SCOTUS Rules that North Carolina Tax on Certain Trusts Violates the Due Process Clause of the Fourteenth Amendment

On June 21, 2019, the Supreme Court of the United States issued a unanimous opinion finding that North Carolina’s imposition of an income tax on trusts based solely on the residence of a trust’s beneficiaries is unconstitutional.  North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, No. 18-457.
 

Background

The Kimberly Rice Kaestner 1992 Family Trust’s (Kaestner Trust’s) only connection to the state of North Carolina was the residence of the trust’s beneficiaries. The Kaestner Trust was established as an inter vivos trust by a New York settlor and was administered by a New York trustee pursuant to the laws of New York, who maintained the Kaestner Trust’s books and records in New York. The Kaestner Trust’s assets were custodied in Massachusetts, and the Kaestner Trust maintained no real property in North Carolina nor made any direct investments in the state.  When the Kaestner Trust was created, the beneficiary was a resident of New York.  Subsequently, she and her family moved to North Carolina. 
 
The trustee had “absolute discretion” to distribute the trust’s assets to beneficiaries “in such amounts and proportions” as the trustee determined “from time to time.” During the years in question, the trustee did not make any distribution of income to the Kaestner Trust’s beneficiaries.  A beneficiary of the Kaestner Trust could not assign any right they may have to trust property.
 
The North Carolina Department of Revenue sought to tax the income of the Kaestner Trust under its tax law, which imposes an income tax on trust income that “is for the benefit of” a North Carolina resident. North Carolina courts had traditionally interpreted this law to permit taxation when a trust’s beneficiaries lived in the state, even if the beneficiaries received no income distribution from the trust and had no right to demand any income from the trust.
 
The trustee of the Kaestner Trust paid the tax assessed and then sued in state court for a refund. The trial court ruled in favor of the Kaestner Trust holding that a beneficiary’s residence, by itself, does not establish the minimum connection necessary for the state to impose a tax. Both the North Carolina Court of Appeals and the North Carolina Supreme Court affirmed. The Supreme Court of the United States granted certiorari.
 

SCOTUS Holding

The court held “that the presence of in-state beneficiaries alone does not empower a State to tax trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that income and are uncertain ever to receive it.” In its rationale, the court looked to its previous rulings, which found that the due process clause of the U.S. Constitution requires a taxpayer to have a minimum connection to the state seeking to impose a tax and that such contacts limit a state tax from being imposed on those who derive no “benefits and protections” from associating with a state. 
 
In Kaestner 1992 Family Trust, the trustee held absolute discretion on the amount and timing of distributions to the beneficiaries and, in the years in question, made no distributions to the beneficiaries. Further, the beneficiaries had no right to demand trust income, to make investment decisions, or to assign their interests in the trust to another person.
 
Subsequent to the years under review by the North Carolina Department of Revenue, the trustee rolled Kimberley Kaestner’s interest in the Kaestner Trust to a new trust. This was done under the laws of New York and in accordance with Ms. Kaestner’s wishes. Had the trust assets not been rolled over, the Kaestner Trust would have terminated when Ms. Kaestner turned 40 years old and required the distribution of the Kaestner Trust’s assets to Ms. Kaestner. The court held that this action was not demonstrative of Ms. Kaestner being able to demand distributions in the tax years under review or count on receiving any income in future years.
 
The court distinguished the North Carolina tax under review from other state trust tax cases previously decided in favor of the state’s tax by the court under the due process clause, which include: (1) a tax on trust income distributed to a state resident, (2) a tax based on the trustee’s residence, and (3) a tax imposed based on the site of the trust administration.
 
The court concluded that when a state income tax on a trust is premised on the residency of a beneficiary, settlor, or trustee, the due process clause requires a relationship between that resident and the trust assets the state seeks to tax.  When a state asserts tax jurisdiction over a trust based on the residence of a beneficiary, the due process clause requires the resident to have some degree of possession, control, or enjoyment of the trust property or a right to receive that property.
 

