosvetooftheirtaxcreditstheinterestingquestionwithmultistateramificationsiswhetherGovernorChristiecrossedaFirstAmendmentlinewhenhedeniedtaxcreditstoJersey Shorebaseduponthecontentoftheproduction15TheFirstAmendmentprovidesthatCongressshallmakenolawabridgingthefreedomofspeechandismadeapplicabletothestatesthroughtheFourteenthAmendment16FirstAmendmentjurisprudencerecognizes

UnderoursystemofgovernmentthereisanaccommodationforthewidestvarietiesoftastesandideasWhatisgoodliteraturewhathaseducationalvaluewhatisrefinedpublicinformationwhatisgoodartvarieswithindividualsasitdoesfromonegenerationtoanotherButarequirementthatliteratureorartconformtosomenormprescribedbyanofficialsmacksofanideologyforeigntooursystem17

IfweassumethattheFirstAmendmentprotectstherightofafilmmakertoproduceamotionpicturethatfeaturescannibalismorthatportraysTexasinanegative

Tax Incentives(Continued from page 1)


ToensurecompliancewithrequirementsimposedbytheIRSMorrisonampFoersterLLPinformsyouthatifanyadviceconcerningoneormoreUSfederaltaxissuesiscontainedinthispublicationsuchadviceisnotintendedorwrittentobeusedandcannotbeusedforthepurposeof(i)avoidingpenaltiesundertheInternalRevenueCodeor(ii)promotingmarketingorrecommendingtoanotherpartyanytransactionormatteraddressedherein

THE TExAS FILM COMMISSION rEFUSED TO PAY $175 MILLION

IN TAx INCENTIvES TO THE PrODUCErS

OF THE MOTION PICTUrE MACheTe CITING A STATE LAW THAT ALLOWS THE STATE TO rEFUSE

TO PAY INCENTIvES FOr CONTENT THAT

POrTrAYS TExAS Or TExANS IN A NEGATIvE

FASHION

3

Winter 2012State + Local Tax Insights

fashionorbothisthatrightviolatedbyTexasrsquorefusaltoawardtaxincentivestothatfilmmakerWhataboutrestrictionsinstatestatutesdenyingtaxincentiveprogrameligibilityforproductionsthataresexuallyexplicitorcontainobscenematerialIstheanswerdifferentifstatesusealdquocarrotrdquoratherthanaldquostickrdquoForexampleFloridaoffersanadditional5taxcreditforldquofamily-friendlyproductionsrdquo18

Obscenity Is Not Protected Speech

IntheareaofFirstAmendmentjurisprudenceonethingthatisclearisthatobscenityisnotprotectedspeech19NonethelesstheSupremeCourtrecognizesthatstatestatutesdesignedtoregulateobscenematerialsmustbecarefullylimited20ProvidedthatstatesadopttheproperFirstAmendmentstandardsfordeterminingwhetherparticularmaterialisobscenemotionpictureandtelevisionproductionincentiveprogramsthatdenytaxbenefitstoproductionscontainingobscenematerialareprobablyfaciallyconstitutional21Inanindividualcasehoweveritwouldbenecessarytoconsidertheapplicationoftherelevant

standardtotheproductionseekingtoqualifyfortaxbenefits

ManystatesrelyonthefederalstandardsetforthbytheChildProtectionandObscenityEnforcementActof1988todefinethecategoryofsexuallyexplicitcontentthatisnoteligibleformotionpictureandtelevisionproductionincentives22Otherstateshavetheirowndefinitionofldquoobscenematerialrdquoorldquoobscenecontentrdquo23AnydefinitionwilllikelybeinterpretedandappliedbyarelativelysmallgroupofpeoplewhoformthelocalfilmcommissionthatischargedwithreviewingandapprovingtaxincentiveapplicationsAsevidencedbyarecentscandalinIowarsquosFilmOfficeinvolvingimproperlyawarded



January 17 Tax Executives Institute (TEI) Dallas Texas EricJCoffillHollisLHyans

January 18 Tristate CPA Conference New York New York PaulHFrankel

January 23 2012 Council on State Taxation (COST) Basics School Atlanta Georgia AndresVallejo

January 24 New York State Bar Association New York New York HollisLHyans

January 25 Ohio Tax Conference Columbus Ohio PaulHFrankel

February 2 ndash 3 The National Multistate Tax Symposium Orlando Florida CraigBFieldsPaulHFrankelHollisLHyans

February 17 ABA Section of Taxation 2012 Midyear Meeting San Diego California DebraSHerman

February 29 New York City Bar Association New York New York HollisLHyansDebraSHerman

March 5 Council on State Taxation (COST) Sales Tax Conference Austin Texas PaulHFrankel

March 19 ndash 21 2012 ABAIPT Advanced Income Tax Seminar New Orleans Louisiana CraigBFieldsPaulHFrankel

May 3 Council on State Taxation (COST) Advanced Tax School Atlanta Georgia PaulHFrankel

May 11 New Jersey Tax Executives Institute (TEI) State Tax Day Morristown New Jersey PaulHFrankel

June 14 University of Wisconsin SALT Conference Milwaukee Wisconsin PaulHFrankel

August 7 Georgetown SALT Conference Washington DC PaulHFrankel

Upcoming 2012 Speaking Engagements

4


creditsstatefilmcommissionshaveatremendousamountofdiscretionandaresusceptibletoerrorsinjudgment24

Supreme Court Cases Considering the First Amendment and State Taxes

OutsideofobscenematerialthestateofconstitutionallawwhenFirstAmendmentrightsareimpactedbygovernmentfunding(ordenialthereof)issomewhatunclearOnoneendofthespectrumaretwoUnitedStatesSupremeCourtcasesextendingFirstAmendmentprotectionintheareaoftaxexemptions

InSpeiser v RandalltheCourtreviewedaCaliforniaruleenactedin1954thatrequiredveteransseekingpropertytaxexemptionstosignadeclarationstatingthattheydidnotadvocatetheforcibleoverthrowoftheGovernmentoftheUnitedStatesorofCalifornia25VeteranswhorefusedtoexecutetheoathweredeniedtheexemptionTheSupremeCourtstruckdowntheoathrequirementstatingldquowhentheconstitutionalrighttospeakissoughttobedeterredbyaStatersquosgeneraltaxingprogramdueprocessdemandsthatthespeechbeunencumbereduntiltheStatecomesforwardwithsufficientprooftojustifyitsinhibitionrdquo26InSpeisertheSupremeCourtconcludedthatCalifornialackedacompellinginterestthatwouldjustifysuppressingthespeechatissueInreachingthisdecisiontheSupremeCourtspecificallyrejectedCaliforniarsquosargumentthatbecauseataxexemptionisaprivilegeorbountyitsdenialdoesnotinfringespeech27TheSupremeCourtstatedthatldquo[to]denyanexemptiontoclaimantswhoengageincertainformsofspeechisineffecttopenalizethemforsuchspeechItsdeterrenteffectisthesameasifthestateweretofinethemforthisspeechrdquo28

NearlythirtyyearslaterinArkansas Writersrsquo Project Inc v RaglandtheSupremeCourtheldthatArkansasrsquoselectiveapplicationofitssalestaxtomagazinesviolatedtheFirstAmendmentrsquosguaranteeoffreedomofthe

pressbecauseitdifferentiatedbetweenmagazinesbasedontheircontent29TheArkansasstatuteprovidedanexemptionforreligiousprofessionaltradeandsportspublicationsAccordingtotheSupremeCourtldquo[r]egulationswhichpermittheGovernmenttodiscriminateonthebasisofthecontent

ofthemessagecannotbetoleratedundertheFirstAmendmentrdquo30InordertojustifysuchdifferentialtaxationtheSupremeCourtstatedthatArkansasmustshowthatitsregulationwasnecessarytoserveacompellingstateinterestandwasnarrowlydrawntoachievethatend31Arkansaswasunabletomeetthisstandard

Arkansas Writersrsquo ProjectwastechnicallynotaldquofreedomofspeechrdquocaseRathertheSupremeCourtdecidedthattheArkansassalestaxschemeviolatedfreedomofpressNonethelessArkansas Writersrsquo Project iscitedincasesevaluatingfreedomofspeechclaimsandstandsfortheprinciplethatstategovernmentswanderintodangerousterritorywhenthegrantofataxexemptionrequiresgovernmentscrutinyofthecontentofspeech32ThereasoningofArkansas Writersrsquo ProjectisparticularlyrelevanttostatemotionpictureandtelevisionproductionincentiveprogramsbecausetheSupremeCourthasheldthat

expressionbymeansofmotionpicturesisincludedwithinboththefreespeechandthefreepressguaranteesoftheFirstandFourteenthAmendments33

Supreme Court Cases Considering the First Amendment and Government Spending

Ontheotherendofthespectrumarenon-taxcasesinwhichtheSupremeCourthasupheldgovernmentreviewofthecontentofspeechwhenthegovernmentisthespeakerorwhenthegovernmentactsasapatronAttheoutsetitisimportanttonotethatthefollowingcasesbothinvolvedfacialchallengestolawsinvolvingspeechandthereforethechallengersoftheselawsfacedaheavierburdenWedonotknowhowthesecaseswouldhavebeendecidedifachallengerpresentedanldquoasappliedrdquosituationfortheSupremeCourtrsquosreview

InRust v SullivantheSupremeCourtconsideredafacialchallengetofederalregulationsthatprohibitedcounselingconcerningtheuseofabortioninfederallyfundedfamilyplanningprograms34PetitionersgranteesanddoctorswhosupervisedthefamilyplanningfundsarguedthattheregulationsviolatedtheirFirstAmendmentrightsbyimpermissiblyimposingviewpointdiscriminatoryconditionsongovernmentsubsidiesandthuspenalizingcertainspeech35Inacontroversial5-4decisiontheSupremeCourtrejectedtheFirstAmendmentchallengefindingldquo[t]heGovernmentcanwithoutviolatingtheConstitutionselectivelyfundaprogramtoencouragecertainactivitiesitbelievestobeinthepublicinterestwithoutatthesametimefundinganalternativeprogramwhichseekstodealwiththeprobleminanotherwayrdquo36

RustisdistinguishablefromtheJersey ShoresituationbecauseNewJersey



Morrison amp Foersterrsquos State amp Local Tax Group would like to welcome Debra S Herman Ms Herman joins us as Of Counsel in the New York office

MOFO ATTOrNEY NEWS

STATE GOvErNMENTS WANDEr INTO DANGErOUS

TErrITOrY WHEN THE GrANT OF A TAx

ExEMPTION rEqUIrES GOvErNMENT

SCrUTINY OF THE CONTENT OF SPEECH

5


didnotenactitsfilmproductioncreditinordertoestablishaprogramforfundingmotionpictureandtelevisionproductionsthatmakeNewJerseylookgoodNewJerseyrsquosincentiveprogramlikethoseofotherstateswasenactedtospureconomicdevelopmentinthestate

IfNewJerseydecidestohireaproductioncompanytomakeafilmfortheexpresspurposeofportrayingNewJerseyinapositivelightthenunderRustNewJerseycanexertsomelevelofcontroloverthecontentofthefilmHoweverthisdoesnotmeanthatstatessuchasTexasorUtahcanconstitutionallydenyfilmcreditstoproductionsthatportraythestatesortheirresidentsinanegativemannersimplybecausetheirincentiveprogramshaveidentifiedsuchcontentasabasisfordenialofincentivesThedecisiveinquiryshouldbewhethertheincentiveprogramrepresentsldquogovernmentspeechrdquoinwhichthestateshouldhavesomesayaboutthemessagethatisbeingconveyed

InNational Endowment for the Arts v FinleytheSupremeCourtuphelda1990amendmenttofederallawrequiringthechairpersonoftheNationalEndowmentfortheArts(ldquoNEArdquo)totakeintoconsiderationgeneralstandardsofdecencyandrespectforthediversebeliefsandvaluesoftheAmericanpublicwhenjudgingtheartisticmeritofgrantapplications37ThelegislativehistoryindicatedthatthechangeinlawwasatleastinpartduetoaCongressionalreactiontotheuseofNEAgrantmoneytofunda1989retrospectiveoftheworksofcontroversialphotographerRobertMapplethorpe

OriginallyinFinleyagroupofartistswhoweredeniedNEAgrantschallengedthelawasbeingbothunconstitutionalasappliedtothemaswellasunconstitutionalonitsfaceHoweverduringthecourseofthelitigationtheas

appliedconstitutionalclaimsweresettled(withtheplaintiffsreceivingtheamountofthevetoedgrantsdamagesandattorneyrsquosfees)andthecaseproceededsolelyasafacialchallengetothelawundertheFirstAmendment

ExpressingreluctancetoinvalidatelegislationonthebasisofitshypotheticalapplicationtosituationsnotbeforetheCourttheSupremeCourtinFinleyfoundthatthenewrequirementtotake into consideration general standards of decencyseemedunlikelytointroduceanygreaterelementofselectivitythanthedeterminationofldquoartisticexcellencerdquoalreadyrequiredbythelawforthejudgingofapplicationsforartisticgrants38TheSupremeCourtalsorecognizedthatanycontent-basedconsiderationsthatmaybetakenintoaccountintheNEAgrant-makingprocessareaconsequenceofthesubjectivenatureofartsfunding39TheNEAhaslimitedresourcesanditmustdenythemajorityofthegrantapplicationsthatitreceivesincludingmanythatproposeartisticallyexcellentprojects40UltimatelythemajorityopinioninFinleyheldthatthegovernmentmaytakeintoconsiderationgeneralstandardsofdecencyandrespectforthediversebeliefsandvaluesoftheAmericanpublicinconnectionwithallocatingcompetitivefundingeventhoughsuchcriteriamightbeimpermissibleweredirectregulationofspeechoracriminalpenaltyatstakebecauseCongresshaswidelatitudetosetspendingpriorities41IneffectthefederalgovernmentinFinleywasldquoactingaspatronratherthanassovereignrdquo42

AfterFinleycanaproductioncompanychallengethedenialofspecifictaxincentivesbasedonthecontentoftheproductionTheanswershouldbeldquoyesrdquoWhileFinleyacknowledgesthatsomelevelofcontentreviewispermissiblewhenthegovernmentfundstheartsstatemotionpictureandtelevisionincentivesprogramswerenotenactedtosupporttheartsbuttoencouragethecreationofjobsandspendingintheenactingstateNewJerseyshouldnotbeconsideredaldquopatronrdquoforJersey ShoreoranyotherproductionapplyingforNewJerseytaxcreditsTheendresultmaybeanartisticproductionbutthepurposeofmotionpictureandtelevisionincentiveprogramsistobringaproductiontothestatetofurtherthestatersquosowneconomicinterestsThuseligibilityforcreditsshouldbebasedonsuchfactorsasthenumberofpersonsemployedintheproductionandspendinglevelswithinthestatenotonthecontentoftheproduction

AdditionallyakeycomponentoftheFinleyanalysiswasthelimitednumberofgrantsavailableforNEAapplicantsandthefactthatmanyifnotmostapplicantswererejectedforwhollysubjectivereasonsAlthoughstatesmayhavemoreapplicantsforfilmtaxcreditsthantheycanhonoritisnotuncommonforstatestoadministertheirprogramsonafirst-comefirst-servedbasis43ForexampleinNewMexicotaxcreditsareawardedonafirst-comefirstservedbasisandwhentheprogramrsquos$50millioncapisreachedtheremainingamountsareplacedatthefrontofaqueueandawardedinthenextfiscalyear44

StateslikeNewMexicodonotlookattheentirepoolofapplicantstodeterminewhichproductionsaremostworthyofagrantaswasthecaseinFinleyThusthehighlyselectivenatureoftheNEAgrantsthatmadecontentreviewapermissiblefactorinFinleydoesnotexistinmotionpictureandtelevisionproductionincentiveprogramswithafirst-comefirst-servedfeature

Evenwhenthestatemaybeconsideredapatronoftheartsapost-FinleydecisioninvolvinganasappliedchallengetothedenialofartsfundingbyNewYorkCityinterpretedFinleyasupholdingthe



NEW JErSEYrsquoS INCENTIvE PrOGrAM LIkE THOSE OF OTHEr STATES WAS ENACTED

TO SPUr ECONOMIC DEvELOPMENT IN THE STATE

6


ldquodecencyrdquoandldquorespectrdquoconsiderationsonlybyreadingthemontheirfaceasnotpermittingviewpointdiscrimination45Inthatcasethen-MayorGiulianiadvancedargumentssimilartothoseraisedbyGovernorChristiestatingthatNewYorkCitydidnothavetofundanartexhibitattheBrooklynMuseumthatitfoundtobeoffensiveandthatwhiletheexhibitcouldbeshownprivatelyldquothetaxpayersdonrsquothavetopayforitrdquo46ThefederaldistrictcourtrejectedthisargumentconcludingthatwherethedenialofabenefitsubsidyorcontractismotivatedbyadesiretosuppressspeechinviolationoftheFirstAmendmentthatdenialwillbeenjoined47

Conclusion

UntilcourtsareaskedtodecidetheextentofFirstAmendmentprotectionintheareaofstatemotionpictureandtelevisionproductionincentiveprogramstheindustrywillhavetooperateinanareaofuncertaintyInthemeantimethelessonforfilmmakerswhowanttoportrayTexasorUtahinanegativefashionistofilmyourmovieinNewJerseyMaybethereisapartforGovernorChristieinaremakeofA Fistful of DollarsItworkedforRonaldReaganwhynotChrisChristie

1 NewJerseysuspendeditsfilmproductiontaxcreditprogramforfiscalyear2011NJStatAnnsect5410A-539aThetemporarysuspensionoftaxcreditsappliestotheauthorizationofnewcreditsandtheapplicationofpreviouslyauthorizedcreditsinthe2011fiscalyearItdoesnothoweveraffectthecarryoverofunusedtaxcreditspreviouslyallowedorwhichmaybeallowedfollowingthesuspensionAssemblyBudgetCommitteeStatementtoAssemblyNo3011(June242010)

