Tax News

CCH (cch.taxgroup.com) reports:

Tennessee Governor Phil Bredesen has signed S.B. 4173, enacting various excise, franchise, and individual income tax amendments, including provisions that require financial institutions to disclose dividends received from captive real estate investment trusts (REITs) and new credit provisions for certified green energy supply chain manufacturers. The legislation also contains sales and use (TAXDAY, 2008/06/09, S.24) and other tax provisions (TAXDAY, 2008/06/09, S.23), which are reported in separate stories.
Dividends from captive REITs: Applicable to tax periods ending on or after July 1, 2008, any financial institution that receives dividends, directly or indirectly, from a captive REIT must disclose the dividends on a form prescribed by the Commissioner of Revenue. If the required disclosure is not made, then the deduction for dividends will be disallowed with respect to any direct or indirect dividends from the captive REIT. In addition, the taxpayer's net earnings will be adjusted accordingly, and the taxpayer will be subject to a 50% penalty on the amount of any underpayment arising from the adjustment. "Captive REIT" means an entity with an election in effect under IRC §856(c)(1), in which the taxpayer, directly or indirectly, has at least a 90% ownership interest by value, determined in accordance with generally accepted accounting principles, and whose shares are not traded on a national stock exchange.
Gain from sale of asset: The legislation expands the provision requiring an entity or individual not otherwise subject to the excise tax to be taxed on the gain from certain asset sales. Under the amendment, effective July 1, 2008, tax applies if, during the 12-month period immediately prior to the sale, the asset was owned by an affiliate subject to the excise tax.
Asset-backed securitization: The franchise and excise tax exemption for certain entities engaged in the asset-backed securitization of debt obligations is expanded to include an entity that is classified as a trust under the laws of the state in which it is created and that is disregarded for federal income tax purposes under IRC §7701. In addition, a similar exemption under the individual income tax is amended so that it parallels the franchise and excise tax exemption.
Diversified investing funds: The exemption for diversified investing funds is amended to specify that, as applied to individuals, the term "affiliates" means any natural person who, directly or indirectly, has more than a 50% ownership interest in the fund. Indirect ownership by an individual includes ownership by any family member of the individual, as follows: (1) an ancestor of the individual; (2) the spouse or former spouse of the individual; (3) a lineal descendant of the individual, of the individual's spouse or former spouse, or of the individual's parent; (4) the spouse or former spouse of any lineal descendant described in (3); or (5) the estate or trust of a deceased individual described in (1) --(4). As before, one condition for the exemption to apply is that the fund's capital must be primarily derived from investments by entities or individuals not affiliated with the fund. This amendment applies to tax periods beginning on or after January 1, 2009.
Jobs credit: Jobs credit provisions are amended to require that new full-time employee jobs be filled prior to January 1, 2016 (previously, January 1, 2011).
Under the expanded credit allowed for certain enterprises involving a required capital investment exceeding $1 billion, the Commissioner of Economic and Community Development may extend by four years (previously, two years) the three-year periods allowed for making the required capital investment and for providing wages equal to or greater than 150% of Tennessee's average occupational wage after completion by a worker of initial training or a probationary period.
A new provision allows integrated suppliers to qualify for an expanded jobs credit, regardless of the level of capital investment or the number of jobs created. "Integrated supplier" means a supplier that is located within the footprint of a project site and that provides goods and services on the project site solely for a manufacturer that is qualified for an expanded jobs credit in connection with a required capital investment exceeding $1 billion.
A new provision is also added to specify that if a qualified business enterprise is located in a tier 2 or tier 3 economically distressed county, then the taxpayer has three years or five years, respectively, to create the minimum number of qualifying jobs necessary to receive the credit.
Under another amendment, the Commissioner of Revenue, with the approval of the Commissioner of Economic and Community Development, is authorized to approve a jobs credit in cases where the newly created position existed in Tennessee as a job position of the taxpayer or another business entity less than 90 days prior to being filled by the taxpayer, provided that the taxpayer has satisfied all other requirements to obtain the credit and both Commissioners have determined that allowing the credit is in the best interests of the state.