BDO Insight 

  • While Kaestner 1992 Family Trust presents an obvious win for taxpayers, its application beyond the state of North Carolina could be limited. The court stressed that its opinion was limited to the situation where a state seeks to tax a trust based solely on the residency of a beneficiary when the beneficiary received no trust income, had no right to demand income, and is uncertain to ever receive income.
  • Trusts that have previously paid North Carolina income tax due to a beneficiary’s residence, should consider whether a claim for refund is warranted.  In addition, trusts that filed returns in states applying residency of the beneficiary as the criteria for the trust’s residency, should consider the facts and circumstances surrounding that filing.  Claims for refund may also be warranted in those cases.

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BDO Indirect Tax News

BDO Indirect Tax News focuses on issues of practical importance in the field of VAT and similar indirect taxes, such as GST. Experts from all over the world provide first-hand information on recent developments in legislation, jurisdiction and tax authorities’ opinions and directives.

In this issue: 

  • ARGENTINA – Administrative changes to the value added tax regime
  • BAHRAIN – Second phase of VAT implementation to kick in
  • BELGIUM – Update VAT rate modifications in Belgium (ebooks and bicycles)
  • CANADA – Non-residents of Canada impacted by federal Carbon Pricing Backstop
  • FRANCE – EU VAT Refund claim – Failing to respond in a timely fashion to Tax Authorities’ Request for Additional Information
  • INDIA – GST – The road ahead
  • JAPAN – Revision of Japanese consumption tax system
  • THE NETHERLANDS – New rules regarding the special exemption scheme for small enterprises
  • NORWAY – Various VAT changes in Norway
  • ROMANIA – CJEU Judgment in C-17/18 Mailat – VAT treatment of a restaurant leased to a third party
  • SAUDI ARABIA – Revised rules for Directors’ Fees
  • SINGAPORE – Zero-rating of support services
  • SOUTH AFRICA
    • Update on VAT on e-services in South Africa
    • Recent amendments, court cases and other changes in VAT for 2019
  • SPAIN
  • UNITED ARAB EMIRATES – New tax schemes introduced in the UAE
  • ZIMBABWE – Submission of VAT returns and payments

 

Treasury Issues Proposed and Final Regulations Relating to GILTI and Other International Provisions

Summary

On June 14, 2019, the Department of the Treasury and the Internal Revenue Service (collectively, Treasury) issued proposed regulations (REG-101828-19) regarding the treatment of domestic partnerships for purposes of determining amounts included in the gross income of their partners with respect to foreign corporations. In addition, the proposed regulations include rules regarding gross income that is subject to a high rate of foreign tax under the global intangible low-taxed income (GILTI) provisions. The proposed regulations would affect U.S. persons that own stock of foreign corporations through domestic partnerships and U.S. shareholders of foreign corporations.
 
In addition, Treasury issued final and temporary regulations (T.D. 9866) that provide guidance to determine the amount of GILTI included in gross income of certain U.S. shareholders of foreign corporations, including U.S. shareholders that are members of a consolidated group. The final regulations also include guidance relating to the determination of a U.S. shareholder’s pro rata share of a controlled foreign corporation’s (CFC) Subpart F income included in the shareholder’s gross income, as well as certain reporting requirements relating to inclusions of Subpart F income and GILTI. Moreover, the final regulations also include rules relating U.S. persons that own stock of foreign corporations through domestic partnerships for purposes of computing inclusions under GILTI, and contain rules relating to certain foreign tax credit provisions applicable to persons that directly or indirectly own stock in foreign corporations.
 
This tax alert highlights some of the key items included in the proposed and final regulations.
 