2 httpwwwstatenjusgovernornewsnews552011approved20110926bhtml

3 Id

4 MichaelCieplyState Backing Films Says Cannibal is Deal-Breakerny timesJune142010httpwwwnytimescom20100615movies15creditshtml

5 RussellGoldVigilante Justice Texas Refuses to Pay lsquoMachetersquo Producerswall street journalDec92010httpblogswsjcomwashwire20101209vigilante-justice-texas-refuses-to-pay-machete-producers

6 TexGovrsquotCodeAnnsect485022(e)

7 StateofUtahMotionPictureIncentiveFundFiscal

Year2011InformationandApplicationhttpfilmutahgovdocumentsMPIF-FY2011pdf

8 WisAdminCodesect13330(4)

9 WVaCodesect11-13X-3(b)(8)(F)

10 WyoStatAnnsect9-12-403(a)(v)

11 KyRevStatAnnsect148546(9)FilmTaxCreditProgramGuidelinesOctober2009httpfilminpacomwp-contentuploads200907Film-Tax-Credit_Guidelines-09pdf

12 SeeegCalRevampTaxCodesect23685(b)(15)(D)Thestatutestatesthat

ldquoQualifiedmotionpicturerdquoshallnotincludecommercialadvertisingmusicvideosamotionpictureproducedforprivatenoncommercialusesuchasweddingsgraduationsoraspartofaneducationalcourseandmadebystudentsanewsprogramcurrenteventsorpubliceventsprogramtalkshowgameshowsportingeventoractivityawardsshowtelethonorotherproductionthatsolicitsfundsrealitytelevisionprogramclip-basedprogrammingifmorethan50percentofthecontentiscomprisedoflicensedfootagedocumentariesvarietyprogramsdaytimedramasstripshowsone-halfhour(airtime)episodictelevisionshowsoranyproductionthatfallswithintherecordkeepingrequirementsofSection2257ofTitle18oftheUnitedStatesCode

Id

13 SeeegNJStatAnnsect5410A-539e(excludingproductionscontainingobscenematerialasdefinedunderstatelawfromthedefinitionofldquofilmrdquo)

14 SeeegConnecticutguidelinespublishedbytheOfficeofFilmTelevisionampDigitalMediahttpctgovecdlibecd3-5-10_lMediaMotionPictureTaxCreditGuidelinespdf(requiringsubmissionofacopyofthefinalversionoftheproductioninDVDformat)InNorthCarolinaqualifyingexpensesaresubjecttoauditbeforethecreditisallowedNCGenStatsect105-13047(d)AccordingtoNorthCarolinaFilmOfficeguidelinesacopyoftheproduction(rough-cutorfinishedcopyDVD)willberequestedatauditSeehttpwwwncfilmcomuploadsdownloadsFilm20Incentive20DocumentsNCFilmIncentive_Rev2010pdf

15 ItisquestionablewhetherGovernorChristiehasavetopowertorevokefilmcreditsNewJerseyregulationsprovidethatonlythemembersoftheNewJerseyEconomicDevelopmentAuthority(ldquoEDArdquo)candenyanapplicantrsquoseligibilityfortheprogramNJAdminCodesect187-3B5(c)WhenthemembersoftheEDAdenyarequestforfilmcreditstheirdecisionissubmittedtotheGovernorandtheEDArsquosactioniseffective10daysaftertheGovernorrsquosreceiptoftheminutesprovidednovetohasbeenissuedNJAdminCodesect187-3B5(d)BasedontheplainlanguageoftheregulationtheGovernordidnothavethepowertovetothegrantofthefilmcredittoJersey ShorersquosproducersByregulationheonlyhadthepowertovetoafilmcreditdenialbytheEDAHoweverinvetoingtheJersey ShorecreditsGovernorChristierelieduponaconflictingstatuteprovidinggeneralvetopowerforactionstakenatEDAmeetingsNJStatAnnsect341B-4(i)

16 Gitlow v New York268US652666(1925)

17 Hannegan v Esquire327US146157(1946)

18 FlaStatsect2881254(4)(b)(4)Thestatutestatesthat

family-friendlyproductionsarethosethathavecross-generationalappealwouldbeconsideredsuitableforviewingbychildrenage5orolderareappropriateinthemecontentandlanguageforabroadfamilyaudienceembodyaresponsibleresolutionofissuesanddonotexhibitorimplyanyactofsmokingsexnudityorvulgarorprofanelanguage

Id

19 Miller v California413US1523(1973)

20 Id

21 AccordingtotheSupremeCourtthestandardsfordeterminingwhethermaterialisobsceneare(a)whethertheaveragepersonapplyingcontemporarycommunitystandardswouldfindthattheworktakenasawholeappealstotheprurientinterest(b)whethertheworkdepictsordescribesinapatentlyoffensivewaysexualconductspecificallydefinedbytheapplicablestatelawand(c)whethertheworktakenasawholelacksseriousliteraryartisticpoliticalorscientificvalueIdat24

22 SeeegAlaCodesect41-7A-42(8)(b)ArkCodeAnnsect15-4-2003(8)(b)(iv)CalRevampTaxCodesect1705385(b)(15)(D)ConnGenStatsect12-217jj(a)(3)(B)IllCompStatsect1610(7)MeRevStatAnnsect13090-L(2-A)(D)(6)MdCodeAnnTax-Gensect10-729(a)(4)MichCompLawsAnnsect207803(j)(1)OhioRevCodeAnnsect12285(A)(5)RIGenLawssect44-312-2(4)andSCCodeAnnsect12-62-20(3)

23 SeeegFlaStatsect2881254(1)(i)(2)IndCodesect6-31-32-5(c)IowaCodesect15393(4)KyRevStatAnnsect148542(15)MoRevStatsect135750(1)(2)(h)MontCodeAnnsect15-31-903(2)(b)(i)andPaStatAnnsect8702-D

24 OnOctober182011anIowaDistrictCourtsentencedtheformerdirectoroftheIowaFilmOfficetotwoyearsprobationforfeloniousmisconductinofficearisinginconnectionwithhisattemptstosecuretaxincentivesforamotionpictureproductioncompanyIowa v WheelerIowaDistCtNoCR-FECR-243355(Oct182011)

25 Speiser v Randall357US513(1958)

26 Idat528-529

27 Idat518

28 Id

29 Arkansas Writersrsquo Project Inc v Ragland481US221(1987)

30 Idat230

31 Idat221

32 SeeegSimon amp Schuster vMembers of the New York State Crime Victims Board502US105115(1991)

33 Joseph Burstyn vWilson343US495502(1952)

34 Rust vSullivan500US173(1991)

35 Idat192

36 Idat193

37 National Endowment for the Arts v Finley524US569(1998)

38 Idat584

39 Idat585

40 Id

41 Idat587-88

42 Idat589(whereintheCourtalsodeniedtheFinleyplaintiffsrsquovaguenesschallengestothenewlaw)

43 SeeegArkStatAnnsect15-4-2008(c)(2)CalRevampTaxCodesect23685(g)(1)(D)FlaStatsect2881254(4)(a)WVaCodeStRsect110-13X-42andWisAdminCodesect13334(1)(c)

44 httpwwwnmfilmcomfilmingdownloadsnm25PercentTaxCreditpdf

45 The Brooklyn Institute of Arts and Sciences vCity of New York64FSupp2d184202(EDNY1999)

46 Idat200

47 Id


7


IndividualsthathaveldquoresponsiblerdquopositionsinacompanycouldbefoundtobepersonallyliableforthecompanyrsquosunpaidtaxesincertainstatesStatetaxingjurisdictionsareincreasinglyturningtoresponsiblepersonlawstocollectunpaidliabilities1ThistrendisdueinparttotheincreaseincompanybankruptciesduringthelastfewyearsFrom2007to2010thenumberofUScompaniesfilingforChapter7orChapter11bankruptcyalmostdoubled2

ResponsiblepersonliabilitymayapplyinthecontextofsalesandusetaxeswithholdingtaxesandcorporateincometaxesaswellasallothertaxesadministeredbyastatetaxingauthorityAlthoughresponsiblepersonissuesoftenarisefollowingbankruptcysuchissuesmayalsopresentthemselvesfollowingdissolutionsandliquidationsThetopicisimportantforofficersmembersandemployeeswhomaybepersonallyliableforsuchtaxesaswellasforin-housetaxdepartmentpersonnelwhomanagetaxreportingandpayment

Inthisarticleweaddress(1)thetypesoftaxesandpenaltiesthatcouldbeatissue(2)thetypesofindividualswhohavebeenfoundtoberesponsiblepersonsand(3)proceduralissuesthatmayariseOnethingiscertainThatisthestatesarenotuniforminthetaxesforwhichanindividualcouldberesponsibletheindividualswhocouldberesponsiblepersonsandtheapplicableprocedure

Applicable Taxes and Penalties

StatesmayholdindividualsliableforsalesandusetaxeswithholdingtaxescorporateincometaxesandeveninsomestatesalltaxesadministeredbythestatetaxingagencyIndividualsmayalsoincurcivilpenaltiesorcriminalpenaltiesFurthermorejointandseveralliabilitymayapplytomultipleresponsiblepersonswithinacompany

Sales and Use Taxes

StateresponsiblepersonlawsoftenapplytosalesandusetaxesForexampleCaliforniaholdsresponsiblepersonsliableforldquoanyunpaid[salesanduse]taxesandinterestandpenaltiesonthosetaxesifthe[responsibleperson]willfullyfailstopay[those]taxesrdquo3InadditiontoliabilityfortheCaliforniasalestaxthatshouldhavebeencollectedonacompanyrsquossalesanindividualmayberesponsibleforsalesandusetaxesthatthecompanywasresponsibleforpayingasaconsumeronitspurchases4

OtherstatessuchasConnecticutNewJerseyNewYorkandNorthCarolinadonotuselanguagethatisassuccinctastheCalifornialanguagetoimposepersonalliabilitybutprovideforliabilitybyincludingresponsiblepersonsinthedefinitionsofpersonsrequiredtocollectsalesandusetax5

Withholding Taxes

ResponsiblepersonlawsmayalsoapplytowithholdingtaxesForexampletheMassachusettstaxstatutesprovidethatanyofficeroremployeeldquowhofailstowithhold[personalincometaxes]shallbepersonallyandindividuallyliablethereforetothecommonwealthrdquo6InSouthCarolinaaresponsiblepersonmaybeldquoindividuallyliablefortheamountof[personalincometax]notwithheldorpaidrdquo7

All Taxes

InsomestatesindividualsmaybeliableforalltaxesofacompanyForexampleVirginialawprovidesthatanyofficeroremployeewhowillfullyfailstopayldquoanytaxadministeredbytheDepartmentrdquomaybeliableforthetax8TheVirginiaDepartmentofTaxationadministers23taxesincludingcorporateincometaxsalesandusetaxwithholdingtaxbankfranchisetaxcigaretteexcisetaxandtelecommunicationstax9

TheColoradostatuteissimilarlywordedandappliesresponsiblepersonliabilitytoanytaxadministeredbyArticle2110TheColoradoDepartmentofRevenueadministers13taxesunderArticle21includingcorporateincometaxsalesandusetaxwithholdingtaxcigarettetaxandgasolinetax11

Penalties and Interest

Inadditiontothetaxliabilityastatemayprovidethatresponsiblepersonscanbeliableforpenaltiesandinterestthatwouldotherwisebeassessedonthecompany12ForexampleinthesalestaxcontextConnecticutexpresslyholdsresponsiblepersonsliableforthe15latefilingpenaltythatistypicallyassertedagainstthecompany13AresponsiblepersonunderConnecticutlawisalsoliableforinterestattherateof1permonthrunningfromtheduedate14

StatesmayalsoimposepenaltiesthatarespecifictoresponsiblepersonsIfaresponsiblepersonwillfullyfailstoremitColoradotaxessuchasthecorporateincometaxorsalesandusetaxaresponsiblepersonmaybesubjecttoapenaltyof150ofthetaxdue15

Joint and Several Liability

AstatemayassertjointandseveralliabilityforacompanyrsquosunpaidtaxesNewYorkcaselawprovidesforjointandseveralliabilityforresponsiblepersons16TheRhodeIslandDivisionofTaxationrsquospositionisalsooneofjointandseveralliability17

Individual Liability for Company TaxesBy Mitchell A Newmark and Richard C Call


[IN COLOrADO] A rESPONSIBLE PErSON MAY BE SUBJECT TO A

PENALTY OF 150 OF THE TAx DUE

8


ThusresponsiblepersonsmaybefullyliablefortheunpaidtaxestotheextentthatthetaxliabilityhasnotbeensatisfiedbyanotherresponsiblepersonForinstanceaNewYorkStateAdministrativeLawJudgerejectedtheargumentthatbecausetherewerethreeotherofficersthatwerealsoresponsibleforsubmittingtheunpaidtaxesaresponsiblepersonshouldbeheldliableforonly25ofacompanyrsquosunpaidNewYorkwithholdingtax18

Criminal Penalties

BeyondfinancialpenaltiessomestatesimposecriminalliabilityonresponsiblepersonswhoknowinglyfailtocollectandremitacompanyrsquostaxestothestateItisaClassDfelonyinIndianaforexampleforaresponsiblepersontoknowinglyfailtoremitsalestaxestothestate19AClassDfelonyinIndianamayresultinimprisonmentofuptothreeyears20

InVirginiaawillfulfailuretoremitsalesorwithholdingtaxcouldresultinanindividualbeingfoundguiltyofamisdemeanor21CertainpersonswhowillfullyfailtofileaWisconsincorporateincometaxreturnmaybeguiltyofamisdemeanorinthatstate22

Who Could Be a Responsible Person

ThestatesvaryintheirdefinitionsofaresponsiblepersonThedeterminationofwhoisaresponsiblepersonmaydependmerelyonthepersonrsquostitleormaybeafact-intensiveinquiry

Title-Based Liability

SomestatesconsideronlyanindividualrsquostitleinacompanytodeterminepotentialindividualresponsibilityStatesmayalsolooktowhetheranindividualisapartnerormemberinaflow-throughentity(forincometaxes)todeterminewhethertheindividualcouldbeliableforunpaidtaxes

ForexampletheMarylandstatutesextendtheliabilityforMarylandsalesandusetaxestoldquoanypresidentvicepresidentortreasurerrdquo23TheMarylandstatutesdonotcontainlanguagethatwouldrequiresuchofficerstooverseeormanagefinancialortaxmattersofthecorporation24

Alsotitle-basedtheOhioregulationsprovidethatofficersofacorporationwhoowncollectivelyorindividuallymorethana50interestinthecorporationareliableforOhiowithholdingpaymentsandsalestaxifthecorporationfailedtofilewithholdingreportsorsalestaxreturnsorfailedtoremitpaymentwithafiledreportorreturn25

UndertheNewYorkstatutesapartner(whethergeneralorlimited)ofapartnershipandamemberofalimitedliabilitycompanymaybeheldstrictlyliableforthecompanyrsquosNewYorksalestaxobligationsevenifthepartnerormemberdidnothaveadutytoremitthetaxonbehalfofthecompany26RecentlytheNewYorkStateDepartmentofTaxationandFinanceadoptedapolicythatrelievesqualifyinglimitedpartnersandmembersoflimitedliabilitycompaniesfromper seliabilityforsomeoralloftheunpaidNewYorksalesandusetaxesofthelimitedpartnershiporlimitedliabilitycompanyifspecificconditionsaremet27

DefensestoTitle-BasedLiability

Instatesinwhichresponsibleperson

liabilityisbasedsolelyonapersonrsquostitlestateorfederalconstitutionalprotectionsmaybeavailableasadefensetopersonalliabilityForexampleWestVirginiastatutesimposeliabilityoncorporateofficersforunpaidandunremittedWestVirginiasalestaxesanddonotcontainlanguagesettingforthanyotherstandardsforimpositionofsuchliability28NeverthelesstheWestVirginiaSupremeCourtofAppealsthestatersquoshighestcourtstatedthatdueprocessprotectionsintheWestVirginiaConstitutionmayabsolveacorporateofficerfrompersonalliabilityforacompanyrsquosunpaidandunremittedsalestaxesasfollows

[I]ntheabsenceofstatutoryorregulatorylanguagesettingforthstandardsfortheimpositionofpersonalliabilityforunpaidandunremittedsalestaxesonindividualcorporateofficerssuchliabilitymaybeimposedonlywhensuchimpositionisinanindividualcasenotarbitraryandcapriciousorunreasonableandsuchimpositionissubjecttoafundamentalfairnesstest29

RecentlyaWestVirginiaadministrativelawjudgeappliedthisfundamentalfairnesstestandrelievedanindividualofpersonalliabilitywhereitwasshownthattheindividualwasreleasedfromhispositionasavice-presidentbeforetheWestVirginiataxliabilitywasincurredandtheindividualhadnofinancialresponsibilitiesinthecompany30

responsibility-Based Liability

Insomestatesapersonrsquostitleisnotdeterminativeofwhethertheindividualmaybearesponsiblepersonratheranofficeroremployeecouldbeheldliableforthecompanyrsquosunpaidtaxiftheindividualisldquounderadutyrdquotoactforthecompanyincomplyingwithitstaxpaymentobligations31Whetheranindividualisunderadutytoactmaybeafact-intensiveinquiryandmayinvolvethequestionofwhetherthepersonhadknowledgeoforintenttoevadethetaxliability

DutytoAct

Courtsmaylooktoavarietyoffactorstodetermineifataxpayerhasadutytoact


Individual Liability(Continued from page 7)

IT IS A CLASS D FELONY IN INDIANA

FOr ExAMPLE FOr A rESPONSIBLE PErSON

TO kNOWINGLY FAIL TO rEMIT SALES

TAxES TO THE STATE A CLASS D FELONY IN

INDIANA MAY rESULT IN IMPrISONMENT OF UP

TO THrEE YEArS

9


Courtsmayalsolooktootherstatesthathavesimilarprovisions

TheTaxCourtofNewJerseyinCooperstein v Director Division of Taxationlookedtothefollowingninefactorstodeterminewhetherthepersoninquestionhasadutytoact