In addition, the provision allowing the jobs credit to be computed by certain general partnerships (i.e., those establishing and operating a call center in Tennessee) is expanded so that the credit may also be computed by a general partnership that has established a qualifying international, national, or regional headquarters facility in Tennessee. This provision applies to business plans filed with the Department of Revenue on or after January 1, 2008.
Net operating losses: Certain taxpayers eligible for an expanded jobs credit in connection with a required capital investment exceeding $100 million may be allowed to carry net operating losses forward beyond the initial 15-year period, provided that the Commissioner of Revenue and the Commissioner of Economic and Community Development determine that extending the period is in the best interests of the state.
Headquarters relocation credit: A new provision allows the qualified headquarters facility relocation expenses credit to be computed by a general partnership that has established a qualifying international, national, or regional headquarters facility in Tennessee and has qualified for the jobs credit. The credit is to be computed as if the general partnership were subject to the excise and franchise taxes. With respect to the general partnership tax year during which a credit is so computed, a partner in the general partnership that is subject to the excise and franchise taxes and that directly holds a first tier ownership interest in the general partnership may take a percentage of the credit that equals the total amount of the credit for the general partnership, multiplied by the partner's percentage interest in the general partnership on the last day of the general partnership's tax year. In the hands of the first tier partner, the credit passed through from the general partnership is subject to applicable provisions and limitations. A credit may not be taken by a business entity unless it was a partner in the general partnership and subject to the excise and franchise taxes at the time the credit was earned by the general partnership. This provision applies to business plans filed with the Department of Revenue on or after January 1, 2008.
Credits for green energy supply chain manufacturers: A certified green energy supply chain manufacturer is allowed a green energy tax credit equal to the amount by which the charge for electricity sold to the manufacturer exceeds the charge that would have been made for the total delivered electricity if the maximum certified rate had been applied during the applicable tax year. A carbon charge credit is also allowed, equal to any carbon charges incurred by or imposed directly on the manufacturer, or imposed on the Tennessee Valley Authority or other applicable energy provider and billed to the manufacturer during the applicable tax year.
Any credits, net operating losses, or carryforwards available to the manufacturer under the excise and franchise tax provisions, aside from the green energy and carbon charge credits, must be applied to the tax liability first. Any green energy tax credit and any carbon charge credit will then be applied second and third, respectively, and will be refundable if they exceed the remaining liability. However, for the green energy credit, the refund for any tax year may not exceed an amount equal to $1.5 million for each $250 million in cumulative capital investments made by the manufacturer. To the extent that any green energy tax credit amount is not applied to the taxpayer's liability and is not received as a refund, the credit may be carried forward in perpetuity until it is claimed as a refund or used as a credit by the manufacturer. Except for purposes of receiving a refund or otherwise using credits that have been carried forward, the green energy tax credit will cease to be effective on January 1, 2029, and no new credit will be allowed for tax years ending on or after that date.
"Certified green energy supply chain manufacturer" means any manufacturer that has made, during the investment period, a required capital investment exceeding $250 million in constructing, expanding, or remodeling a certified facility engaged in manufacturing a product that is necessary for the production of green energy. The three-year investment period for making the required capital investment may be extended by the Commissioner of Economic and Community Development for a reasonable period, not to exceed two years, for good cause shown.
Deduction for financial institutions: For purposes of computing the consolidated net worth of a financial institution affiliated group, the legislation phases out the franchise tax deduction allowed for 25% of the group's securities classified as held to maturity or available for sale. Specifically, the deduction is reduced to 20% for tax years beginning after 2007, reduced to 12.5% for tax years beginning after 2008, reduced to 5% for tax years beginning after 2009, and eliminated for tax years beginning after 2010.
Family-owned noncorporate entities: For taxpayers qualifying under the exemption for certain family-owned noncorporate entities, the legislation requires forms to be filed and information to be reported periodically regarding the entity and the participating family members, as prescribed by the Commissioner of Revenue. By January 20, 2009, the Commissioner must prepare a report for the state Legislature including analyses of the utilization, costs, and benefits of the exemption, as well as findings and recommendations concerning the continuation of the exemption.
S.B. 4173, Laws 2008, effective June 5, 2008, applicable as noted.