Details

1. Proposed Regulations

a. Adoption of Aggregate Treatment for Purposes of Section 951
The proposed regulations provide that a domestic partnership is treated consistently as an aggregate of its partners in determining the ownership of stock within the meaning of Section 958(a) for purposes of Sections 951, and any provision that applies by reference to Section 951. In other words, the proposed regulations treat a domestic partnership as an aggregate of its partners for purposes of determining its partners’ Subpart F income and Section 956 inclusions. This aggregate treatment does not apply, however, for purposes of determining whether a U.S. person is a U.S. shareholder, whether a U.S. shareholder is a controlling domestic shareholder (as defined in §1.964-1(c)(5)), and whether a foreign corporation is a CFC.[1]  This aggregate treatment also does not apply for any other purpose of the Code, including for purposes of Section 1248.
 
These proposed regulations are proposed to apply to taxable years of foreign corporations beginning on or after the publication date of the Treasury decision to adopt these rules as final regulations in the Federal Register (the finalization date), and to taxable years of a U.S. person in which or with which such taxable years of foreign corporations end. However, with respect to taxable years of foreign corporations beginning before the finalization date, the proposed regulations provide that a domestic partnership may apply these rules to taxable years of a foreign corporation beginning after December 31, 2017, and to taxable years of the domestic partnership in which or with which such taxable years of the foreign corporation end provided certain conditions are satisfied. See the proposed regulations for details.
 

b. GILTI High Tax Exclusion
The proposed regulations provide that an election may be made for a CFC to exclude under Section 954(b)(4), and thus to exclude from gross tested income, gross income subject to foreign income tax at an effective rate that is greater than 90 percent of the rate that would apply if the income were subject to the maximum rate of tax specified in Section 11 (18.9 percent based on the current rate of 21 percent).[2] The proposed regulations also include various rules such as (i) how to make the election, (ii) who is bound by the election, (iii) revoking the election, and (iv) determining whether income is subject to high foreign income taxes. 

The changes related to the election to exclude a CFC’s gross income subject to high foreign income taxes under Section 954(b)(4) are proposed to apply to taxable years of foreign corporations beginning on or after the date that final regulations are published in the Federal Register, and to taxable years of U.S. shareholders in which or with which such taxable years of foreign corporations end. 
 

BDO Insight

Applying an aggregate approach to determine stock owned under Section 958(a) for purposes of Section 951 is consistent with the treatment of domestic partnerships under Section 951A in the final regulations (see discussion below) and should harmonize the two regimes.
 
It should be noted that until the GILTI High Tax Exclusion regulations are effective, a taxpayer may not exclude any item of income from gross tested income under Section 951A(c)(2)(A)(i)(III) unless the income would be foreign base company income (FBCI) or insurance income but for the application of Section 954(b)(4) and §1.954-1(d).
 

2. Final Regulations

The final regulations retain the basic approach and structure of the GILTI proposed regulations issued in October 2018 (REG-104390-18) and the foreign tax credit proposed regulations issued in December 2018 (REG-105600-18) with certain revisions. For a summary discussion of the GILTI proposed regulations see our September 2018 alert and see our December 2018 alert for a summary discussion of the foreign tax credit proposed regulations. 

a. Pro Rata Share Anti-abuse Rule
Proposed §1.951-1(e)(6) provides that any transaction or arrangement that is part of a plan a principal purpose of which is the avoidance of federal income taxation, including, but not limited to, a transaction or arrangement to reduce a U.S. shareholder’s pro rata share of the Subpart F income of a CFC, which transaction or arrangement would otherwise avoid federal income taxation, is disregarded in determining such U.S. shareholder’s pro rata share of the Subpart F income of the corporation (the pro rata share anti-abuse rule). The pro rata share anti-abuse rule also applies in determining the pro rata share of each tested item of a CFC for purposes of determining a U.S. shareholder’s GILTI inclusion amount under Section 951A(a) and §1.951A -1(b).
 