(1)thecontentsofthecorporatebylaws(2)statusasanofficerandorstockholder(3)authoritytosignchecksandactualexerciseofthisauthority(4)authoritytohireandfireemployeesandactualexerciseofthisauthority(5)responsibilitytoprepareandorsigntaxreturns(6)day-to-dayinvolvementinthebusinessorresponsibilityformanagement(7)powertocontrolpaymentofcorporatecreditorsandtaxes(8)knowledgeofthefailuretoremittaxeswhendueand(9)derivationofsubstantialincomeorbenefitsfromthecorporation32

TheCoopersteinTaxCourtadoptedtheaforementionedfactorsfromNewYorkcaselaw33TheNewYorkcaselawrelieduponfactorssetforthbyafederaldistrictcourt34

StatesotherthanNewJerseyhavereliedonfactorsthatincludewhethertheindividualisresponsibleformaintainingthecorporatebooks35orwhethertheindividualhadknowledgeofthetaxliabilitythroughaneducationalbackgroundorworkexperience36

KnowledgeMayNotBeRequiredandMayTrumpGoodIntentions

Knowledgeoforintenttoevadeataxliabilitymaybeafactorindeterminingwhetheranindividualisaresponsibleperson

TheTaxCourtofNewJerseyconsidersknowledgetobeonefactorintheanalysisbutdoesnotconsiderknowledgetobeanecessaryindicia

ofaresponsiblepersonliabilityForexampletheTaxCourtofNewJerseyfoundthattwocorporateofficerswereunawareoftheoutstandingsalestaxliabilityanddidnothaveanintenttoevadethesalestaxlaw37Neverthelessitfoundtheindividualofficersliableforacompanyrsquosoutstandingsalestaxobligations38

BycontrastTexaslawimposesliabilityonanindividualforacompanyrsquosunpaidsalestaxobligationsonlyiftheindividualwillfullyfailstopaythetax39Aresponsiblepersonactsldquowillfullyrdquoiftheperson

(1)ldquohasknowledgerdquothattaxesareowedandyetpaysothercreditorsor(2)ldquorecklesslydisregardstheriskrdquothatthetaxesmaynotbepaidtothestate40

In2010thefederalFifthCircuitCourtofAppealsappliedTexaslawandfoundthetrusteeofacompanyinbankruptcyliableforthebankruptcompanyrsquosunpaidsalestaxdespitethetrusteersquosargumentthathisdutytomaximizetheestatersquosvaluesupersededhisdutytotimelypaythesalestaxliability41Thecourtwasnotpersuadedbythetrusteersquosldquogoodintentionsrdquoinasmuchasthetrusteeknewofthesalestaxliabilityandchosetopayothercreditorsinordertokeepthecompanyoperatingasagoingconcern42

Procedural Issues

Twoproceduralissuesmeritconsideration(1)extendedstatutesoflimitationsperiodsforassessmentsagainstresponsiblepersonsand(2)theidentificationofresponsiblepersonsonformsandreports

Statute of Limitations

Thelimitationsperiodapplicabletoresponsiblepersonassessmentsmayexceedtheperiodwithinwhichataxauthoritymayassessthecompanyforthatsameliability

TheCaliforniasalestaxlimitationsperiodforacompanyisthreeyearsfromthedatethatthereturnisfiled(exceptinenumeratedsituations)43HowevertheCaliforniastatutesauthorizeassessmentsagainstaresponsiblepersonwithineightyearsfromacompanyrsquosdissolutiondateiftheCaliforniaStateBoardofEqualizationdoesnothaveactualknowledgeofthecompanydissolution44

NorthCarolinahasamoregenerallyapplicableextensionthatappliesforashorterperiodthanCaliforniarsquosextensionperiodTheNorthCarolinastatutespermittheDepartmenttoassessaresponsiblepersonduringaperiodthatextendsoneyearfromtheexpirationofthecompanyrsquoslimitationsperiod45

Self-Identification as a responsible Person

SomestatetaxformsandreturnsrequirethattheprepareridentifyresponsiblepersonsForexampleCaliforniarequiresidentificationofcorporateofficersforsalesandwithholdingtaxes46InMichiganifthecompanyhiresapayrollprovidertoremitpayrolltaxesthecompanymustfileForm3683whichmustbesignedbythecorporateofficeronalinethatreadsldquo[s]ignatureofCorporateOfficerPartnerorMemberresponsibleforreportingandorpayingMichigantaxesrdquo47FurthermoreNewYorkauditorshaverequestedthatcompaniescompleteresponsiblepersonquestionnairesaftersendingassessmentnoticestocompanies48



THE COUrT WAS NOT PErSUADED BY THE TrUSTEErsquoS ldquoGOOD

INTENTIONSrdquo INASMUCH AS THE TrUSTEE

kNEW OF THE SALES TAx LIABILITY AND

CHOSE TO PAY OTHEr CrEDITOrS IN OrDEr

TO kEEP THE COMPANY OPErATING AS A GOING

CONCErN

10


Conclusion

IndividualliabilityforcompanytaxesisagreatconcernthatshouldnotbeoverlookedWeencouragecompaniestocloselyreviewtheresponsiblepersonsprovisionsinthestatesinwhichtheyconductbusinessAsdiscussedabovethefactorstobeconsideredforindividualliabilityandthetaxesforwhichanindividualcouldbeliablevarybystateResponsiblepersonlawsarelikelytocontinuetobeusedoftenbystatetaxingagenciestopursueindividualsforcompanyliabilities

1 AlthoughstatestatutesthatimposeindividualliabilityforacompanyrsquosunpaidtaxesusevaryingtermswewillrefertosuchlawsasldquoresponsiblepersonlawsrdquoandtheliableindividualsasldquoresponsiblepersonsrdquounlessreferringtoastatersquosspecificlawsCompareNYTaxLawsect1131(1)(providingthatacorporateofficeroremployeeisliableforsalestaxiftheindividualisunderaldquodutytoactrdquoforthecorporationincomplyingwithitssalestaxobligations)withTexTaxCodeAnnsect111016(providingthatanindividualwholdquocontrolsorsupervisesthecollectionoftaxrdquofromanotherperson(egsalestaxwithholdingtax)isliableasaldquoresponsibleindividualrdquo)

2 AmericanBankruptcyInstituteUSBankruptcyFilings1980-2010wwwabiworldorg(lastvisitedDec292011)

3 CalRevampTaxCodesect6829(a)See alsoFlaStatsect21329LaRevStatAnnsect4715611

4 CalRevampTaxCodesect6829(c)

5 SeeConnGenStatsect12-414aNJStatAnnsect5432B-2(w)NYTaxLawsectsect1131(1)amp1133(a)NCGenStatsect105-2422(b)

6 MassGenLawsch62Bsect5See alsoArizRevStatAnnsect43-435NCGenStatsect105-2422(b)UtahCodeAnnsect59-1-302(2)

7 SCCodeAnnsect12-8-2010(A)amp(D)

8 VaCodeAnnsect581-1813

9 VaCodeAnn581SubtitleIThetelecommunicationstaxistheVirginiaCommunicationsSalesandUseTaximposedbyVirginiaCodeAnnotatedsection581-648

10 ColoRevStatsect39-21-116(2)

11 ColoRevStatsect39-21-102(1)amp(2)

12 StatestatutesregardingpenaltiesforresponsiblepersonsshouldbereadcarefullyinasmuchasastatestatutemayusethetermldquopenaltyrdquotorefertotheactualtaxliabilitythatisimposedonresponsiblepersonsSeeegAlaCodesectsect40-29-72(b)amp40-29-73(a)

13 ConnGenStatsectsect12-414a12-419(a)TheCommissionermaywaivealloranypartofthepenaltiesifldquofailuretopayanytaxwasduetoreasonablecauseandwasnotintentionalorduetoneglectrdquoConnGenStatsect12-419(c)

14 ConnGenStatsectsect12-414a12-419(a)

15 ColoRevStatsect39-21-1165

16 See Matter of MarchelloDTANo821443(NYSTaxAppealsTribunalApr142011)(interpretingNYTaxLawsectsect1131(1)amp1133(a))

17 SeeRhodeIslandAdminHearingDecision2011-03(Feb112011)(interpretingRhodeIslandGeneralLawsSection44-19-35toprovideforjointandseveralliabilityonresponsiblepersons)

18 Seeeg Matter of WeinblattDTANo819934(NYSDivofTaxAppJan192006)(statingthattheNewYorkDivisionofTaxationcouldpursuecollectionfromoneoralloftheresponsiblepersonssolongastheDivisiondidnotattempttocollectmorethanthetotalamountoftaxowed)AlthoughdeterminationsofNewYorkStateadministrativelawjudgesarenotprecedentialandmaynotbecitedinNewYorktheydoreflecttheviewsofanadministrativelawjudgewhoisknowledgeableoftheNewYorkTaxLawandareindicativeofhowanadministrativelawjudgemayruleonanissueSeeNYTaxLawsect20105NYCompCodesRampRegstit20sect300015(e)(2)

19 IndCodesect6-25-9-3(2)

20 IndCodesect35-50-2-7(a)


22 WisStatsect7183(2)(a)

23 MdCodeAnnTax-Gensect11-601(d)See Fox vComptroller728A2d776779(MdCtSpecApp1999)

24 MdCodeAnnTax-Gensect11-601(d)

25 OhioAdminCode5703-7-15(F)(withholdingliability)5703-9-49(F)(salestaxliability)

26 NYTaxLawsect1131(1)

27 New Policy Relating to Responsible Person Liability Under the Sales Tax LawTSB-M-11(17)S(NYSDeprsquotofTaxationampFinSept192011)ForadditionalanalysisandinsightontheNewYorkDepartmentofTaxationandFinancersquosnewpolicyseeIrwinASlomkaUpdate on Partial Relief from Responsible Person Liability for Limited Partners amp LLC MembersVol2iss10mofo new york tax insightsp2(MorrisonampFoersterLLPNewYorkOctober2011)IrwinASlomkaNew Policy Offers Partial Relief from Controversial Responsible Person LiabilityVol2iss5mofo new york tax insightsp1(MorrisonampFoersterLLPNewYorkMay2011)

28 WVaCodesect11-15-17

29 Schmehl vCommrsquor222WVa98108(1998)

30 WestVirginiaAdministrativeDecision10-332WWVStTaxRep(CCH)P2001621029(May272011)(findingverbalreleasefromhispositionwasasufficientrelease)

31 See egMassAnnLawsCh64Hsect16NJStatAnnsect5432B-2(w)NYTaxLawsect1131(1)Matter of CohenTSB-H-85(234)S(NYSTaxCommOct31985)(statingthatforNewYorkStatesalesandusetaxpurposesldquotheholdingofcorporateofficedoesnotper seimposepersonalliabilityupontheofficeholderrdquo)

32 Cooperstein vDirector Div of Taxation13NJTax6888(TaxCt1993)affrsquod14NJTax192(AppDiv1994)

33 Id

34 Idat84

35 20NYCompCodesRampRegs52611(b(2)Matter of SteinbergDTANo822971(NYSDivofTaxAppSept92010)(findingpersonallyliableaCEOwhowasthechairmanoftheboardofdirectorswasaldquomajorstockholderrdquoofthecorporationwasresponsibleforthemanagementofthecompanyrsquosoperationshadaccesstothebooksandrecordshadtheauthoritytohireandfireemployeesandhadtheauthoritytosigntaxreturnsandchecksonbehalfofthecompany)ForadditionalanalysisonMatter of SteinbergseeHollisLHyansExecutives Beware Responsible Officer LiabilityVol1iss1mofo new york tax insightsp3(MorrisonampFoersterLLPNewYorkNov2010)

36 Dellorfano v Commrsquor of RevenueMassATBFindingsofFactandReports2010-972993(MassAppTaxBdOct272010)(consideringitrelevantthatanofficerhadanLLMintaxationandhadpreviouslyworkedasataxcounselforacertifiedpublicaccountingfirmindeterminingwhethertheindividualhadadutytoact)

37 Skaperdas v Director Div of Taxation14NJTax103(TaxCt1994)affrsquod16NJTax454(AppDiv1996)

38 Id

39 TexTaxCodesect111016(b)

40 State v Crawford262SW3d532542(TexCtApp2008)

41 Tex Comptroller of Pub Accounts v Liuzza610F3d937(5thCir2010)

42 Idat942

43 CalRevampTaxCodesect6487(a)

44 CalRevampTaxCodesect6829(f)ThelimitationsperiodislimitedtothreeyearsfromthedatethattheCaliforniaStateBoardofEqualizationobtainsactualknowledgeofthedissolutionIdSee also Ilko v California State Board of EqualizationBAPNoSC-09-1119-JuRMo2009BankrLEXIS4541(BAP9thCir2009)affrsquod without op651F3d1049(9thCir2011)(upholdingaresponsiblepersonassessmentmademorethantwoyearsafterthecompanydissolvedandmorethaneightyearsafterthesalestaxreturnsweredue)

45 NCGenStatsect105-2422(e)

46 CaliforniaSellerrsquosPermitApplicationavailable athttpwwwboecagovpdfboe400spapdfRegistrationforCommercialEmployersavailable at httpwwweddcagovpdf_pub_ctrde1pdf

47 MichiganTaxForm3683available at httpwwwmigovdocuments3683f_2907_7pdf

48 See egMatter of Crescent BeachDTANo822080(NYSTaxAppealsTribunalSept222011)(theauditorrequestedthatthecompanyrsquosCPAsubmitaresponsiblepersonquestionnaireforfourspecificemployeesatthecompanyafterissuingaStatementofProposedAuditChange)Matter of GrilloDTANo823237(NYSDivofTaxAppNov32011)(theauditorrequestedthecompletionofaresponsiblepersonquestionnaireforanumberofthecompanyrsquosexecutiveofficers)


11


ldquoBusinessincomerdquohasbeenastatutorilydefinedconceptsinceCaliforniarsquosadoptionoftheUniformDivisionofIncomeforTaxPurposesAct(ldquoUDITPArdquo)in19651BywayofthreeclassicdecisionsfromtheCaliforniaStateBoardofEqualization(ldquoSBErdquo)thisarticleexplorestherelationshipbetweenbusinessincomeandtheunitarybusinessconceptinthecontextofthedispositionofassetsthathadonlytheldquopotentialrdquo tobeincorporatedintoaunitarybusinessFinallythisarticlediscussesrecentCaliforniadecisionsanddevelopmentsinthearea

ThedefinitionofldquobusinessincomerdquofoundinCaliforniaRevenueandTaxationCodeSection25120provides

ldquoBusinessincomerdquomeansincomearisingfromtransactionsandactivityintheregularcourseofthetaxpayerrsquostradeorbusinessandincludesincomefromtangibleandintangiblepropertyiftheacquisitionmanagementanddispositionofthepropertyconstituteintegralpartsofthetaxpayerrsquosregulartradeorbusinessoperations2

ThisdefinitionhasnotbeenamendedbytheCaliforniaLegislaturesinceitsadoptionAdministrativeandjudicialdecisionallawhasmadeclearthatthisstatutorydefinitioncontainstwoseparateandindependenttestsforbusinessincomealdquotransactionalrdquotestandaldquofunctionalrdquotest3Rarelydoesthetransactionaltestcausedifficultiesinitsapplicationasitisusuallyclearwhetherornotincomearisesldquofromtransactionsandactivityintheregularcourseofthetaxpayerrsquostradeorbusinessrdquo4Incomparisonproblemsaboundinapplyingtheseparatefunctionaltesttodetermineifandwhenincomearisesfromtheacquisitionmanagementanddispositionofpropertywhichldquoconstituteintegralpartsofthetaxpayerrsquosregulartradeorbusiness

operationsrdquo5RecallthatUDITPAisamodelapportionmentformulawhichcontainsnoprovisionsaddressingthetaxbaseAccordinglythatapportionmentformulaisequallyapplicabletoasinglecorporationaconsolidatedgroupofcorporationsoraunitarygroupofcorporationsInCaliforniaafiercelyunitarystateanespeciallytroublesomeproblemarisesattheconvergenceofthefunctionaltestwiththeunitarybusinessconceptwhereassetshavebeenacquiredwiththeintentalbeitultimatelyfrustratedtointegratethemintoaunitarybusiness

Three Classic California State Board of equalization Decisions

Threedecisionsillustratethisldquopotentialrdquotointegrateissue

ThefirstdecisionisAppeal of Standard OildecidedbytheSBEin19836Therethetaxpayerreceivedapproximately$160millionofdividendsfromtwoentitiesThefirstentitywasArabianAmericanOilCo(ldquoAramcordquo)inwhichthetaxpayerowneda30interestThesecondentitywasPTCaltexPacificIndonesia(ldquoCPIrdquo)inwhichthetaxpayerowneda50interestSince1958thetaxpayerrsquosproductionentitlementsinAramcoandCPIrepresentedatleast50ofthetaxpayerrsquosworldwidesupply

RelyingupontheCaliforniaFranchiseTaxBoardrsquos(ldquoFTBrdquo)regulationsandcaselawtheSBEheldinStandard OilthatthedividendswerebusinessincomeunderthefunctionaltestTheSBEexplainedthefunctionaltestrequiresanexaminationoftherelationshipbetweentheintangiblepropertyandthetaxpayerrsquosunitarybusiness

Iftheincome-producingpropertyinquestionisintegrallyrelatedtotheunitarybusinessactivitiesofthe

taxpayertheincomeisbusinessincomeif the income-producing property is unrelated to the unitary business activities of the taxpayer the income is nonbusiness income subject to specific allocation7

