Tough Economic Times Lead to Extraordinary Tax Activities by States
| Tough Economic Times Lead to Extraordinary Tax Activities by States |
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As more and more states face tough budget crunches and are dealing with significant decreases in revenues, they are looking for new sources of revenues. Rather than making tough decisions regarding spending, the states seem to be looking for revenue alternatives. In particular, several of the New England states are implementing new tools to bring in extra money. Rhode Island is implementing a new computer software program to nab tax delinquents. Massachusetts implemented a limited tax amnesty. New Hampshire has developed a unique interpretation of the law which will affect 1031 exchanges and possibly other transactions. Rhode Island According to the Providence Journal, the Rhode Island Division of Taxation has used sophisticated new technology to collect nearly $2 million in back taxes from individuals. The Division of Taxation will next use this technology to go after delinquent corporations. This new technology consists of a special computer system, called a data warehouse, together with a special computer software program, called a data mining tool. This computer and software quickly sorts through the reams of information gathered from the Rhode Island Secretary of State's Office, the Internal Revenue Service and other state and federal agencies. As a result of this project, more than 12,600 individuals have received notices, including residents and non-residents, indicating that they may have failed to file returns or may have filed but did not pay all that they owed. So far, the state has collected almost $2 million in back taxes, penalties and interest from more than 3,500 individuals. The Division of Taxation expects to collect a total of $2.5 million by the end of June. This new program, called "Compliance 2000", is expected to collect about $10 million by June 30, 2010. The program has targeted individual taxpayers for the 2004 and 2005 tax years. The next phase of the campaign will target individual taxpayers for subsequent tax years and businesses for all years beginning with 2004. Tax Administrator David Sullivan has indicated that the Division of Taxation will start mailing out thousands of new notices in June and July to businesses organized as C corporations, S corporation and limited liability companies. In particular, the following businesses will be targeted:
Massachusetts In order to collect back taxes, Massachusetts implemented a limited tax amnesty program. The Commissioner has established a 2-month amnesty period commencing on March 1, 2009 and ending on April 30, 2009 to encourage the payment of delinquent tax obligations to Massachusetts. The amnesty program applied to tax years ending on or before December 31, 2007 and was limited to individuals with existing personal income, use, and cigarette excise tax liabilities. The Commissioner notified taxpayers of their eligibility to participate in the amnesty program and only those taxpayers who were notified were eligible. Click here for more details. Since the program recently ended, the Department of Revenue has not released figures indicating how much revenue was collected. Stay tuned for more details. New Hampshire According to our good friend George Foss in New Hampshire, the New Hampshire Department of Revenue (DRA) has recently developed a new audit tactic that could cost taxpayers a lot of money. The Single-Member LLC (SMLLC), an entity disregarded for Federal tax purposes, has become a popular planning tool for acquiring and holding real estate. A SMLLC is generally taxed as a sole proprietorship, and accounted for on Schedule C or E of the Client's federal tax return. The State of New Hampshire requires each such entity to file a separate Business Profits Tax (BPT) return. As the popularity of Section 1031 Exchanges grew, taxpayers began acquiring replacement property in the name of a newly-formed SMLLC directly, despite the fact that the relinquished property had been held differently. Beyond liability protection, taxpayers began using the SMLLC to acquire Tenant-In-Common (TIC) investments, which were made popular by the IRS issuance of Rev. Proc. 2002-22. Under this ruling, an investor could sell their relinquished property in New Hampshire, which was held in any number of ways (corporate, individual, trust, etc.), and take a fractional interest in replacement property located somewhere else in the country, for example an undivided interest in a signature building, shopping center, medical facility, and the like. The promoters of these investments, and more importantly the banks who financed them, required each of the up to 35 investors to go into the investment "clean", with no baggage. A special type of SMLLC was created in Delaware, which had a second, "swing" member whose sole purpose was to veto a bankruptcy filing on the part of the SMLLC. In this way, the bank financing the TIC assured itself that none of the investors could declare bankruptcy, none had any past business liabilities or "baggage", and none could be sued because the most a creditor could get was an attachment on the investor's SMLLC interest, not on the underlying property. Since 2002, hundreds if not thousands of these TIC investments were sold to New Hampshire taxpayers who were exchanging out of old, low basis real estate in New Hampshire. Enter the New Hampshire Department of Revenue (DRA), about April of 2008. It began to use transfer tax information provided to it by the 10 Registries of Deeds to track persons who sold New Hampshire real estate and did not file a Business Profits Tax Return with gain figures indicated that were comparable to the value of the stamps that had been placed on the deeds of conveyance. It appears that transfers of $2 million and above were targeted initially. Eventually the DRA identified a rather large number of NH taxpayers for the 2007 tax year who sold property, did not file a BPT return (because it was a Section 1031 Exchange), and who did not take the Replacement Property in exactly the same name as was on the deed to the Relinquished Property. The cases divided themselves into two groups: a Voluntary Group of taxpayers who took the new property in an SMLLC to enhance their liability protection going forward, and an Involuntary Group of taxpayers who took the new property in an SMLLC because they were required to do so by the TIC sponsor. There has long been an issue in Section 1031 Exchanges called the "Identity of Taxpayer Rule," which states that for Federal tax deferral to occur in an otherwise valid transaction, the same taxpayer giving the relinquished property must get the replacement property. However, certain types of entities were "Disregarded" by the IRS, namely Grantor Trusts, SMLLC's and others. As of April of last year, such is not the case in New Hampshire. Only the Grantor Trust is disregarded, which means that the taxpayers mentioned above owe NH Business Profits Taxes on their completed exchanges. For anyone effectuating 1031 exchanges in New Hampshire, special care must be taken. Be sure to consult a qualified intermediary such as All States 1031 Exchange Facilitator, LLC who is familiar with all the rules. |