The final regulations clarify that the anti-abuse rule applies only to require appropriate adjustments to the allocation of allocable E&P that would be distributed in a hypothetical distribution with respect to any share outstanding as of the hypothetical distribution date.[3] Thus, under the rule, if applicable, adjustments will be made solely to the allocation of allocable E&P in the hypothetical distribution between shareholders that own, directly or indirectly, stock of the CFC as of the relevant hypothetical distribution date. As clarified, the rule will not apply to adjust the allocable E&P allocated to a shareholder by reason of a transfer of CFC stock, except by reason of a change to the distribution rights with respect to stock in connection with such transfer (for example, an issuance of a new class of stock, including by recapitalization).

b. Gross Income Excluded by Reason of Section 954(b)(4)
The final regulations retain the GILTI high tax exclusion from the October 2018 GILTI proposed regulations without modification. However, see the discussion above in section 1.b. regarding the new proposed GILTI High Tax Exclusion regulations and our BDO Insights discussing when a taxpayer may apply such rules.

c. Section 952(c) Coordination Rule and Coordination with De Minimis Rule, Full Inclusion Rule and High Tax Exception
The final regulations adopt the Section 952(c) coordination rule in proposed §1.951A-2(c)(4)(i) but revises the rule to apply also to disregard the effect of a qualified deficit or a chain deficit in determining gross tested income.[4]

The final regulations also include rules that coordinate the Subpart F exclusion in Section 951A(c)(2)(A)(i)(II) with the de minimis rule, full inclusion rule, and high tax exception to Subpart F income.[5]

d. Deduction or Loss Attributable to Disqualified Basis
The final regulations broaden the rule in proposed §1.951A-2(c)(5) and treat any deduction or loss attributable to disqualified basis as not “properly allocable” to gross tested income, Subpart F income, or effectively connected income of the CFC.[6] In addition, this rule in the final regulations applies to deductions or losses attributable to disqualified basis in any property, other than property described in Section 1221(a)(1), regardless of whether the property is of a type with respect to which a deduction is allowable under Section 167 or 197 (as compared to the rule in the proposed regulations that only applied to deductions or losses attributable to property that is of a type with respect to which a deduction is allowable under Section 167 or 197).[7]

e. Determination of Basis under Alternative Depreciation System (ADS)
The final regulations provide that a CFC that is not required to use ADS for purposes of computing income and E&P may elect, for purposes of calculating QBAI, to use its non-ADS depreciation method to determine the adjusted basis in specified tangible property placed in service before the first taxable year beginning after December 22, 2017, subject to a special rule related to salvage value.[8] The election also applies to the determination of a CFC’s partner adjusted basis under §1.951A-3(g)(3) in partnership specified tangible property placed in service before the CFC’s first taxable year beginning after December 22, 2017.[9]

The preamble to the final regulations confirms that a CFC does not need the Commissioner’s consent to use ADS for purposes of determining its adjusted basis in specified tangible property in determining its QBAI. However, a change to ADS from another depreciation method for purposes of computing tested income or tested loss is a change in method of accounting subject to Section 446(e). In the preamble, Treasury states that it intends to publish another revenue procedure further expanding the availability of automatic consent for depreciation changes and updating the terms and conditions in Sections 7.07 and 7.09 of Rev. Proc. 2015-13 (related to the source, separate limitation classification, and character of Section 481(a) adjustments) to take into account Section 951A.
 
Also, the final regulations clarify that the period in the CFC inclusion year to which such depreciation relates is determined without regard to the applicable convention under Section 168(d).[10] Accordingly, in the year property is placed in service, the depreciation deduction allowed for the taxable year is prorated from the day the property is actually placed in service, and in the year property is disposed of, the depreciation deduction allowed for the taxable year is prorated to the date of disposition.