TheSBEthenproceededtopointoutthetaxpayerrsquosldquofundamentalpurposerdquoincreatingtheAramcoandCPIoperationswastoensureanavailablesupplyofcrudeoilandnaturalgasliquidsforitsworldwidepetroleumoperationsthatthetaxpayerrsquosldquoregularuseofthesecrudeoilsupplyrightsembodiedinitsAramcoandCPIstockholdingsprovidedanecessaryandessentialelementofitsworldwideoiloperationsrdquothatwithouttheseintereststhetaxpayerrsquosldquocompetitivepositioninthepetroleumindustryanditsabilitytoeffectivelyutilizeitsrefiningandmarketingcapacitieswouldhavebeensubstantiallyimpairedrdquoandthatthetaxpayerrsquosinterestinthesetwooperationsldquocontributedmateriallytotheproductionofoperatingincomefromtherestofappellantrsquosunitarybusinessandclearlyservedtofurthertheoperationsoftheintegratedpetroleumenterpriseconductedwithinandwithoutthisstaterdquo8

ThusStandard Oil framedthebusinessincomeinquirybyjuxtaposingitagainsttheunitarybusinessinquiryincomeldquounrelatedrdquototheunitarybusinessisnotbusinessincome

ThesecondclassicSBEdecisiononthisissueisAppeal of Occidental Petroleum CorporationwhichwasdecidedlessthanfourmonthsafterStandard Oil9 ThesignificanceofOccidental PetroleumisthatittooktheStandard Oilldquorelated-unrelatedrdquolinkbetweenthebusinessincomeissueandtheunitarybusinessissueandapplieditinthecontextofassetswhichhadonlytheldquopotentialrdquotobepartoftheunitarybusiness

TherelevantfactsinOccidental PetroleumareasfollowsInkeeping

Potential Unity and Business Income in CaliforniaBy Eric J Coffill and Timothy A Gustafson


12


withitsexpansionprograminthenaturalresourcesareaOccidentalwasinterestedincombiningthebusinessofKernCountyLand(ldquoKCLrdquo)withitsownAfterfailingtoinduceKCLrsquosmanagementtodiscussamergerOccidentalinitiatedatenderofferforaportionofKCLrsquosstockAlthoughOccidentalultimatelyacquiredover20ofKCLrsquosoutstandingstockKCLthwartedOccidentalrsquostakeoverbyagreeingtobeacquiredbyTennecoAsaresultofthattakeoverOccidentalreceivedTennecostockinexchangeforitsKCLstockOccidentalthensoldtheTennecostockforagainsothatitcouldredeployitsassetsintootherventures

OccidentalalsoundertookafriendlyacquisitionofIslandCreekCoalCo(ldquoIslandCreekrdquo)PriortotheacquisitionOccidentalhadacquiredsomeofIslandCreekrsquosstockInordertoensurethattheInternalRevenueServicewouldclassifythemergerasatax-freereorganizationforfederaltaxpurposesOccidentalwasrequiredtodisposeofitsIslandCreekstockpriortoconsummatingthemergerAfterOccidentalsoldthestockforagainthemergerwithIslandCreekwassuccessfullyconsummated

TheSBEinOccidental Petroleumnotedthattheevidenceclearlyshowedthatbothofthestocksalesinquestionwereldquomadepursuanttoaspecificcorporateplantoconsolidateorexpandtheunitarybusinessinaccordancewithanestablishednaturalresourcesorientationrdquo10HowevereventhoughOccidentalrsquospurposeinacquiringtheKCLandIslandCreekstockwastoexpanditsunitarybusinesstheSBEstatedthat

neitherthestockholdingsnortheassetsandactivitiestheyrepresentedconstitutedintegralpartsofappellantrsquosexistingunitaryoperationsatthetimesappellantdecidedtosellthemIn fact at no time did they possess more

than the potential for actual integration into appellantrsquos ongoing business and we believe that mere potential is insufficient to support a finding that the gains on these sales were business income under the functional test11

ForthisldquopotentialrdquoversusldquoactualrdquodistinctiontheSBEinOccidental PetroleumdrewitssupportnotonlyfromStandard OilbutalsofromFW Woolworth Co v Taxation amp Revenue Department of New MexicowheretheUnitedStatesSupremeCourtstatedldquothepotentialtooperateacompanyaspartofaunitarybusinessisnotdispositivewhenlookingatldquothelsquounderlyingeconomicrealitiesofaunitarybusinessrsquordquothedividendincomefromthesubsidiariesinfactisldquo[derived]fromlsquounrelatedbusinessactivityrsquowhichconstitutesalsquodiscretebusinessenterprisersquordquo12

ThelastofthethreedecisionsisAppeal of Mark Controls CorporationanSBEdecisionfrom1986whichprovidesaclassicillustrationoftheapplicationoftheOccidental Petroleumldquopotentialrdquotointegratetest13InMark ControlstheSBEdeterminedthatthetaxpayerrsquospurchaseofstockintwocorporationswiththeintenttointegratethecompaniesintothetaxpayerrsquoscorebusinesswasinsufficientforafindingthatincomefromthestocksaleswasbusinessincomewhenthetaxpayerneverpossessedmorethanthepotentialforactualintegrationofthecompaniesintothetaxpayerrsquosongoingunitarybusinessoperations

TherelevantfactsofMark ControlsareasfollowsIn1971MarkControlspurchased495ofthestockofWeirPacificValvesLtd(ldquoWeirrdquo)withanoptiontopurchaseadditionalsharesownedbytheWeirGroupMarkControlsacknowledgedthepurposeforthepurchasewastoallowittoexpanditsmarketingandmanufacturingoperationstotheUnitedKingdomAfterthepurchaseMarkControlsandWeirexecutedalicensingagreementthatallowedWeirtomanufacturesomeofMarkControlsrsquoproductsandtherewereapproximately$200000inannualintercompanysalesMarkControls

alsoreceivedaseatontheboardofdirectorsofWeirAfteracquiringtheWeirstockMarkControlsrealizedthatWeirwasmismanagedMarkControlsthenattemptedtoimproveWeirrsquosmanagementandprovidedtwoexecutivesinanattempttoimproveWeirrsquosperformanceHowevertheeffortsfailedandMarkControlssolditssharesin1976foragain

Inaseparatetransactionin1975MarkControlspurchased20oftheoutstandingsharesofWalthon-WeirPSA(ldquoWalthonrdquo)MarkControlsandWalthonexecutedalicensingagreementsimilartotheagreementwithWeirMarkControlsalsoreceivedaseatonWalthonrsquosboardofdirectorsConcernedwiththeproprietyofWalthonrsquosbusinessdealingsMarkControlssoldthestockin1977foragain

TheSBEinMark ControlsbeganbyanalyzingtherelationshipbetweenWeirandMarkControlsWhiletheSBEobservedthepurchaseofalargeminorityblockinabusinesssimilartothebusinessofMarkControlssuperficiallyappearedtocreateanintegratedoperationparticularlycoupledwiththeintentofMarkControlstoexpanditsbusinessintheUnitedKingdomtheSBEconcludedtheactionsandintentofMarkControlsldquodidnotresultinthestockholdingsnortheunderlyingassetsoractivitiesofWeirbecominganintegralpartofappellantrsquosbusinessrdquo14TheSBEfoundthatallofMarkControlsrsquoactionsldquowereatmostpreparatorytointegratingWeirrdquointotheunitarybusiness15WhileMarkControlsplacedanemployeeontheboardofdirectorsofWeirtherewasnoevidencethisemployeehadanyinfluenceoverWeirrsquoscorporatepolicyorday-to-dayoperationsThiswasevidentbythefailureofattemptsmadetorepairWeirrsquosmismanagementIntercompanysalesbetweenthetwocompaniesalsofailedtoshowanyfunctionalintegrationastherewasnoindicationofldquoanyspecialeconomicadvantagegainedrdquobyMarkControlsbydoingbusinesswithWeir16AsaresulttheSBEfoundthatldquoatnotimedidWeirpossessmorethanthepotentialforactualintegrationintoappellantrsquos

Potential Unity(Continued from page 11)


13


ongoingunitarybusinessoperationsrdquoandcitingOccidental Petroleumfoundthatldquomerepotentialisinsufficienttosupportafindingthatthegainsonthesestocksaleswerebusinessincomeunderthefunctionaltestrdquo17TheSBEthenconcludedthatthegainfromthesaleofWeirrsquosstockwasproperlyclassifiedasnonbusinessincome

SimilarlytheSBEfoundnointegrationbetweenMarkControlsandWalthonAtnotimeduringtheownershipofthestockdidMarkControlsattempttocontroltheday-to-dayoperationsofWalthonandatnotimedidMarkControlsattempttointegrateWalthonrsquosactivitiesintoitsunitarybusinessTheexistenceofthelicensingagreementmighthavecreatedapotentialforactualintegrationwiththeownershipofthestockbutagaintheSBErepeatedtheruleoflawfromOccidental Petroleumthatldquomerepotentialisinsufficienttosupportafindingthatthegainsonthesesaleswerebusinessincomeunderthefunctionaltestrdquo18

AccordinglytheSBEruleoflawunderOccidental PetroleumandMark ControlsisthatincomegeneratedbyanassetthathasonlytheldquopotentialrdquotooperateasapartofataxpayerrsquosunitarybusinesscannotbebusinessincomeThepointmadeinOccidentalPetroleum(aswellasinMark ControlsandearlierbytheUnitedStatesSupremeCourtinWoolworth)isthatincomefromassetsnot actually integratedintothetaxpayerrsquosbusinessdoesnotgiverisetobusinessincomeInotherwordsifthestockonlyhasthepotentialtobeintegratedbutisnotintegratedthestockisnotanintegralpartofthetaxpayerrsquosregulartradeorbusinessThusasinOccidentalPetroleuminvolvingOccidentalrsquosstockinterestsinKCLandIslandCreekandinMark ControlsinvolvingMarkControlsrsquostockinterestinWalthonandWeiraldquopotentialrdquounitaryassetproducesnonbusinessincome

HowaretheseclassicdecisionsbeingappliedbytheSBEinmorecontemporarytimesTworecentnonprecedentialSBEdecisionsAppeal of Crane Co (2009)andAppeal of Rheem Manufacturing (2011)providesomeguidance19

InCranethetaxpayerCraneCoampSubsidiaries(ldquoCranerdquo)wasadiversifiedmanufactureroperatinginfivemajorsectorsEngineeredMaterialsMerchandisingSystemsAerospaceFluidHandlingandControlsIn1994CraneacquiredELDECCorporation(ldquoELDECrdquo)asawholly-ownedsubsidiarywhichoperatedanindustrialwirelessbusinesssegmentELDECsoughtastrategicpartnershipwithPOWECamanufacturerofproductsandpowersystemsELDECenteredintoanagreementwithPOWECthetermsofwhichprovidedthatELDECwouldbePOWECrsquosexclusivedistributorandELDECwouldacquirea47interestinPOWECThetwocompaniesalsoagreedtosharetechnologyinformationandknow-howandenteredintoadistributionandlicensingagreementandashareholdersrsquoagreementwherebyELDECreceivedtherighttoappointtwoofPOWECrsquosfiveboardmembersIn2000ELDECsolditsinterestinPOWECandCranetreatedthegainonthesaleasnonbusinessincomeTheFTBdisagreed

OnappealbeforetheSBECraneconcededthatboththeacquisitionanddispositionofPOWECrsquosstockwereintegralpartsofitsbusinessunderthefunctionaltestbutarguedtheelementofmanagementwaslackingbecauseELDECheldonlyaminorityinterestinPOWECandcouldonlyappointtwooutoffivePOWECboardmembersThusCranearguedELDECnevercontrolledPOWECrsquosbusinesssuchthatitbecameinterwovenwithandinseparablefromCranersquosbusinessCranealsoarguedELDECrsquosintentionofaccomplishingbusinessintegrationnevercametofruitionandcitedtobothOccidental Petroleum andMark Controlsforthepropositionthatthemerepotentialforintegrationdoesnotgeneratebusinessincome

TheSBEdisagreedTheSBEconcludedthatldquoELDECgeneratedbusinessincomeasaresultof[the]strategicbusinessrelationshiprdquobetweenELDECandPOWEC20AccordinglytheSBEfoundldquothegainfromthesaleofthepropertyusedtogeneratethebusinessincomeiethePOWECstockisalsobusinessincomerdquo21IndistinguishingitsformerdecisionstheSBEfoundldquothere[was]noindicationthatELDECpurchaseditsinterestinPOWECasaninitialsteptowardbusinessintegrationwithPOWECrdquoandthatldquotheevidencedoesnotdiscloseanintentionby[Crane]tointegraterdquothePOWECstockacquisitionintoitsbusiness22

InRheemthetaxpayerwasamanufacturerofwaterheatingairconditioningandheatingproductsthataresoldthroughdistributorstocustomersRheemandWatscoInc(ldquoWatscordquo)eachacquiredownershipinterestsinthreeotherdistributorsRheemsubsequentlyexchangeditsinterestinthesethreedistributorsforsharesinWatscoIn2003RheemsolditsinterestinWatscoforagainofover$24millionwhichitreportedasnonbusinessincomeTheFTBsubsequentlyauditedandassessedRheemandtheappealfollowed

OnappealRheemarguedthefunctionaltestwasnotmetbecauseRheemandWatscowerenotunitaryoperatedasseparatecompaniesandsharedneithercorporateofficersnoremployeesRheemassertedithadnomanagementorotherdecision-makingcontroloverWatscoholdingnomorethana43ownershipinterestinWatscoatanytimeWhileWatscoaccountedfor24ofRheemrsquosairconditioningsalesRheemstressedthatWatscoenteredintoagreementswithRheemrsquoscompetitorswhichresultedinasignificantreductionofWatscorsquospurchasesofRheemrsquosproductsInitsbriefingRheemcitedtobothOccidental Petroleum andMark Controlsforthepropositionthatasaleofstockwasnonbusinessincomewherethetaxpayerhadnotintegratedthestockintoitsunitarybusinessatthetimeofsale

TheFTBrespondedthatthefunctionaltestwasmetbecauseRheemrsquos



14


acquisitionmanagementanddispositionoftheWatscostockcreatedaflowofvaluebetweenthetwocompaniesTheFTBarguedthatWatscorsquosskillasadistributorledtoincreasedsalesofRheemrsquosproductsandbecauseWatscoaccountedfor24ofRheemrsquosairconditioningsalesthestockwasintegraltoRheemrsquosbusinessTheFTBassertedRheemhadnointentiontoacquireacontrollinginterestinWatscoandpointedtothelong-standingoperationalrelationshipithadwithWatscoandotherdistributorswithexclusivedistributionagreements

TheSBEultimatelyrejectedRheemrsquoscontentionsfindingtherewasampleevidenceforconcludingthestockwasintegraltoRheemrsquosbusiness23TheSBEnotedtherepresentationsmadebyWatscoindocumentsfiledwiththeUSSecuritiesandExchangeCommissionincludingstatementsthatWatscoldquomaintain[ed]auniqueandmutuallybeneficialrelationshiprdquowithRheemandthatRheemhadacquiredanownershipinterestinthreedistributorsldquoasajointventurepartnerrdquowithWatsco24

Observations and Themes

TosomeextenttheSBEsldquopotentialityrdquotointegrateissuedatingtoStandard OilandOccidentalhasnowbecomeusurpedbythegreaterissueofunityThatisbecauselikebeautyldquopotentialityrdquoisintheeyesofthebeholderespeciallywhenthoseeyesareattheFTBTheanalysisnowseemstofocusmoreonabinaryinquiryiewhetherornotanassetispartofthetaxpayerrsquosunitarybusinesswiththegrayareaofldquopotentialrdquointegrationremovedfromtheinquiryPerhapsputdifferentlytheFTBseesactualitywheretaxpayersseepotentialityPartofthisshiftmaybeexplainedbya2001decisionbytheCaliforniaSupremeCourt

SubsequenttothethreeclassicSBEdecisionsaddressedabovetheCaliforniaSupremeCourtdecidedHoechst Celanese Corp v Franchise Tax Board25TheretheCourtreiteratedthestatutorystandardthatldquo[u]nderthefunctionaltestcorporateincomeisbusinessincomelsquoiftheacquisitionmanagementanddispositionofthe[income-producing]propertyconstituteintegralpartsofthetaxpayerrsquosregulartradeorbusinessoperationsrsquordquo26Thecourtwentontoexplainthattheldquocriticalinquiryrdquoforpurposesofthefunctionaltestisldquothenatureoftherelationshipbetweenthispropertyandthetaxpayerrsquoslsquobusinessoperationsrsquordquo27ThecourtexplainedthatthestatutorylanguageofSection25120requiresatwo-partinquiry28Firstthestatutoryphraseldquolsquoacquisitionmanagementanddispositionrsquodirectsustoexaminelsquothetaxpayerrsquosinterestinandpowerovertheincome-producingpropertyrsquordquo29Ifthetaxpayerhasasufficientinterestintheincome-producingpropertyunderthatstandardonethenmovestothesecondinquirywhichiswhetherldquothetaxpayerrsquoscontrolanduseoftheproperty[are]anlsquointegralpartofthetaxpayerrsquosregulartradeorbusinessoperationsrsquordquo30

SofarthatanalysisseemsstraightforwardandconsistentwiththelanguageofthestatutedefiningbusinessincomeButtheCelaneseCourtthenwentontostateldquothatlsquointegralrsquorequiresanorganicunitybetweenthetaxpayerrsquospropertyandbusinessactivitieswherebythepropertycontributesmateriallytothetaxpayerrsquosproductionofbusinessincomerdquo31ThusthebusinessincomeanalysisappearstocomefullcirclebacktounityorwhateverismeantbyldquoorganicunityrdquointhewordsoftheCelaneseCourt

DoesCelanesechangetheanalysisunderStandard OilandOccidentalTheanswershouldbeldquonordquobecausethesame(un-amended)statuteisthebasisforandthesubjectofallthesedecisionsPlustheldquopotentialrdquostandarddidnotoriginatewiththeSBEbutisrootedintheUnitedStatesSupremeCourtdecisioninWoolworthwhichmost

certainlycannothavebeenchangedoroverruledbytheCaliforniaSupremeCourtinCelaneseInanyeventdonotbesurprisedtofindadiscussionwiththeFTBregardingthebusinessincomeldquopotentialrdquoissuetobecomelitteredwithreferencestoldquoflowsofvaluerdquounderContainerandtherelationbetweentheincomeandtheactivitiesinthetaxingstateunderASARCOandAllied Signal32PerhapsnoweveryCaliforniastatutorybusinessincomeissueincludingtheldquopotentialityrdquoissuewillbecomeanissueoftheFTBrsquosconstitutionalpowertotaxIfsothenthespecificlanguageofSection25120nolongerhasmeaningandthestatutebecomesonlyaldquolong-armrdquostatuteinterpretedbytheFTBtomeanitcantaxcorporateincomeonanapportionedbasistothefullestextentpermittedundertheFederalConstitution

ThemostrecentexampleoftheissuesbrewingaroundtheldquopotentialrdquotointegrateissueisthePacific BellcasewhichwasdecidedbytheSBEwithoutanywrittendecisioninSeptember201133

InPacific Bellthetaxpayeroperatedaregionaldomestictelephonecompanyin13statesPacificBellbegantoinvestinforeigntelecommunicationscompaniesinthe1990sandsentapproximately60employeestotheforeigncountrieswhereinthosecompanieswerelocatedtofunctioninanadvisorycapacitypursuanttoarmrsquos-lengthmanagementagreementsSomeoftheseagreementsalsoprovidedforPacificBelltoappointmemberstoaforeigncompanyrsquosboardofdirectorsPacificBellbegandivestingitselfofitsforeigninvestmentsinthelate1990sandearly2000sbecauseitneededcapitaltogrowitsdomestictelecommunicationsbusinessAtissueinthiscasewerethegainsfromthesaleofitsinvestmentinsevenforeigncompaniesduring2001and2002

InarguingthefactsofthecasedidnotmeetthefunctionaltestunderCelaneseparticularlywithregardtothestatutorytermldquointegralrdquoPacificBellclaimedCelaneserequiredan



15


ldquoorganicunityrdquobetweenthetaxpayerrsquospropertyandbusinessactivitiessuchthatthepropertycontributesmateriallytothetaxpayerrsquosproductionofbusinessincomeAdditionallyPacificBellarguedCelanese heldthatthepropertymustbesointerwovenintothefabricofthetaxpayerrsquosbusinessoperationsthatitbecomesldquoindivisiblerdquofromthetaxpayerrsquosbusinessactivitieswithbothgivingvaluetotheotherPacificBellalsoargueditneverhadaplantointegratetheforeigninvestmentsintoitsregularbusinessandthatvariousregulatorylogisticalandtechnologicalimpedimentspreventeditfromdoingsoifithadwantedtoMoreoverPacificBellarguedthatbecauseitonlyhadaminorityinterestintheforeigncompaniesitcouldnotexercisesufficientcontrolovertheinvestmentstointegratethemintoitsdomestictelephoneoperationsAlsoPacificBellclaimedithadnomaterialintercompanysalesorlicensingagreementswiththeforeignentities

TheFTBrespondedinpartthattheinvestmentswereintheidenticallineofbusinessasPacificBellrsquosregularbusinessoperations(iethetelecommunicationsindustry)andassuchwereacquiredmaintainedanddisposedofasanintegralpartofthatbusinessTheFTBalsoarguedPacificBellthroughitsemployeesactinginadvisorycapacitiesanditsrepresentativesservingontheboardsofthevariousforeigncompanieswasactivelyinvolvedinthedailyoperationsincludingthemanagementoftheforeigninvestmentsFurthertheFTBarguedthatPacificBellgainedbusinessadvantagesthroughitsforeigninvestmentshavingenteredintocooperationagreementsandagreementsregardingthesharingofinformationtechnologywiththeforeignentitiesandthatsuchbenefitsconstitutedaflow

ofvaluebetweenPacificBellandtheforeignentitiesundertheUnitedStatesSupremeCourtdecisioninContainer34MoreovertheFTBarguedthatPacificBellrsquosrelationshipwiththeforeignentitieswasaunitaryrelationshipandthatPacificBellasoneoftheworldrsquoslargesttelecommunicationscompanieswasnotapassiveinvestorintheseentities

AttheSBEhearingthepartiesentertainedquestionsfromtheBoardMembersonvariousissuesincludingwhethertheforeigninvestmentswereinthesamegenerallineofbusinessasPacificBellandwhetherandtowhatextenttheforeigninvestmentswereindivisibleandinseparablefromPacificBellrsquosbusinesstherelationshipbetweentheforeigninvestmentsandPacificBellrsquosactivitiesinCaliforniawhatwastheappropriatelegalstandardunderthelanguageofCelanese andContainerandwhetherPacificBellrsquoscontrolanduseoftheforeigninvestmentscreatedaflowofvaluetoPacificBellrsquosproductionofbusinessincomeAfteralengthydiscussionofthefactsandthelawtheSBEvoted5-0infavorofPacificBellonthisissue35

InterestinglyanddespitetheopportunitytoprovidemuchneededguidanceonthisissuetheSBEchosenottopublishanywrittenopinionformalorotherwiseinPacific BellThustaxpayersdealingwiththeldquopotentialrdquotointegrateissuearestilllefttospeculateexactlywhichfactualscenariosorlegalargumentsultimatelywonthedayAnecdotallyatleasttwoothercasesaresetforhearingintheupcomingmonthsbeforetheSBEonthisissueItremainstobeseenwhethertheFTBortheSBEwilltakeamoredefinitivepositionunderthelawgoingforward

1 CalRevampTaxCodesectsect25120-25139

2 CalRevampTaxCodesect25120(a)ConverselynonbusinessincomeisdefinedasldquoallincomeotherthanbusinessincomerdquoCalRevampTaxCodesect25120(d)

3 SeeHoechst Celanese Corp v Franchise Tax Bd25Cal4th508526-527(Cal2001)see alsoAppeal of Occidental Petroleum CorporationCalStBdofEqualJune211983


5 IdThefunctionaltestldquofocusesonwhetherthepropertyservesanoperationalfunctioninthetradeorbusinessrdquoCalFranchiseTaxBdLegalRuling05-2(July82005)

6 Appeal of Standard Oil Company of CaliforniaCalStBdofEqualMar21983

7 Id(emphasisadded)

8 Id

9 Appeal of Occidental Petroleum CorporationCalStBdofEqualJune211983

10 Id

11 Id(emphasisadded)

12 Woolworth458US354362(1982)quotingMobil Oil Corp v Commissioner of Taxes of Vermont445US425(1980)

13 Appeal of Mark Controls CorporationCalStBdofEqualDec31986

14 Id

15 Id

16 Id

17 Id(internalcitationsomitted)

18 Idciting Appeal of Occidental Petroleum Corporation

19 Appeal of Crane Co amp SubsidiariesCalStBdofEqualJune302009(nonprecedentialsummarydecision)Appeal of Rheem Manufacturing CompanyoprsquononpetforrehrsquogCalStBdofEqualApr272011(nonprecedentialletterdecision)

20 Appeal of Crane Co ampSubsidiariesCalStBdofEqualJune302009(nonprecedentialsummarydecision)

21 Id

22 Id

23 Appeal of Rheem Manufacturing CompanyoprsquononpetforrehrsquogCalStBdofEqualApr272011(nonprecedentialletterdecision)

24 Appeal of Rheem Manufacturing CompanyCalStBdofEqualhearingheldMay252010(nonprecedentialHearingSummary)

25 Celanese25Cal4th508(Cal2001)

26 Idat527


28 See Celanese25Cal4that528see also Jim Beam Brands Co v Franchise Tax Bd133CalApp4th514524(2005)

29 Celanese25Cal4that528

30 Id

31 Id at530

32 Container Corp v Franchise Tax Board463US159(1983)ASARCO Inc v Idaho State Tax Commission458US307(1982)Allied Signal Inc v Director Division of Taxation504US768(1992)

33 Appeal of Pacific Bell Telephone Company amp AffiliatesCalStBdofEqualCaseNo521312heardSept202011(nonprecedentialdecision)

34 See Containersupra463USat179

35 Appeal of Pacific Bell Telephone Company amp AffiliatesCalStBdofEqualCaseNo521312heardSept202011(nonprecedentialdecision)TheSBEvotedagainstPacificBellonanunrelatedtreasuryfunctiongrossreceiptsissue


16


TaxmanagersandpayrolladministratorsincompanieswithemployeestravelingtomanystatesonbusinessfaceaformidableburdeninlearningandcomplyingwithdifficultwithholdingrequirementsinvariousstatesStateincometaxstatutestypicallyimposewithholdingandreportingobligationsonemployerswhoseemployeestraveltothestateonbusinesseveniftheemployeesrsquovisitstothestateareinfrequentAlthoughsomestatesprovideademinimisthresholdbeforerequiringtaxwithholdingfornonresidents(eg14daysorfewerinNewYorkand60daysorfewerinHawaii)1suchthresholdstypicallydonotexemptemployeesfrompersonalincometaxInadditioncurrentsafeharborstendnottoapplytosituationsinvolvingdeferredcompensationorstockoptionsinasmuchasthatincometypicallyrelatestomultiyearcompensationarrangements2

DeterminingtheamountofwithholdingonincomefromdeferredcompensationandstockoptionsisparticularlychallenginginthecaseofnonresidentsgiventhedifficultlyindeterminingwhenincomeaccruesrelativetotheperiodthatthenonresidentemployeeperformsservicesinthestateStatesrsquoapproachestoallocatingdeferredincomeandstockoptionincomevaryandleadtoconflictingresultsInadditioninmostcaseswhenindividualsreceiveretirementandotherkindsofdeferredcompensationtheyarenolongeremployeesofthecompany

CongressiscurrentlyconsideringtheMobileWorkforceStateIncomeTaxSimplificationActof2011underwhichanemployeersquoswageswouldnotbesubjecttopersonalincometaxorwithholdingandreportingrequirementsinanystateother

thantheemployeersquosstateofresidenceandinastateinwhichtheemployeeispresentandperformingemploymentformorethan30daysduringacalendaryear3Unfortunatelytheproposaldoesnotadequatelyaddressthewithholding(andpersonalincometax)complexitiesraisedbydeferredcompensationandstockoptionincomeUntilfederallegislationisenactedormodelstaterulesareadoptedemployersmustunderstandvaryingstatewithholdingrequirementsondeferredcompensationandstockoptionincomeInmanystatesinadditiontobeingliableforthetaxanemployerispotentiallysubjecttopenaltiesforfailuretoproperlywithhold4andemployeesownersandofficersmaybeheldpersonallyliablefortheunpaidwithholdingtaxesinterestandpenalties5HoweveremployerscanreducetheirwithholdingtaxexposurewithcarefulmonitoringofstateincomeallocationapproachesmanagementofemployeemovementimplementationofrecordkeepingsystemsandcommunicationwithemployeesThisarticlebringsyouanupdateonthelatestallocationapproachesstatesareusingtodeterminetheamountoftaxwithholdinganddiscussestheissuesandpracticescorporatetaxmanagersandpayrolladministratorsshouldconsiderwhenmanagingthistypeofwithholdingfortheirmobileworkforce

Deferred Compensation

DeferredcompensationisgenerallyincomethatispaidatalaterdatethanwhenitisearnedCommonexamplesofdeferredcompensationincludepensionandretirementincomeandstockoptionincomeTherearetwoprimaryissuesthatariseatthestatetaxlevelwithrespecttodeferredcompensationFirstiswhetherastateisprohibitedfrom

taxingsuchincomeunderfederallawAndsecondifastateisnotprohibitedfromtaxingtheincomewhatisthepropertimingforwithholdingandtheproperamountofincomethatissubjecttowithholding

Federal Preemption of Taxation of Certain retirement Income

In1996Congressenactedafederalstatute(PL104-95)thatprohibitsstatesfromimposingincometaxontheldquoretirementincomerdquoofnonresidents6ThusunderPL104-95thestatewheretheincomeisearned(theldquosourcestaterdquo)maynottax(orrequirewithholdingfor)someonewhoisanonresidentofthesourcestateonldquoretirementincomerdquoldquoRetirementincomerdquoisbroadlydefinedtoincludepaymentsfromseveralcategoriesoffederallyqualifiedplansmeetingtherequirementsofspecificprovisionsoftheInternalRevenueCode(ldquoIRCrdquo)including401(k)andpensionplansannuitiesIRAsanddeferredcompensationofstateandlocalgovernmentsandtaxorganizations7InadditionprotectedldquoretirementincomerdquoincludesbenefitsfromnonqualifieddeferredcompensationplansdescribedinIRCSection3121(v)(2)(C)asdefinedforpurposesoftheFICA(socialsecurity)taximposedwithrespecttoemploymentprovidedthatthepayments


Managing Withholding for a Mobile Workforce Special Treatment of Deferred Compensation and Stock OptionsBy Paul H Frankel and Debra S Herman

EMPLOYErS MUST UNDErSTAND vArYING STATE WITHHOLDING

rEqUIrEMENTS ON DEFErrED

COMPENSATION AND STOCk OPTION INCOME

17


arepartofaseriesofsubstantiallyequalperiodicpaymentsmadeatleastannuallyforeitherthelifeorlifeexpectancyoftherecipientoraperiodofatleast10years8In200610yearsafterPL104-95rsquosenactmentCongressamendedthelawtocoverpaymentsreceivedfromnonresidentretiredpartnersasseveralstatestookthepositionthatthelawasoriginallyenacteddidnotprohibitastatefromimposingitsincometaxonpaymentsreceivedbyretiredpartnersunderdeferredcompensationplans9

TheNewYorkStateDepartmentofTaxationandFinance(ldquoDepartmentrdquo)recentlyconsideredwhetheranemployerhadanobligationtowithholdondistributionsfromanonqualifieddeferredcompensationplantotwononresidentformeremployeesofthecompany10Astheemployeeselectedtotakeannualdistributionsfromtheplanaspartofaseriesofsubstantiallyequalinstallmentpaymentsovera10-yearperiodandtheplanqualifiedasaplandescribedinIRCSection3121(v)(2)(C)theDepartmentconcludedthatthedistributionswerenotsubjecttoNewYorkStateincometaxandNewYorkStateincometaxwithholdingInsteadtheemployerwouldwithholdinthetwoemployeesrsquostatesofresidence

InaletterrulingissuedinMassachusettstheCommissioneroftheDepartmentofRevenueadvisesemployersthatherequiresthemtoobtainaMassachusettsWithholdingExemptionCertificateforPensionAnnuityandOtherPeriodicPayments(FormM-4P)whendeterminingifMassachusettswithholdingisrequiredforretirementpayments11TherulingfurtherprovidesthatanemployercanrelyontheinformationsetforthinFormM-4Pregardingstateofresidenceunlesstheemployerhasknowledgethatsuchinformationisfalse12

Employersshouldconsiderobtainingarulingfromrelevantstatesontheissueof

federalpreemptionAlthoughPL104-95coversincomefrommostpensionandretirementplansdefinedintheIRCmanytypesofdeferredcompensationincomearenotcoveredandarepotentiallysubjecttotaxbystateswheretheincomewasearnedFurthermorewhenstatetaxation(andwithholding)isnotbarredbyfederallawemployersshouldconsiderwhetherthereareanystatespecificexemptionsthatcouldapplyForexampleinNewYorkdeferredcompensationthatqualifiesasanannuityisnotsubjecttopersonalincometaxandwithholding13Ifnoexemptionappliesthenemployersshouldconsiderthepropertimingforwithholdingandtheamountofwithholding

Timing and Amount of Withholding

MoststatesfollowthetimingofincomerecognitionusedforfederalincometaxpurposesThisisprimarilybecausemoststatesstartwithfederaladjustedgrossincomewhendetermininganemployeersquospersonalincometaxes14Manystatesalsoadoptthefederaldefinitionofwagesforpurposesofstateincometaxwithholdingandrequirewithholdingbasedonthesamepayrollperiodusedforfederalincometaxwithholding15ThusinmoststateswithholdingofstatepersonalincometaxesisrequiredwhenthedeferredcompensationisproperlyincludableinthetaxpayerrsquosfederaladjustedgrossincomeUsuallythisiswhenthedeferredcompensationispaid(iethestockisdistributedtotheemployee)HowevertherearesomeexceptionsForexampleinPennsylvaniawithholdingmayberequireduponthedeferraloftheincome(iewhenthecontributionismadetotheplan)underaconstructivereceipttheory16Asnotedabovesomestatesprovidesafeharborprovisionsbasedeitheronathresholdnumberofdaysanemployeeispresentinastateorondollaramountsthatrelievetheemployerofwithholdingobligationsuntilthethresholdistriggered17Severalstatesalsohavereciprocalagreementsthatexemptanemployerfromwithholdingtaxonanonresidentemployeewhoworksinthatstateiftheemployeersquoshomestatehasareciprocalagreementwiththestatethattheemployeeworksin

andthatstateexemptsasimilarlysituatedemployerfromawithholdingrequirement18

TheamountofdeferredincomesubjecttostatewithholdinggenerallywillconformtotheamountincludableinfederalgrossincomeHowevertheportionofthatamountthatwillbesubjecttopersonalincometaxandthuswithholdingtaxdependsonwhethertheemployeeisaresidentandwheretheemployeeearnedtheincomeStatesgenerallytaxresidentsonallincomereceivedregardlessofthesourceoftheincome(iewheretheincomeisearned)19ThusthegeneralruleisthatwithholdingisrequiredonallofaresidentemployeersquoscompensationincomeIftheresidentemployeeperformedservicespartlywithintheresidentstateandpartlywithinanotherstatethestateofresidencegenerallyprovidesacreditfortaxespaidtothesourcestateandwithholdingisrequiredonlytotheextentthattheresidentstatersquoswithholdingtaxliabilityisgreaterthanthetaxthathasbeenwithheldforthesourcestate

StatesrsquopersonalincometaxationandwithholdingfornonresidentsaremorecomplexMoststatestaxnonresidentindividualsonlyonincomethatisderivedfromsourcesinthestate(ldquosourceincomerdquo)20WithrespecttowagestheinquiryiswhethertheincomeisattributabletoservicesperformedinthestateInmoststatestheportionofcompensationthatisattributabletoservicesperformedinthestateisdeterminedbasedontheratioofdaysworkedinthesourcestatetothetotaldaysworkedduringtherelevantperiod21Ofcoursestatesvaryindetermininghowadayshouldbecalculatedandthescopeofthecompensableperiodinparticularwhenstockoptionsareinvolved22