f. Definition of Tested Interest Expense and Tested Interest Income and Interest Expense Paid or Accrued by a Tested Loss CFC
The final regulations define “interest expense” and “interest income” by reference to the definition of interest expense and interest income under Section 163(j).[11] In addition, the final regulations reduce a tested loss CFC’s tested interest expense by its tested loss QBAI amount, an amount equal to 10 percent of the QBAI that the tested loss CFC would have had if it were instead a tested income CFC.[12]

g. Adoption of Aggregate Treatment for Purposes of Determining GILTI Inclusion Amounts
Rather than adopting the hybrid approach that was included in the proposed regulations, the final regulations provide that, in general, for purposes of Section 951A and the Section 951A regulations, and for purposes of any other provision that applies by reference to Section 951A or the Section 951A regulations (for instance, Sections 959, 960, and 961), a domestic partnership is not treated as owning stock of a foreign corporation within the meaning of Section 958(a).[13] Rather, the partners of a domestic partnership are treated as owning proportionately the stock of CFCs owned by the partnership in the same manner as if the partnership were a foreign partnership under Section 958(a)(2).[14] Because a domestic partnership is not treated as owning Section 958(a) stock for purposes of Section 951A, a domestic partnership does not have a GILTI inclusion amount and thus no partner of the partnership has a distributive share of a GILTI inclusion amount. Furthermore, because only a U.S. shareholder can have a pro rata share of a tested item of a CFC under Section 951A(e)(1) and §1.951A-1(d), a partner that is not a U.S. shareholder of a CFC owned by the partnership does not have a pro rata share of any tested item of the CFC. Given these changes, domestic partnerships that have already filed tax returns applying the rules in the prior GILTI proposed regulations may need to consider amending or superseding their tax returns and also revising their K-1s based on the final regulations.
 
The final regulations provide that the aggregation rule for domestic partnerships does not apply for purposes of determining whether a U.S. person is a U.S. shareholder, whether a U.S. shareholder is a controlling domestic shareholder (as defined in §1.964-1(c)(5)), or whether a foreign corporation is a CFC.[15]

h. Adjustments to Basis Related to Net Used Tested Loss
The final regulations do not adopt the rules in proposed §1.951A-6(e) related to downward adjustments to the adjusted basis in stock of a tested loss CFC to the extent its tested loss was used to offset tested income of another CFC. Treasury states in the preamble that rules related to basis adjustments will be considered in a separate project and any such rules will apply only with respect to tested losses incurred in taxable years of CFCs and their U.S. shareholders ending after the date of publication of any future guidance.

i. Consolidated Groups
The final regulations generally adopt the aggregation approach from the proposed regulations without substantial changes. However, the special rules for consolidated groups related to basis adjustments to member stock is reserved.[16] In addition, the final regulations also do not finalize the rules in proposed §1.1502-32(b)(3)(ii)(F) that would treat a member as receiving tax-exempt income immediately before another member recognizes income, gain, deduction, or loss with respect to a share of the first member’s stock (the F adjustment). As a result, taxpayers may not rely on the F adjustment.

j. Regulations under Sections 78, 861 and 965
The final regulations also finalize certain rules included in the foreign tax credit proposed including:

  • Rules that do not treat dividends under Section 78 that relate to taxable years of foreign corporations that begin before January 1, 2018 (as well as Section 78 dividends that relate to later taxable years), as dividends for purposes of Section 245A.[17]
  • Rules on adjusting stock basis in CFC stock taking into account Section 965 basis adjustment elections.[18] 
  • Rules related to the Section 965(n) election to forgo use of a net operating loss.[19]

k. Applicability Dates
For dates of applicability, see §§1.78-1(c), 1.861-12(k), 1.951-1(i), 1.951A-7, 1.1502-51(g), 1.6038-2(m), and 1.6038-5(e).

For additional details, along with other revisions and clarifications included in the final regulations that are not discussed in this tax alert, see the final regulations.

 

BDO Insight

While the final regulations largely adopt the proposed regulations, certain key modifications were made that could substantially alter a taxpayer’s GILTI inclusion amount. Please contact a BDO international tax specialist for assistance in understanding and applying the final regulations.