Stock Option Income

Ingeneraltherearetwotypesofstockoptionplansstatutoryandnonstatutory(fromafederaltaxperspective)Statutorystockoptionsincludeincentivestockoptions23EmployeeswhoreceivestatutorystockoptionsdonotrealizeincomewhentheyaregrantedtheoptionorwhentheyexercisetheoptionInsteademployeescandefertaxuntiltheysellorexchangethestock24Nonstatutorystock


Managing Withholding(Continued from page 16)

18


optionsdonotreceivethesamefavorabletimingandcharacterofincometreatmentasstatutorystockoptionsbutemployeeswhoreceivetheseoptionsmaybeabletodeferthetaxunderIRCSection83Ingeneralanemployeerecognizesgainonthegrantofthenonstatutorystockoptionsiftheoptionshaveareadilyascertainablefairmarketvalue25Morecommonlyemployeesrecognizeordinaryincomeupontheexerciseofthestockoptionsmeasuredbytheexcessofthefairmarketvalueoftheoptionedsharesovertheoptionexerciseprice26Thereaftertheappreciationrecognizedonthesaleofthestockistreatedasgainderivedfromthesaleofthestock(investmentincome)andistypicallyofnoconcerntotheemployer27Moststatesrsquorulesfollowthesefederalprincipleshowevercomplexityarisesoverhowtodeterminetheproperamountofincomethatshouldbeallocatedtoaparticularstatewhenthetaxpayerisanonresidentandhasperformedservicesinmultiplestatesovertheyearsatissue

Differing State Allocation Formulae

ItshouldbenosurprisethatstateshaveadoptedvariousconflictingmethodsfordeterminingthetaxableportionofstockoptionincomeForcomparisonsakeletrsquosfocusonnonstatutorystockoptionswithnoreadilyascertainablefairmarketvalue

NewYorkStateandCity InNewYorkStateincomefromtheseoptionswillbeallocatedbasedonwheretheemployeeworkedduringtheperiodbetweenthegrantdateandthevestdate28Forexampleifanemployeehas200NewYorkworkdaysoutofatotalof400workdaysfromdateofgranttodateofvestNewYorkwilltax50oftheoptionincomePriorto2007NewYorkemployedadateofgranttodateofexerciseallocationapproachbutsuchapproachwasrejectedwhenNewYork

promulgateditscurrentregulatoryregimeprimarilybecausetheapproachwaschallengedandrejectedbyNewYorkrsquosTaxAppealsTribunalinIn re Stuckless29AsnonresidentsarenolongersubjecttoaNewYorkCityearningstaxthereiscurrentlynoNewYorkCitypersonalincometaxorwithholdingobligationondeferredcompensationincomeorregularwageincome

ArizonaandCalifornia SeveralstatescontinuetoemployNewYorkrsquosformerdateofgranttoexerciseapproachsuchasArizonaandCalifornia30Ifwegobacktoourpreviousexampleandthesameemployeeworks200daysinNewYorkoutofatotalof1000daysbetweengrantandexerciseArizonaandCaliforniawouldconsideronly20oftheincomeasNewYorksourced(versus50underNewYorkrsquosrules)ThemismatchalsoaffectsanemployeersquosabilitytoobtainacreditfortaxespaidtootherjurisdictionsasmoststatesapplytheirownsourceruleswhencalculatingtheamountoftheallowablecreditThusinourexample30oftheemployeersquosincomemaybesubjecttodoubletaxation

Georgia AsignificantchangehasrecentlyoccurredinGeorgiaEffectiveJanuary12011Georgialawprovidesthataswellasothertypesofcompensation

theincomefromtheexerciseofstockoptionsreceivedbyanonresidentofGeorgiawhoengagedinemploymenttradebusinessprofessionalorotheractivityforfinancialgainorprofitinaprioryearwithinGeorgiaandwhoseincomeexceedsthelesseroffivepercentoftheincomereceivedfromallplacesduringthetaxableyearor$5000shallbesubjecttotaxation31

FornonstatutorystockoptionswithnoreadilyascertainablefairmarketvaluetheamountofincomeincludedinGeorgiataxableincomeiscomputedbasedontheratioofdaysworkedinGeorgiafortheemployerfromthegrantdatetothevestdateonorafterJanuary12011tothetotalnumberofdaysworkedfortheemployerduringthetimefromthegrantdatetothevestdate32ThusGeorgialike

NewYorkemploysadateofgranttodateofvestallocationmethodologyHoweveremployeesinGeorgiaeffectivelyreceiveapassforthedaysworkedinGeorgiapriortotheeffectivedateofthenewlawassuchdaysarenotincludedinthenumeratoroftheallocationformulabutareincludedinthedenominatoroftheallocationformulatherebydilutingtheamountofstockoptionincomeallocabletothestate33

IdahoInIdahoanotherstatethatemploysthedateofgranttodateofvestapproachthestatersquosregulationsprovidethatldquothegrantingofstockoptionsshallbepresumedtobeintendedascompensationforfutureservicesrdquoandtheldquopartyallegingotherwiseshallbeartheburdenofprovingthatthestockoptionswereintendedforservicesrenderedbeforethedateofgrantrdquo34

OhioInOhiotheallocationisbasedontheOhio-relatedappreciation35ldquoForpurposesofdeterminingtheOhio-relatedappreciationthenonresidentwilltreatasOhioincomethevalueoftheunexercisedstockoptionatthetimetheindividualleftOhiominusthevalueoftheunexercisedstockoptionatthetimetheindividualreceivedtheoptionrdquo36

AscanbeseentherearemanyoptionsforallocatingstockoptionincometoastateJuxtaposedwiththeserulesarethestatesrsquowithholdingtaxruleswhichgenerallyprovidethatanemployerisrequiredtowithholdanamountsubstantiallyequivalenttotheamountoftaxdueYetNewYorkrequiresanemployertowithholdon100ofthedeferredcompensationincomeunless(1)theemployeesubmitsaFormIT-21041forthedeferredcompensationreflectingtheproperallocationoftheincome(2)theemployerhasaFormIT-21041onfileforanemployeeforthecurrentyeartheemployeeisstillperformingservicesinNewYorkandthedeferredcompensationislessthan$1000000forthepayrollperiodinwhichcasetheemployermaywithholdbasedontheFormIT-21041onfileforthecurrentyear(3)theemployeeisnolongeremployedbytheemployerorisnolongerperformingservicesinNewYorkandthedeferredcompensationis



19


lessthan$1000000forthepayrollperiodinwhichcasetheemployermaywithholdbasedonthelastFormIT-21041onfilefortheemployeeor(4)theemployerhasadequaterecordstodeterminetheproperallocationofthedeferredcompensationincometoNewYork37WhatareadequaterecordsRecordssufficienttoenabletheemployertodeterminethepercentageofservicesperformedinastateforallyearsinwhichthedeferredcompensationincomeisearned

Record Keeping

AnemployerbearstheburdenofkeepingtrackofthephysicallocationofitsmobileworkforcersquosbusinessactivitiesandmaintainingrecordsthatreflectthisinformationformanyyearsEmployersshouldconsiderimplementingwithholdingsystemsthatinteractwithexpensereportingsystemsEmployersshouldalsotakestepstoobtainandretainstatespecificformsfromtheiremployeesforpurposesofdeterminingtheproperallocationpercentageandstateofresidence(egNewYorkIT-21041andMassachusettsFormM-4P)Anemployermayalsowishtoreminditsemployeestokeeptheirownpersonaldiariesexpensereportsandotherrecordsnecessarytodocumenttheirworkingdays

Conclusion

Employersshouldreviewandrevisetheirpracticestocapturestatespecificallocationperiodsfordeterminingthecorrectamountofwithholdingandimplementinternalmechanismstotrackandretaininformationabouttheiremployeesrsquobusinessactivities(egphysicallocationwhereservicesareperformed)includingspecificformsrequiredbythestatesAmountscalculatedunderonestatersquosrulesmaynotsufficientlysatisfyanemployerrsquoswithholdingtaxdutiesinotherstatesInourexperiencepenaltiesarelesslikelytoapplywhenanemployerhasmadeagoodfaithefforttocomplywiththestatersquoswithholdingtaxrules

1 NewYorkhasadoptedaninformal14daysduringthecalendaryearrulewithintheNewYorkStateDepartmentofTaxationandFinancersquosWithholdingTaxFieldAuditGuidelinesNYDeprsquotTaxrsquonampFinIncomeFranchiseFieldAuditBurWithholding Tax Field Audit Guidelinespp50-52(Mar272009)(ldquoNY Withholding Tax Audit Guidelinesrdquo)TheguidancerelievesemployersfromwithholdingonnonresidentemployeeswhoareassignedtoaprimaryworklocationoutsideofNewYorkStateandworkinNewYorkState14orfewerdaysinacalendaryearIncontrasttoNewYorkHawaiirsquos60daysduringthecalendaryearwithholdingtaxsafeharborissetforthinthestatersquoswithholdingtaxregulationsSeeHawRegsect18-235-61-04(b)(1)

2 See NY Withholding Tax Audit Guidelines supranote1pp50-51(statingthatldquo14dayguidancewillnotapplytoemployeeswhoreceiveincomeinthecurrentyearthatisrelatedtoserviceperformedinNewYorkinprioryearsrdquoincludingincomefromldquostockoptionsanddeferredcompensationrdquo)SB2170sect262ndLegislativeAssemblyofNorthDakota(enactinga20-daynonresidentmobileworkforceexceptionforemployerwithholdingbutexcludingcompensationpaidtocertainkeyemployeesldquofortheyearimmediatelyprecedingthecurrenttaxyearrdquo)

3 HR1864112thCongress(2011-2012)

4 ForexampleinPennsylvaniaifanemployerfailstowithholdtaxandthereafterthetaxispaidthetaxthatwasrequiredtobewithheldwillnotbecollectedfromtheemployerbuttheemployerremainsliableforanypenaltiesinterestoradditionstotaxwithrespecttothefailuretowithhold72PaStatsect7321PaRegsect11312TheemployerispotentiallysubjecttopenaltiesoradditionstotaxforthefailuretoproperlywithholdPennsylvaniapersonalincometaxincludinganadditiontotaxof5ofthetaxthatshouldhavebeenwithheldiffailuretowithholdisfornotmorethanonemonthTheemployerisliableforanadditional5additiontotaxforeachadditionalmonththeincomewasnotwithheldupto25whichmaynotbecollectedfromtheemployeeIfthefailuretowithholdisldquowillfulrdquotheemployerisliableforapenaltyof100ofthetaxthatwasnotwithheld72PaStatsect7352(e)

5 InPennsylvaniacorporateofficersoremployeesarepersonallyliableforuncollectedtaxesandpenaltiesiftheyhadadutytowithholdtax72PaStatsect7352(e)InNewYorkcorporateofficersoremployeesarepersonallyliableforuncollectedtaxesiftheyareconsideredaldquopersonrequiredtocollecttruthfullyaccountforandpayoverthetaxrdquoandthefailuretowithholdwasldquowillfulrdquoNYTaxLawsect685(g)

6 4USCSsect114

7 Id

8 Id

9 HR4019109thCongress(2005-2006)CongressmadetheretiredpartneramendmentsretroactivetopaymentsreceivedafterDecember311995Id

10 NYSDeprsquotofTaxrsquonampFinTSB-A-11(10)I(Nov172011)

11 MassDeprsquotofRevLetterRuling00-1WithholdingonNonperiodicPaymentsMadeUnderaNonqualifiedPlan(Jan282000)

12 Id

13 20NYCRRsectsect1324(d)13220

14 See ColoRevStatsect39-22-104DCCodeAnnsect47-180302GaCodeAnnsect48-7-27(a)IndCodeAnnsect6-3-1-8KanStatAnnsect79-32117NYTaxLawsect611

15 See ConnAgenciesRegssect12-701(b)-1(a)(12)amp12-705(a)-1(a)DelDivisionofRevenueWithholding

RegulationsandEmployerrsquosDutiesavailableathttprevenuedelawaregovserviceswit_foldersection1shtmlDCCodeAnnsect47-180104(56)ampDCMunRegssect9-130220NYCRRsectsect1711amp1713

16 61PaCodesectsect1016(b)(8)amp1017

17 See supranote1(providingexamplesofthresholdsbasedoncalendardays)see alsoIdahoIncomeTaxAdminRulessect350101871(providingthatnowithholdingisrequiredifanonresidentearnsin-statewageslessthan$1000inacalendaryear)OklaStattit68sect23851(e)(4)(providingthatnowithholdingisrequiredifanonresidentearnsin-statewageslessthan$300inacalendarquarter)

18 ForexampleareciprocalagreementexistsbetweenNewJerseyandPennsylvania See72PaStatsect7356(b)APennsylvaniaresidentmustsubmitanEmployeersquos Certificate of Nonresidence in New Jersey(FormNJndash165)tohisemployer

19 SeeConnGenStatsect12-700(a)GaCodeAnnsect48-7-20(a)MoRevStatsect143111NYTaxLawsect611

20 SeeConnGenStatsect12-700(b)GaCodeAnnsect48-7-20(a)MoRevStatsect143041NYTaxLawsect631

21 SeeConnAgenciesRegssect12-711(c)-520NYCRRsect13218cfOhioRevCodeAnnsect574705(providingthatanonresidentreceivesacreditonthatportionoftheadjustedgrossincomenotearnedorreceivedinOhio)

22 Compare20NYCRRsect13218(providingawork-dayallocationbasedonconvenienceofemployerrulewheredaysworkedoutsideNewYorkaretreatedasNewYorkworkdaysunlessthenonresidentworkedoutsideofNewYorkbynecessity)withMinnStatsect29017(providingawork-dayallocationbasedonperformanceofserviceswithinthestate)

23 SeeIRCsect423

24 IRCsect422(a)(1)

25 IRCsect83(a)

26 Id

27 IRCsectsect100112211222

28 20NYCCRsect13224see also20NYCRRsectsect132251546

29 In re StucklessDTANo8193192006NYTaxLEXIS171(NYTaxAppTribAug172006)

30 ArizIndividualIncomeTaxRulingITR02-5(Oct212002)CalFranchiseTaxBdFTBPublication1004(Oct2007)(statingthatldquoyoumustallocatetoCaliforniathatportionoftotalcompensationreasonablyattributedtoservicesperformedinthestaterdquoifyouperformedservicesforthecorporationbothwithinandoutsideCaliforniaandprovidingthatonereasonablemethodisanallocationbasedontotalamountoftimeworkedinCaliforniafromgrantdatetoexercisedatetototalworkdaysfromgrantdatetoexercisedate)

31 GaRuleofDeprsquotofRevenueIncomeTaxDivCh560-7-4-05(3)(b)see alsoGaCodeAnnsect48-7-1(11)

32 GaRuleofDeprsquotofRevenueIncomeTaxDivCh560-7-4-05(3)(b)(2)(i)

33 Idat(3)(b)(3)(iv)

34 IdahoIncomeTaxAdminRulesect350101271

35 OhioDeprsquotofTaxrsquonIT1996-01ndashPersonalIncomeTaxLawPreemptingStateTaxationofRetirementPlanIncomendashIssuedMarch111996RevisedMay2007

36 Id

37 See NY Withholding Tax Audit Guidelines supranote1pp46-47


20


TheCaliforniaConstitutiongenerallyrequiresthatallprivatelyheldrealpropertyinthestatemustbetaxed1Howeveritpermitsexclusionsorexemptionsforspecifictypesofpropertiesundercertaincircumstancesincludinganexclusionofldquoactivesolarenergysystemsrdquofromthedefinitionofassessablenewconstruction2ThisexclusioneffectivelyallowsunderspecificconditionslargesolarenergyfueledelectricitypowerplantstobeexemptfromalmostallrealpropertytaxonenergyproducingfixturesandequipmentforaslongastheplantrsquosinitialownercontinuestoownthepropertyHoweverasdiscussedinthisarticletheexclusioncaneasilybelostbydevelopersofsuchplantswhoareunawareoftherigidrequirementsformaintainingtheexclusionAndaccordingtotheCaliforniaStateBoardofEqualizationrsquosrecentproposedguidancemanualfortheapplicationoftheexclusionitcaneasilybelostifadevelopercompletesconstructionofaplantbeforeJanuary1butdoesnottransfertheplanttothefirstoperatoruntilafterJanuary13ThelessonfordevelopersDonrsquotfinishwhatyoucanrsquotsellbytheendoftheyearoryourbuyermaygetstuckwithapropertytaxhangoverthatwillnevergoaway

ThepropertytaxexclusionforactivesolarenergysystemsoftenreferredtoastheldquoSection73exclusionrdquohasitsoriginsintheCaliforniaConstitutionarticleXIIIAwhichisthearticleaddedbythetaxpayerreferendumcommonlyknownasldquoProp13rdquo4AsmanyknowProp13establishedaldquochangeinownershiprdquobasedpropertytaxsysteminCaliforniawherebyassessmentswouldbesetand

cappedbythefairmarketvalueoftherealpropertyasofthedateitundergoesachangeinownershipUnderProp13oncethatchangeinownershipldquobaseyearvaluerdquoissetthepropertyrsquosassessmentvaluecannotincreasebymorethan2peryearthereafterunlessthereisanotherchangeinownershipatwhichtimethebaseyearvalueisresettomarketvalueHoweverifldquonewconstructionrdquoisperformedonthepropertythevalueoftheongoingconstructioninprogress(ldquoCIPrdquo)canbeaddedtotheexistingbaseyearvalueontheJanuary1liendatefollowingtheinitiationofthenewconstructionanduponcompletionofanewconstructionprojectthetotalvalueofthenewconstructiongetsaddedtotheexistingbaseyearvaluetoformanewcompositebaseyearvalue(iethechangeinownershipbaseyearvaluesetbythelasttransferoftherealpropertyplusthenewconstructionbaseyearvaluesetbythevalueaddedbythenewconstructionminusthevalueremovedbyanydemolitionofpre-existingproperty)

Asimpleexamplehelpstoillustratethetypicalbaseyearvaluerulesifahouseonanacreoflandwerepurchasedinanarmrsquos-lengthtransactionfor$800000onMarch12011theassessorwouldenrollthefairmarketvalueoftherealpropertyasoftheMarch12011changeinownershipdateForthisexampleletrsquospresumethatthe$800000purchasepricewasacceptedasthefairmarketvalueTheassessorwouldbeobligatedtoallocatethetotalvaluebetweenlandandimprovementsLetrsquosassumethattheassessorallocated$500000tothelandand$300000totheimprovementsTheassessorcouldthenincreasetheassessmentbynomorethan

2peryearthereafteruntilthepropertysellsagainorthereisnewconstruction(includingdemolitionofexistingimprovements)

ContinuingtheexampleinDecember2012theownertearsdownadetachedgaragethathadbeenonthepropertywhenpurchased(presumedtobeworth$25000atthetimeofpurchaseinthisexample)andstartstoerectasmallguestcottageinitsplaceThevalueoftheguestcottage(usuallydeterminedbythecoststobuildit)isdeterminedtobe$100000whencompletedonMay12014with$50000invalueaddedbynewconstructionduringtheyear2013andtheremaining$50000invalueaddedintheyear2014whenthecottageiscompletedThepropertyshouldbeassessedasfollows(assumingthepropertyrsquosmarketvaluehasincreasedbyatleast2eachyear)

March12011Landndash$500000Improvementsndash$300000Totalndash$800000

Thebaseyearvalueissetbythechangeinownershipandallocatedbetweenthelandandimprovements

Californias Property Tax Exclusion for Solar Energy Power Plants Waiting to Sell Until New Years Day Might Produce a Huge HangoverBy Peter B Kanter


DONrsquoT FINISH WHAT YOU CANrsquoT SELL BY

THE END OF THE YEAr Or YOUr BUYEr MAY

GET STUCk WITH A PrOPErTY TAx

HANGOvEr THAT WILL NEvEr GO AWAY

21


January12012Landndash$510000Improvementsndash$306000Totalndash$816000

The2perannummaximumassessmentinflationfactorisappliedtobothlandandimprovementsbaseyearvalues


Thelandandimprovementscontinuetotrendupby2butthe$25000valueofthedemolishedgarageisremovedfromtheimprovementsbaseyearvalueasoftheJanuary1liendate


Thelandandremainingimprovementsbaseyearvaluescontinuetoinflateat2plusthe$50000CIPinplaceasoftheJanuary1liendateisaddedtotheimprovementsbaseyearvalue

May12014Landndash$530604Improvementsndash$392352Totalndash$922956

Uponcompletionofconstructiontheimprovementsbaseyearvalueisresettoaddthetotalvalueaddedtothepropertybythenewconstructionmdashinthiscasetheremaining$50000invalueaddedafterJanuary12014whichwasnotincludedintheregularJanuary12014annualassessment


ThisisthenewldquocompositebaseyearvaluerdquoconsistingofthebaseyearvalueestablishedbytheMarch12011changeinownershipvaluetrendedupby2minusthevalueofthedemolishedgarageplusthevalueofthenewconstructiontrendedupby2sinceitscompletion

February12015Uponahypotheticalsaleoftheentirepropertyfor$1100000anewchangeinownershipbaseyearvaluewouldbesetallocatingthe$1100000fairmarketvaluebetweenthelandandtheimprovementseg$600000forlandand$500000forimprovements

ThusasdemonstratedintheexampleabovethevalueofnewconstructiontypicallygetsaddedtoapropertyrsquosbaseyearvalueIftheconstructionprojectextendsoveraJanuary1liendatethenthevalueofCIPgetsaddedtothebaseyearvalueforthatupcomingassessmentyearOncetheprojectisdeemedcompletewhichisusuallydeterminedbywhenthepropertyisfullyavailableforlegaloccupancyorusebytheownerthenthetotalvalueofthenewconstructionisformallyaddedtothepropertyrsquostrendedbaseyearvalueandthatnewcompositebaseyearvaluecantheninflatebynomorethan2perannumuntilthereisanotherchangeinownershipofthepropertyatwhichtimeallofthepropertywouldbereassessedatitsfairmarketvalue

TheSection73exclusionforactivesolarenergysystemsprovidesasignificantexceptiontothegeneralrulesgoverningnewconstructionDerivingitsauthorityfromsection2(c)ofarticleXIIIAoftheCaliforniaConstitutionwhichstatessimplythatldquotheLegislaturemayprovidethatthetermlsquonewlyconstructedrsquordquoshallnotincludeldquo[t]heconstructionoradditionofanyactivesolarenergysystemrdquoSection73providessuchanexclusionandprovidesdefinitionsofwhattypeofpropertyisdeemedtobepartofanactivesolarenergysystemsubjecttotheexclusion5

TheSection73exclusionhasbeeninterpretedtoapplytoallnewlyconstructedpropertythatmeetsthedefinitionofldquoactivesolarenergysystemrdquoincludinglargescalesolarpowerelectricityproductionplantsHoweveruntilitwasamendedin2008Section73rsquosexclusionofactivesolarenergypropertyfromthedefinitionofldquonewconstructionrdquodidnotprovideanytaxbenefittoanownerwhopurchasedthe

propertyfromthepriorowner-builderwhocompletedtheconstruction6Thatwasbecauseuponthesaleofthepropertytothenewownerallofthepropertywasreassessedasachangeinownershipsettinganewbaseyearvalueatthethen-currentmarketvalueforboththelandandtheimprovements(includingallofthenewlyconstructedactivesolarenergyequipmentthatpreviouslymayhavebeenexcludedfromtheassessment)The2008amendmentofSection73changedthatforsomeldquoinitialrdquobuyersbyallowingtheexclusiontocontinuetoapplytoaninitialpurchaserwhopurchasesanewlyconstructedactivesolarenergysystemfromadeveloperaslongasallofthefollowingoccur(1)theinitialpurchaserboughtthebuildingfromtheowner-builderwhodidnotintendtooccupyorusethebuildingbeforesellingit(2)theowner-builderhadnotalreadyreceivedtheSection73exclusionforthesameactivesolarenergysystemand(3)ldquotheinitialpurchaserpurchasedthenewbuildingpriortothatbuildingbecomingsubjecttoreassessmenttotheowner-builderasdescribedinsubdivision(d)ofSection7512rdquo7

Section7512providestherulesgoverningthedateofcompletionofconstructionforpurposesofestablishingthenewconstructionbaseyearvalueassessment8Asnotedabovethegeneralruleisthatnewconstructionisdeemedtobecompleteasofthedatewhenthenewconstructionisavailableforlegalusebytheowner9HoweverSection7512provideswhatiscommonlycalledldquothebuilderrsquosexclusionrdquowhichallowsforbuildingdeveloperstoputoffthedateofacompletionofnewconstructionassessmentwhenthedeveloperdoesnotintendtoeveroccupyorusethenewlybuiltpropertybutintendstosellitafteritiscompleted10IfthedevelopersatisfiesthebuilderrsquosexclusionrequirementsofSection7512(whichincludeprovidingnoticetotheassessorofthedeveloperrsquosintenttoclaimtheexclusionwithin30daysoftheinitiationofconstruction)thecompletionofnewconstructionreassessmentispostponedfromthedatethenewlyconstructedpropertyisfirstavailablefor


Solar Energy Exclusion(Continued from page 20)

22


usetothedatethatthepropertyisactually occupied or usedwiththeownerrsquosconsentIneffectifthedeveloperproperlyclaimsthebuilderrsquosexclusionandthendoesnotusethenewlybuiltpropertyneitheraftercompletionnorbeforethepropertyissoldthepropertyrsquosbaseyearvaluewillnotbereassesseduntilthedeveloperactuallysellsthepropertywhichtriggersachangeinownershipreassessmentofboththelandandimprovements(includingthenewconstruction)asofthedateofthesale

Howeversubdivision(d)ofSection7512whichisthesubdivisioncitedinSection73statesldquoNothinginthissectionshallprecludethereassessmentofthatpropertyontheassessmentrollforJanuary1followingthedateofcompletionrdquo11Subdivision(d)therebyrequiresthatifthedeveloperhascompletedthepropertypriortoJanuary1buthasnotsoldthepropertypriortoJanuary1thevalueofthecompletednewconstructionwillstillbeaddedtotheannualassessedvaluefortherealpropertyjustasthevalueofCIPhasbeenaddedasofeachJanuary1liendateduringthecourseofconstruction(assumingtheconstructionspannedpriorliendates)12AndherersquoswheretherubcomesinfordeveloperswhohavecompletedconstructionofactivesolarenergysystempropertiesincludingsolarenergybasedelectricityplantsIf a developer completes construction of a project that includes active solar energy

property such that the property is ready and available for use before January 1 but the developer does not transfer the property to an initial buyer until after the January 1 date succeeding the completion of construction the initial buyer may not be able to claim the Section 73 exclusion13

ThusifasolarpowerplantiscompletedonDecember152011andtransferstothefirstbuyeronDecember312011thebuyermayclaimtheSection73exclusiontoexcludeallactivesolarenergyfixturesandimprovementsfromthebuyerrsquospropertytaxassessmentsforeveryyearthatthebuyercontinuestoownthepropertybecausethedeveloperneverreceivedtheexclusionHowever ifthebuyerwaiteduntilJanuary22012tocloseonthepropertythenthebuyercouldnotclaimtheexclusionandwouldbeassessedontheentirevalueoftheplantincludingallofthesolarenergyequipmentandfixturesbecausethedeveloperwouldhavereceivedthebenefitoftheexclusionofthesolarenergypropertyreassessmentofthenewconstructionasofJanuary1IndeedthatisexactlytheexampleprovidedbythestaffoftheCaliforniaStateBoardofEqualizationinanOctober2011draftofthesoontobepublishedGuidelines for Active Solar Energy Systems New Construction Exclusion

CertainlysucharesultmayseemarbitraryandunfairHoweverthetaxlawsarefilledwitharbitraryandarguablyunfairrequirementsandrulesespeciallyinregardtotimingissuesAndaswithmosttimingissuesinthetaxlawsataxpayerorinthiscasethepartytryingtosellpropertytoataxpayerhassomecontrolovertheapplicationoftheruleThusadeveloperofpropertythatconsistsoforcontainsanysignificantamountofactivesolarenergypropertyshouldmakesurethatthepropertyisnotldquocompletedrdquoiereadyforlegalusebeforeJanuary1ofanyyearifthedeveloperdoesnothavenearcertaintythattheprojectwillbesoldtothefirstbuyerbeforetheendofthecalendaryearAndbuyersshouldmakesurethatthedeveloperisawareofthisruleandcanensurethatthepropertywillnotbecompletedbeforeJanuary1ofanyyearifthebuyerwillnotbeacquiringthepropertybeforeJanuary1aswellMoreover

developersshouldmakesurethattheynotifythecountyassessorthatthedeveloperintendstoclaimthebuilderrsquosexclusionwithin30daysoftheinitiationoftheconstructionortheymaynotbeabletopassontheSection73exclusiontoabuyer

WithcarefulplanningtoensurethattheSection73exclusioncanbemaintainedbuyersofsolarenergypropertiesshouldbeabletobenefitfromthesignificantpropertytaxreductionsallowedbytheSection73exclusionandavoidaNewYearrsquospropertytaxhangoverthatwonrsquotgoaway

1 CalConstartXIIIAsect1

2 CalConstartXIIIAsect2(c)(1)

3 CalSBEGuidelines for Active Solar Energy Systems New Construction Exclusion(draftOct2011)

4 CalRevampTaxCodesect73

5 Id

6 CalRevampTaxCodesect73(2007)

7 CalRevampTaxCodesect73(e)(1)


9 Id

10 Id

11 Idat(d)

12 Id


TheviewsexpressedinthearticlesinthispublicationarethoseoftheauthorsonlyareintendedtobegeneralinnatureandarenotattributabletoMorrisonampFoersterLLPoranyofitsclientsTheinformationprovidedinthesearticlesmaynotbeapplicableinallsituationsandshouldnotbeacteduponwithoutspecificlegaladvicebasedonparticularsituations


ThisnewsletteraddressesrecentstateandlocaltaxdevelopmentsBecauseofitsgeneralitytheinformationprovidedhereinmaynotbeapplicableinallsituationsandshouldnotbeacteduponwithoutspecificlegaladvicebasedonparticularsituationsIfyouwishtochangeanaddressaddasubscriberorcommentonthisnewsletterpleasewritetoNicoleLJohnsonatMorrisonampFoersterLLP1290AvenueoftheAmericasNewYorkNewYork10104-0050oremailheratnjohnsonmofocomorwritetoTimothyAGustafsonatMorrisonampFoersterLLP400CapitolMallSacramentoCalifornia95814oremailhimattgustafsonmofocom

copy2012MorrisonampFoersterLLPAllRightsReservedwwwmofocom

THE TAx LAWS ArE FILLED WITH ArBITrArY AND

ArGUABLY UNFAIr rEqUIrEMENTS AND rULES ESPECIALLY

IN rEGArD TO TIMING ISSUES

23


When these companies

had difficult state tax

cases they sought out

morrison amp foerster

laWyersshouldnrsquot you

ABB v MissouriAlbany International Corp v WisconsinAllied-Signal Inc v New JerseyAE Outfitters Retail v Indiana American Power Conversion Corp v Rhode IslandCiticorp v CaliforniaCiticorp v MarylandClorox v New JerseyColgate Palmolive Co v CaliforniaConsolidated Freightways v CaliforniaContainer Corp v California Crestron v New JerseyCurrent Inc v CaliforniaDeluxe Corp v CaliforniaDIRECTV Inc v IndianaDIRECTV Inc v New JerseyDow Chemical Company v IllinoisExpress Inc v New YorkFarmer Bros v CaliforniaGeneral Mills v CaliforniaGeneral Motors v Denver GMRI Inc (Red Lobster Olive Garden) v CaliforniaGTE v KentuckyHair Club of America v New YorkHallmark v New YorkHercules Inc v IllinoisHercules Inc v KansasHercules Inc v MarylandHercules Inc v MinnesotaHoechst Celanese v CaliforniaHome Depot v CaliforniaHunt-Wesson Inc v CaliforniaIntel Corp v New MexicoKohlrsquos v IndianaKroger v ColoradoLanco Inc v New JerseyMcGraw-Hill Inc v New YorkMCI Airsignal Inc v CaliforniaMcLane v ColoradoMead v IllinoisNabisco v OregonNational Med Inc v ModestoNerac Inc v NYS Division of TaxationNewChannels Corp v New YorkOfficeMax v New YorkOsram v PennsylvaniaPanhandle Eastern Pipeline Co v Illinois Panhandle Eastern Pipeline Co v KansasPier 39 v San Francisco Powerex Corp v OregonReynolds Metals Company v Michigan Department of TreasuryReynolds Metals Company v New YorkRJ Reynolds Tobacco Co v New YorkSan Francisco Giants v San FranciscoScience Applications International Corporation v MarylandSears Roebuck and Co v New YorkShell Oil Company v CaliforniaSherwin-Williams v MassachusettsSparks Nuggett v NevadaSprintBoost v Los AngelesTate amp Lyle v AlabamaToys ldquoRrdquo Us-NYTEX Inc v New YorkUnion Carbide Corp v North CarolinaUnited States Tobacco v CaliforniaUSV Pharmaceutical Corp v New YorkUSX Corp v KentuckyVerizon Yellow Pages v New YorkWhirlpool Properties v New JerseyWR Grace amp ComdashConn v MassachusettsWR Grace amp Co v MichiganWR Grace amp Co v New YorkWR Grace amp Co v Wisconsin

copy2012 Morrison amp Foerster LLP | mofocom

For more information please contactCraig B Fields at (212) 468-8193

Paul H Frankel at (212) 468-8034 orThomas H Steele at (415) 268-7039

2


creditstotheproducersofJersey Shore2GovernorChristieexplainedldquoIhavenointerestinpolicingthecontentofsuchprojectshoweverasChiefExecutiveIamdutyboundtoensurethattaxpayersarenotfootinga$420000billforaprojectwhichdoesnothingmorethanperpetuatemisconceptionsabouttheStateanditscitizensrdquo3

State Review of Motion Picture and Television Production Content

WhileGovernorChristiersquosvetooftheJersey ShoretaxcreditsmadenationalnewsNewJerseyisnottheonlystatethatreviewsthecontentofproductionsbeforegrantingtaxincentivesIn2010theNew York TimesreportedthestatementsofMichiganrsquosFilmCommissionerinconnectionwiththedenialoftaxincentivesforthemotionpictureThe WomanNotingthefilmrsquossubjectmatterldquonamelyrealisticcannibalismthegruesomeandgraphicallyviolentdepictionsdescribedinthescreenplayandtheexplicitnatureofthescriptrdquotheMichiganFilmCommissionerstatedldquo[t]hisfilmisunlikelytopromotetourisminMichiganortopresentorreflectMichiganinapositivelightrdquo4SimilarlytheTexasFilmCommissionrefusedtopay$175millionintaxincentivestotheproducersofthemotionpictureMachetecitingastatelawthatallowsthestatetorefusetopayincentivesforcontentthatportraysTexasorTexansinanegativefashion5

TheproducersofJersey ShorecouldnothaveanticipatedthattheirtaxcreditswouldberevokedbecauseNewJerseyrsquosincentiveprogramliketheprogramsin

moststatesdoesnotdisqualifyproductionsthatmakethestatelookbadHoweverahandfulofstateslikeTexashaveenactedsuchcriteriaintotheirlawsorcreatedsimilarstandardsintheirapplicationreviewguidelines6UtahrsquosMotionPictureIncentiveFundapplicationinstructionsprovidethatthestateisnotrequiredtograntincentivestoprojectsthatincludeldquoinappropriatecontentrdquoorldquocontentthatportraysUtahorResidentsofUtahinanegativewayrdquo7