 


CONTACT

 

Joe Calianno
Partner and International Tax
Technical Practice Leader

  Monika Loving
Partner and International Tax Practice Leader
 

 
Annie Lee
Partner
  Chip Morgan
Partner

 
Robert Pedersen
Partner
  Jerry Seade
Principal

 
Natallia Shapel
Partner
  Sean Dokko
Senior Manager

 
Brandon Boyle
Partner
  Reese Frederickson
Partner

 


[1] See proposed §1.958-1(d).
[2] See proposed §1.951A-2(c)(6)(i).
[3] See §1.951-1(e)(6).
[4] See §1.951A-2(c)(4)(ii).
[5] See §§ 1.951A-2(c)(4)(i) and §1.951A-2(c)(4)(iii)(C).
[6] See §1.951A-2(c)(5)(i).
[7] See §§1.951A-2(c)(5)(iii)(A) and 1.951A-3(h)(2)(ii).
[8] See §1.951A-3(e)(3)(ii).
[9] See id.
[10] See §1.951A-3(e)(1).
[11] See §1.951A-4(b)(1)(ii) and (2)(ii).
[12] See §1.951A-4(b)(1)(i) and (iv) and (c) Example 5.
[13] See §1.951A-1(e)(1).
[14] See id.
[15] See §1.951A-1(e)(2).
[16] See §§1.1502-32(b)(3)(ii)(E) and (b)(3)(iii)(C), and 1.1502-51(c) and (d).
[17] See §1.78-1(c).
[18] See §1.861-12(c)(2)(i).
[19] See §1.965-7(e).

 

Illinois Enacts Significant Tax Changes For Businesses And Individuals

Summary

On June 5, 2019, Illinois enacted its 2019 budget bills S.B. 689 (Public Act 101-0009) and S.B. 687 (Public Act 101-0008) that result in wide-ranging changes to Illinois tax laws, including a phase out of the Illinois franchise tax, a corporate income tax rate increase, implements a graduated personal income tax rate structure, introduces tax amnesty programs, and imposes a marketplace facilitator remote seller sales/use tax nexus statute. The corporate and personal income tax rate changes require Illinois voters to approve Senate Joint Resolution Constitutional Amendment No. 1, which will be placed on the general election ballot in November 2020.
 

Details

S.B. 689 – Illinois Franchise Tax Repeal
The Illinois franchise tax is administered by the Illinois Secretary of State.  The tax has been problematic for many taxpayers for many years (and has been a target for repeal by the Illinois business community for decades).  However, beginning with the 2020 tax year, the franchise tax starts to be phased out over a four-year period under the 2019 Illinois budget bill.  The phase out will occur by exempting certain dollar amounts that would otherwise be due under the franchise tax statute as follows:
 
                2020:  The first $30 of franchise tax liability is exempt
                2021:  The first $1,000 of franchise tax liability is exempt
                2022:  The first $10,000 of franchise tax liability is exempt
                2023:  The first $100,000 of franchise tax liability is exempt
                2024:  Illinois franchise tax is fully repealed
 
S.B. 689 – Tax Amnesty Programs
The budget bill enacts two Illinois tax amnesty programs.  The first will apply only to taxpayers with delinquent franchise taxes or license fees due to the Illinois Secretary of State.  The franchise tax amnesty program will commence October 1, 2019, and will run through November 15, 2019.  The program applies to franchise taxes or license fees due for periods ending after March 15, 2008, and on or before June 30, 2019.  Interest and penalties will be waived.
 
A second tax amnesty program was also enacted by the budget bill, and it applies to taxes administered by the Illinois Department of Revenue.  The general tax amnesty program will run during the same period as does the franchise tax amnesty program, and it will apply to tax periods ending after June 30, 2011, and before July 1, 2018.  Interest and penalties will be waived.
 
S.B. 689 – FDII Addition Modification
The budget bill does not enact any changes to the Illinois corporate income tax dividends received deduction.  However, it does enact an addition modification for the federal foreign derived intangible income (FDII) deduction under IRC Section 250(a)(1)(A), effective for tax years beginning after December 31, 2018.
 
S.B. 689 – Marketplace Facilitator Nexus
Beginning on January 1, 2020, a marketplace facilitator exceeding Illinois’ economic nexus thresholds will be considered a “retailer,” which will require the marketplace facilitator to collect sales tax on taxable transactions made through its marketplace.  Economic nexus will be established if the marketplace facilitator and marketplace seller’s cumulative sales of tangible personal property into Illinois during the preceding 12-month period marketplace facilitator and marketplace sellers exceeded gross receipts of $100,000, or 200 separate transactions.  The marketplace facilitator is responsible for collecting and remitting tax on all taxable sales into Illinois, made through its marketplace, on behalf of its marketplace sellers.  Conversely, marketplace sellers are not responsible for collecting and remitting tax on transactions made through the marketplace.
 
S.B. 689 – Illinois Tax Credits
The Illinois budget bill also enacts a number of changes to Illinois income tax credits.  The legislation creates several new tax credits, including the Enterprise Zone Construction Jobs tax credit, High Impact Business Construction Jobs tax credit, New Construction EDGE credit, and the River Edge Construction Jobs tax credit.  These new tax credits are equal to up to 75 percent of the incremental income tax attributable to eligible construction jobs and are effective for tax years beginning on or after January 1, 2021. Eligibility requirements may vary based on the corresponding programs as outlined above, as well as the physical location of the project site.
 
S.B. 689 – Excess Business Loss Deduction for Trusts and Estates
For tax years beginning after December 31, 2018, and before January 1, 2026, S.B. 689 provides a deduction to trusts and estates that have a disallowed excess business loss under IRC Section 461(l)(1)(B), which treats such a loss as a net operating loss (NOL) carryforward.  Because Illinois does not allow trusts and estates to carryforward NOLs, the amendment enacted by S.B. 689 prevents a trust’s or estate’s excess business loss from being permanently disallowed.   
 
S.B. 687 – Income Tax Rate Changes
In July 2017, Illinois increased its corporate income tax rate to 7 percent (from 5.25 percent).  As part of the state’s 2019 tax legislation, the corporate rate has been increased again to 7.99 percent, effective for tax years beginning on or after January 1, 2021.  Assuming Illinois voters approve the Illinois constitutional amendment in November 2020, beginning with the 2021 tax year, the total Illinois corporate income tax rate, when combined with the 2.5 percent personal property replacement tax, will be 10.49 percent. 
 
In addition, the current Illinois flat individual income tax rate of 4.95 percent will be replaced with a graduated personal income tax rate structure for tax years beginning on or after January 1, 2021, if approved by Illinois voters.  The Illinois graduated rate structure for individuals, trusts and estates will be:
 

For Joint Filers:  
Illinois Net Income Tax Rate
$0 – $10,000 4.75 percent
$10,001 – $100,000 4.9 percent
$100,001 – $250,000 4.95 percent
$250,001 – $350,000 7.75 percent
$350,001 – $1,000,000 7.85 percent
Over $1,000,000 7.99 percent
For Non-Joint Filers:  
Illinois Net Income Tax Rate
$0 – $10,000 4.75 percent
$10,001 – $100,000 4.9 percent
$100,001 – $250,000 4.95 percent
$250,001 – $350,000 7.75 percent
$350,001 – $750,000 7.85 percent
Over $750,000 7.99 percent

While the Illinois personal income tax rate structure enacted by S.B. 687 is graduated for most taxpayers, for joint filers with net income over $1,000,000 and non-joint filers with net income over $750,000, the maximum 7.99 percent rate will be imposed as a flat rate on all of the individual’s, trust’s, or estate’s net income.    
 

BDO Insight

  • The phase out and eventual repeal of the Illinois franchise tax is a welcome development for Illinois businesses.  The franchise tax is not a well-understood tax, and it has created compliance burdens and questions for taxpayers over the years.  
  • The replacement of the Illinois flat rate personal income tax on individuals, trusts and estates with a graduated rate structure and the increase in the corporate income tax rate still depends on voter approval in November 2020.     
  • Taxpayers affected by the enactment of S.B. 689 and S.B. 687 should consult with their financial statement auditor and tax advisor to evaluate and determine the potential financial statement implications under ASC 740, including the impact on current and deferred taxes, uncertain tax benefits, and disclosures.