InWisconsinaproductionwillnotqualifyifitwillhurtthereputationofthestate8AproductionwithcontentthatportraysWestVirginiainaldquosignificantlyderogatorymannerrdquoisineligibleforWestVirginiafilmcredits9WyominglimitsthedefinitionofaldquoqualifiedproductionrdquotofilmedentertainmentthatwouldlikelyencouragemembersofthepublictovisitthestateofWyoming10SimilarlyKentuckyrsquosprogramrequiresadeterminationthattheproductionwillnotnegativelyimpactthetourismindustryoftheCommonwealthandPennsylvaniarsquosapplicationguidelinesindicatethatthePennsylvaniaFilmOfficemayconsiderwhethertheprojectwilltendtofosterapositiveimageofPennsylvania11

Themajorityofstatemotionpictureandtelevisionproductionincentiveprogramshavenotopenlyexpressedasimilarconcernaboutproductionsthatmayportray

astateinanegativefashionHoweverstatesnormallycarveoutbroadcategoriesofproductionsthatdonotqualifyfortaxincentivessuchasnewssportseventsawardprogramsandevendocumentariesandrealitytelevisionshows12Itisalsotypicalforincentiveprogramstocontainsomemannerofprohibitiononproductionsthatcontainsexuallyexplicitorobscenematerial13ByrequiringtaxincentiveapplicantstosubmitascriptscreenplayorsynopsisoftheproductionstatefilmcommissionschargedwithadministeringincentiveprogramsarealsoabletoreviewthecontentofproposedmotionpictureandtelevisionproductionsSomestateincentiveprogramsactuallyrequireproductioncompaniestosubmitacopyofthefinalversionoftheproductiontoqualifyfortaxincentives14

First Amendment Principles

AlthoughtheproducersofJersey ShoremayhavemorethanoneavenueforchallengingGovernorChristiersquosvetooftheirtaxcreditstheinterestingquestionwithmultistateramificationsiswhetherGovernorChristiecrossedaFirstAmendmentlinewhenhedeniedtaxcreditstoJersey Shorebaseduponthecontentoftheproduction15TheFirstAmendmentprovidesthatCongressshallmakenolawabridgingthefreedomofspeechandismadeapplicabletothestatesthroughtheFourteenthAmendment16FirstAmendmentjurisprudencerecognizes

UnderoursystemofgovernmentthereisanaccommodationforthewidestvarietiesoftastesandideasWhatisgoodliteraturewhathaseducationalvaluewhatisrefinedpublicinformationwhatisgoodartvarieswithindividualsasitdoesfromonegenerationtoanotherButarequirementthatliteratureorartconformtosomenormprescribedbyanofficialsmacksofanideologyforeigntooursystem17

IfweassumethattheFirstAmendmentprotectstherightofafilmmakertoproduceamotionpicturethatfeaturescannibalismorthatportraysTexasinanegative



ToensurecompliancewithrequirementsimposedbytheIRSMorrisonampFoersterLLPinformsyouthatifanyadviceconcerningoneormoreUSfederaltaxissuesiscontainedinthispublicationsuchadviceisnotintendedorwrittentobeusedandcannotbeusedforthepurposeof(i)avoidingpenaltiesundertheInternalRevenueCodeor(ii)promotingmarketingorrecommendingtoanotherpartyanytransactionormatteraddressedherein

THE TExAS FILM COMMISSION rEFUSED TO PAY $175 MILLION

IN TAx INCENTIvES TO THE PrODUCErS

OF THE MOTION PICTUrE MACheTe CITING A STATE LAW THAT ALLOWS THE STATE TO rEFUSE

TO PAY INCENTIvES FOr CONTENT THAT

POrTrAYS TExAS Or TExANS IN A NEGATIvE

FASHION

3
























4


















MOFO ATTOrNEY NEWS





5
















6



Conclusion




3 Id












Id








Id


20 Id






26 Idat528-529

27 Idat518

28 Id


30 Idat230

31 Idat221




35 Idat192

36 Idat193


38 Idat584

39 Idat585

40 Id

41 Idat587-88





46 Idat200

47 Id


7







Sales and Use Taxes



Withholding Taxes


All Taxes












8



Criminal Penalties

















DutytoAct









TO THrEE YEArS

9














Procedural Issues















CONCErN

10


Conclusion


































33 Id

34 Idat84




38 Id




42 Idat942








11



















12















13














14















15













7 Id(emphasisadded)

8 Id


10 Id




14 Id

15 Id

16 Id





21 Id

22 Id




26 Idat527




30 Id

31 Id at530






16
















17












Stock Option Income




18

















19



Record Keeping


Conclusion




3 HR1864112thCongress(2011-2012)



6 4USCSsect114

7 Id

8 Id




12 Id












23 SeeIRCsect423

24 IRCsect422(a)(1)

25 IRCsect83(a)

26 Id







33 Idat(3)(b)(3)(iv)



36 Id



20
















21




















22













5 Id




9 Id

10 Id

11 Idat(d)

12 Id









23











3
























4


















MOFO ATTOrNEY NEWS





5
















6



Conclusion




3 Id












Id








Id


20 Id






26 Idat528-529

27 Idat518

28 Id


30 Idat230

31 Idat221




35 Idat192

36 Idat193


38 Idat584

39 Idat585

40 Id

41 Idat587-88





46 Idat200

47 Id


7







Sales and Use Taxes



Withholding Taxes


All Taxes












8



Criminal Penalties

















DutytoAct









TO THrEE YEArS

9














Procedural Issues















CONCErN

10


Conclusion


































33 Id

34 Idat84




38 Id




42 Idat942








11



















12















13














14















15













7 Id(emphasisadded)

8 Id


10 Id




14 Id

15 Id

16 Id





21 Id

22 Id




26 Idat527




30 Id

31 Id at530






16
















17












Stock Option Income




18

















19



Record Keeping


Conclusion




3 HR1864112thCongress(2011-2012)



6 4USCSsect114

7 Id

8 Id




12 Id












23 SeeIRCsect423

24 IRCsect422(a)(1)

25 IRCsect83(a)

26 Id







33 Idat(3)(b)(3)(iv)



36 Id



20
















21




















22













5 Id




9 Id

10 Id

11 Idat(d)

12 Id









23











4


















MOFO ATTOrNEY NEWS





5
















6



Conclusion




3 Id












Id








Id


20 Id






26 Idat528-529

27 Idat518

28 Id


30 Idat230

31 Idat221




35 Idat192

36 Idat193


38 Idat584

39 Idat585

40 Id

41 Idat587-88





46 Idat200

47 Id


7







Sales and Use Taxes



Withholding Taxes


All Taxes












8



Criminal Penalties

















DutytoAct









TO THrEE YEArS

9














Procedural Issues















CONCErN

10


Conclusion


































33 Id

34 Idat84




38 Id




42 Idat942








11



















12















13














14















15













7 Id(emphasisadded)

8 Id


10 Id




14 Id

15 Id

16 Id





21 Id

22 Id




26 Idat527




30 Id

31 Id at530






16
















17












Stock Option Income




18

















19



Record Keeping


Conclusion




3 HR1864112thCongress(2011-2012)



6 4USCSsect114

7 Id

8 Id




12 Id












23 SeeIRCsect423

24 IRCsect422(a)(1)

25 IRCsect83(a)

26 Id







33 Idat(3)(b)(3)(iv)



36 Id



20
















21




















22













5 Id




9 Id

10 Id

11 Idat(d)

12 Id









23











5
















6



Conclusion




3 Id












Id








Id


20 Id






26 Idat528-529

27 Idat518

28 Id


30 Idat230

31 Idat221




35 Idat192

36 Idat193


38 Idat584

39 Idat585

40 Id

41 Idat587-88





46 Idat200

47 Id


7







Sales and Use Taxes



Withholding Taxes


All Taxes












8



Criminal Penalties

















DutytoAct









TO THrEE YEArS

9














Procedural Issues















CONCErN

10


Conclusion


































33 Id

34 Idat84




38 Id




42 Idat942








11



















12















13














14















15













7 Id(emphasisadded)

8 Id


10 Id




14 Id

15 Id

16 Id





21 Id

22 Id




26 Idat527




30 Id

31 Id at530






16
















17












Stock Option Income




18

















19



Record Keeping


Conclusion




3 HR1864112thCongress(2011-2012)



6 4USCSsect114

7 Id

8 Id




12 Id












23 SeeIRCsect423

24 IRCsect422(a)(1)

25 IRCsect83(a)

26 Id







33 Idat(3)(b)(3)(iv)



36 Id



20
















21




















22













5 Id




9 Id

10 Id

11 Idat(d)

12 Id









23











6



Conclusion




3 Id












Id








Id


20 Id






26 Idat528-529

27 Idat518

28 Id


30 Idat230

31 Idat221




35 Idat192

36 Idat193


38 Idat584

39 Idat585

40 Id

41 Idat587-88





46 Idat200

47 Id


7







Sales and Use Taxes



Withholding Taxes


All Taxes












8



Criminal Penalties

















DutytoAct









TO THrEE YEArS

9














Procedural Issues















CONCErN

10


Conclusion


































33 Id

34 Idat84




38 Id




42 Idat942








11



















12















13














14















15













7 Id(emphasisadded)

8 Id


10 Id




14 Id

15 Id

16 Id





21 Id

22 Id




26 Idat527




30 Id

31 Id at530






16
















17












Stock Option Income




18

















19



Record Keeping


Conclusion




3 HR1864112thCongress(2011-2012)



6 4USCSsect114

7 Id

8 Id




12 Id












23 SeeIRCsect423

24 IRCsect422(a)(1)

25 IRCsect83(a)

26 Id







33 Idat(3)(b)(3)(iv)



36 Id



20
















21




















22













5 Id




9 Id

10 Id

11 Idat(d)

12 Id









23











7







Sales and Use Taxes



Withholding Taxes


All Taxes












8



Criminal Penalties

















DutytoAct









TO THrEE YEArS

9














Procedural Issues















CONCErN

10


Conclusion


































33 Id

34 Idat84




38 Id




42 Idat942








11



















12















13














14















15













7 Id(emphasisadded)

8 Id


10 Id




14 Id

15 Id

16 Id





21 Id

22 Id




26 Idat527




30 Id

31 Id at530






16
















17












Stock Option Income




18

















19



Record Keeping


Conclusion




3 HR1864112thCongress(2011-2012)



6 4USCSsect114

7 Id

8 Id




12 Id












23 SeeIRCsect423

24 IRCsect422(a)(1)

25 IRCsect83(a)

26 Id







33 Idat(3)(b)(3)(iv)



36 Id



20
















21




















22













5 Id




9 Id

10 Id

11 Idat(d)

12 Id









23











8



Criminal Penalties

















DutytoAct









TO THrEE YEArS

9














Procedural Issues















CONCErN

10


Conclusion


































33 Id

34 Idat84




38 Id




42 Idat942








11



















12















13














14















15













7 Id(emphasisadded)

8 Id


10 Id




14 Id

15 Id

16 Id





21 Id

22 Id




26 Idat527




30 Id

31 Id at530






16
















17












Stock Option Income




18

















19



Record Keeping


Conclusion




3 HR1864112thCongress(2011-2012)



6 4USCSsect114

7 Id

8 Id




12 Id












23 SeeIRCsect423

24 IRCsect422(a)(1)

25 IRCsect83(a)

26 Id







33 Idat(3)(b)(3)(iv)



36 Id



20
















21




















22













5 Id




9 Id

10 Id

11 Idat(d)

12 Id









23











9














Procedural Issues















CONCErN

10


Conclusion


































33 Id

34 Idat84




38 Id




42 Idat942








11



















12















13














14















15













7 Id(emphasisadded)

8 Id


10 Id




14 Id

15 Id

16 Id





21 Id

22 Id




26 Idat527




30 Id

31 Id at530






16
















17












Stock Option Income




18

















19



Record Keeping


Conclusion




3 HR1864112thCongress(2011-2012)



6 4USCSsect114

7 Id

8 Id




12 Id












23 SeeIRCsect423

24 IRCsect422(a)(1)

25 IRCsect83(a)

26 Id







33 Idat(3)(b)(3)(iv)



36 Id



20
















21




















22













5 Id




9 Id

10 Id

11 Idat(d)

12 Id









23











10


Conclusion


































33 Id

34 Idat84




38 Id




42 Idat942








11



















12















13














14















15













7 Id(emphasisadded)

8 Id


10 Id




14 Id

15 Id

16 Id





21 Id

22 Id




26 Idat527




30 Id

31 Id at530






16
















17












Stock Option Income




18

















19



Record Keeping


Conclusion




3 HR1864112thCongress(2011-2012)



6 4USCSsect114

7 Id

8 Id




12 Id












23 SeeIRCsect423

24 IRCsect422(a)(1)

25 IRCsect83(a)

26 Id







33 Idat(3)(b)(3)(iv)



36 Id



20
















21




















22













5 Id




9 Id

10 Id

11 Idat(d)

12 Id









23











11



















12















13














14















15













7 Id(emphasisadded)

8 Id


10 Id




14 Id

15 Id

16 Id





21 Id

22 Id




26 Idat527




30 Id

31 Id at530






16
















17












Stock Option Income




18

















19



Record Keeping


Conclusion




3 HR1864112thCongress(2011-2012)



6 4USCSsect114

7 Id

8 Id




12 Id












23 SeeIRCsect423

24 IRCsect422(a)(1)

25 IRCsect83(a)

26 Id







33 Idat(3)(b)(3)(iv)



36 Id



20
















21




















22













5 Id




9 Id

10 Id

11 Idat(d)

12 Id









23











12















13














14















15













7 Id(emphasisadded)

8 Id


10 Id




14 Id

15 Id

16 Id





21 Id

22 Id




26 Idat527




30 Id

31 Id at530






16
















17












Stock Option Income




18

















19



Record Keeping


Conclusion




3 HR1864112thCongress(2011-2012)



6 4USCSsect114

7 Id

8 Id




12 Id












23 SeeIRCsect423

24 IRCsect422(a)(1)

25 IRCsect83(a)

26 Id







33 Idat(3)(b)(3)(iv)



36 Id



20
















21




















22













5 Id




9 Id

10 Id

11 Idat(d)

12 Id









23











13














14















15













7 Id(emphasisadded)

8 Id


10 Id




14 Id

15 Id

16 Id





21 Id

22 Id




26 Idat527




30 Id

31 Id at530






16
















17












Stock Option Income




18

















19



Record Keeping


Conclusion




3 HR1864112thCongress(2011-2012)



6 4USCSsect114

7 Id

8 Id




12 Id












23 SeeIRCsect423

24 IRCsect422(a)(1)

25 IRCsect83(a)

26 Id







33 Idat(3)(b)(3)(iv)



36 Id



20
















21




















22













5 Id




9 Id

10 Id

11 Idat(d)

12 Id









23











14















15













7 Id(emphasisadded)

8 Id


10 Id




14 Id

15 Id

16 Id





21 Id

22 Id




26 Idat527




30 Id

31 Id at530






16
















17












Stock Option Income




18

















19



Record Keeping


Conclusion




3 HR1864112thCongress(2011-2012)



6 4USCSsect114

7 Id

8 Id




12 Id












23 SeeIRCsect423

24 IRCsect422(a)(1)

25 IRCsect83(a)

26 Id







33 Idat(3)(b)(3)(iv)



36 Id



20
















21




















22













5 Id




9 Id

10 Id

11 Idat(d)

12 Id









23











15













7 Id(emphasisadded)

8 Id


10 Id




14 Id

15 Id

16 Id





21 Id

22 Id




26 Idat527




30 Id

31 Id at530






16
















17












Stock Option Income




18

















19



Record Keeping


Conclusion




3 HR1864112thCongress(2011-2012)



6 4USCSsect114

7 Id

8 Id




12 Id












23 SeeIRCsect423

24 IRCsect422(a)(1)

25 IRCsect83(a)

26 Id







33 Idat(3)(b)(3)(iv)



36 Id



20
















21




















22













5 Id




9 Id

10 Id

11 Idat(d)

12 Id









23











16
















17












Stock Option Income




18

















19



Record Keeping


Conclusion




3 HR1864112thCongress(2011-2012)



6 4USCSsect114

7 Id

8 Id




12 Id












23 SeeIRCsect423

24 IRCsect422(a)(1)

25 IRCsect83(a)

26 Id







33 Idat(3)(b)(3)(iv)



36 Id



20
















21




















22













5 Id




9 Id

10 Id

11 Idat(d)

12 Id









23











17












Stock Option Income




18

















19



Record Keeping


Conclusion




3 HR1864112thCongress(2011-2012)



6 4USCSsect114

7 Id

8 Id




12 Id












23 SeeIRCsect423

24 IRCsect422(a)(1)

25 IRCsect83(a)

26 Id







33 Idat(3)(b)(3)(iv)



36 Id



20
















21




















22













5 Id




9 Id

10 Id

11 Idat(d)

12 Id









23











18

















19



Record Keeping


Conclusion




3 HR1864112thCongress(2011-2012)



6 4USCSsect114

7 Id

8 Id




12 Id












23 SeeIRCsect423

24 IRCsect422(a)(1)

25 IRCsect83(a)

26 Id







33 Idat(3)(b)(3)(iv)



36 Id



20
















21




















22













5 Id




9 Id

10 Id

11 Idat(d)

12 Id









23











19



Record Keeping


Conclusion




3 HR1864112thCongress(2011-2012)



6 4USCSsect114

7 Id

8 Id




12 Id












23 SeeIRCsect423

24 IRCsect422(a)(1)

25 IRCsect83(a)

26 Id







33 Idat(3)(b)(3)(iv)



36 Id



20
















21




















22













5 Id




9 Id

10 Id

11 Idat(d)

12 Id









23











20
















21




















22













5 Id




9 Id

10 Id

11 Idat(d)

12 Id









23











21




















22













5 Id




9 Id

10 Id

11 Idat(d)

12 Id









23











22













5 Id




9 Id

10 Id

11 Idat(d)

12 Id









23











23