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Central:   Southeast:
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Tax Partner
 
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SALT Managing Director
 
Richard Spengler
Tax Managing Director
 
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Tax Managing Director
 
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Tax Partner
  Taryn Goldstein
Tax Managing Director

 
Northeast:   Southwest:
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Tax Principal
 
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Tax Managing Director
 
Matthew Dyment
Tax Principal
  Laura Holmes
Tax Managing Director

 
West:   Atlantic:
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Tax Partner
 
  Angela Acosta
Tax Managing Director
 
Paul McGovern
Tax Managing Director
   

ERISA “Top Hat” Plan Statements To Be Filed Electronically Starting In Mid-August

On June 17, 2019, the U.S. Department of Labor (DOL) finalized proposed regulations requiring that all “top hat” plan statements and apprenticeship and training plan notices must be filed electronically, starting in mid-August. On average, the DOL receives about 57 apprenticeship and training plan notices, and about 1,815 top hat plan filings annually.
 
Mandatory electronic filing will reduce regulatory burdens on plans and will enable the DOL to make reported data more readily available to participants and the public. The new web-based filing system will also provide an instant confirmation of receipt of the completed filing, which was not available under the paper-based filing system. The final regulations made no changes to the content of the notices.
 
What’s a top hat filing? In 1975 (one year after the Employee Retirement Income Security Act of 1973, or ERISA, was enacted), the DOL issued regulations providing an alternative compliance method with ERISA’s reporting and disclosure requirements for unfunded or insured pension plans established for a select group of management or highly compensated employees (“top hat” plans). Under the simplified compliance method, the top hat plan administrator files a statement with the DOL by mail or personal delivery and agrees to provide plan documents to the Secretary of Labor upon request. In 1980, DOL adopted similar simplified procedures for welfare plans that only provide apprenticeship and/or training programs. Only one statement needs to be filed for each employer maintaining one or more of the plans provided that the notice describes each plan.
 
Electronic filing has been available since 2014. On September 30, 2014, DOL proposed rules to require electronic filing for top hat plan statements and apprenticeship and training plan notices. Simultaneously, the DOL launched a new web-based filing system  for the plans. Using the web-based filing system was voluntary until final rules were adopted. Since then, about 65 percent of apprenticeship/training plan notices, and about 54 percent of top hat plan notices have been filed electronically. The DOL received only one comment on the proposed regulation, asking the DOL to go even further with electronic plan administration.
 

BDO Insight

The proposed regulations are a reminder that although nonqualified deferred compensation plans are ERISA plans, they are exempt from some ERISA requirements.  If the alternative method of reporting and disclosure is not satisfied by filing the one-time statement, the plan is technically required to file an annual report on Form 5500 (but if the top hat notice was not timely filed and Form 5500’s have not been filed, the plan may use the department’s Delinquent Filer Voluntary Compliance Program to file a late top hat notice instead of having to file late Form 5500’s).
 
Failure to timely file Form 5500 can result in IRS penalties of $25 per day up to a maximum of $15,000, and Department of Labor penalties of $2,194 per day without a maximum limit.  However, a failure to file can easily be corrected by completing a submission under the department’s Delinquent Filer Voluntary Compliance (DFVC) Program.
 
Sponsors of nonqualified deferred compensation plans should confirm that the one-time statement was filed within 120 days after the date the arrangement became subject to Title I of ERISA and that the eligible group has not expanded beyond the top hat group.  If no record of the filing can be located, the employer may want to consider submitting a DFVC Program filing.

 


CONTACT:

 

Norma Sharara
National Tax Office Managing Director, Compensation and Benefits
  Kimberly Flett
National Practice Leader ERISA Compliance and Reporting

 
Joan Vines
National Tax Office Managing Director, Compensation and Benefits