The NYSSCPA established the Alternative Tax Systems Task Force to explore the benefits and costs of these proposals both on the national scene and with special emphasis on the New York impact. Because of the importance of this issue to Society members, the Alternative Tax Systems Task Force conducted member roundtables throughout the state in 1996. Their purpose was both to educate the membership about the specific tax proposals and to entertain member concerns and perspectives about the tax reform phenomenon to help in the development of the Society's proactive program pertaining to the flat tax and other alternative tax systems under consideration in Congress.

The Society provided the IRS with an analysis of the New York Limited Liability Partnership law concluding that no New York LLPs could be classified as anything other than a partnership for federal tax purposes.

There are valid, non-tax, business reasons that a proprietor would want to change the form of his or her business to that of a single-member LLC. LLCs are unincorporated, limited liability entities and, therefore, are unencumbered by the strictures of corporate organization.

The IRS and Department of the Treasury have issued final regulations updating the methods they use to classify unincorporated entities. These regulations treat single-member LLCs as "non-entities" and, therefore, the tax information from these entities is reported on the income tax returns of their owners.

The Society informally wrote the IRS Commissioner on October 24, 1994, of the need to advise the members of singly owned LLCs how to file the tax information of these entities. Also, the Society filed formal written comments prepared by the Partnership Taxation Committee in response to IRS Notice 95-16, which first suggested the concepts contained in the proposed regulations, and to the proposed regulations themselves.

What was surprising was the ALJ's comment that the relevant statutory language would apply even if the limited partner were not active in the management of the partnership. Tax Law section 1131(1) includes in the burden to collect sales tax, "any member of a partnership or limited liability company." While there may be some room to quibble with the ALJ in the interpretation of the phrase "member of a partnership" and whether that would include a passive limited partner, there is no room to quibble about the phrase "member of a . . . limited liability company."

New York State sales tax liability is an item even passive LLC members must be concerned about.

The NJ Division of Taxation noted that it will follow the federal "check-the-box" classification rules. Therefore, if a corporation tax return is filed for Federal purposes, a New Jersey corporation tax return will be due. Likewise, if a Federal partnership return is filed, a New Jersey partnership return is due. If the entity is treated as a nonentity for federal purposes, it will be treated as a sole proprietorship for New Jersey tax purposes.

New York City will follow the treatment of unincorporated entities under the federal "check the box" rules for all city tax purposes. Unincorporated entities that were in existence and had activities in the New York City in 1995 are eligible to make a one-time election to continue to be subject to the provisions of the City Unincorporated Business Tax law for years after 1995 even though they will be treated as corporations for federal tax purposes in 1996 or 1997. The one-time UBT election must be made on a timely filed 1996 UBT return. For information regarding the election, see the instructions to Form NYC-204. For further information regarding the "check-the-box" rules, see the addendum to the instructions to Forms NYC 4S, 3L, 202 and 204. Specific information regarding the application of the "check-the-box" rules to condominium homeowners associations is also available in an addendum to Form NYC-204. These addenda are available on the Department of Finance Website at http://www.ci.nyc.ny.us or by calling (718) 935-6739. The addenda are also available by fax by calling (718) 935-6114.

New York State for the thirteenth year running has passed the April 1 beginning of its fiscal year without a budget in place. This year so far has not had the same degree of animosity that marked the preceding two years. Nevertheless, at this writing, we are unable to provide more guidance on the current budget for New York State than to identify the key points of Governor Pataki's budget message, which follows:

Repeal of the Gains Tax. The gains tax has been consigned to history. The repeal applies to real property transfers occurring on or after June 15, 1996. There is still some clean up in the wake of the repeal, however. Returns are still due for transfers occurring before June 15, 1996. A return is also required for partial and successive transfers, such as apartment building conversions, which have not been closed out by June 15, 1996. A final computation of tax on partial and successive transfers is due by May 31, 1997. Any refunds of the gains tax must be applied for within two years of the transfer, or by May 31, 1999 in the case of partial or successive transfers as of June 15, 1996.

The Tax Department advises that sellers of real property are still required to file Form TP-584, New York State Combined Gain Tax Affidavit, Real Estate Transfer Tax Return, and Credit Line Mortgage Certificate. However, there is no longer a requirement to complete the gains tax affidavit portion of the form. Also, the pre-transfer audit procedure has been discontinued. The Department of Taxation and Finance is revising Form TP-584 in light of the gains tax repeal.

The Tax Department is taking questions about the gains tax repeal. To reach the Taxpayer Assistance Bureau from within New York State, call 1 (800) CALL TAX, or (800) 225-5829. From outside New York, call (518) 438-8581.

Spirit of Amnesty Visits New York. In the wake of New Jersey, Connecticut, and Rhode Island, New York shuffled down amnesty lane for the first time since 1985. The New York amnesty was not as generous as New Jersey's which forgave not only penalties, but also interest due on tax underpayments. Like New Jersey, New York used a carrot-and-stick approach. If a taxpayer were eligible for amnesty relief and fails to apply for it, the law added an additional 5% on the penalty.

The 90-day New York amnesty period began November 1, 1996 and ended on January 31, 1997. By most accounts the amnesty failed to bring in the desired amount of money. The New York amnesty applied to personal, sales and corporation tax, but only to businesses under 500 employees. New York City and Yonkers taxes were included as well. The amnesty applied for taxable periods ending, or transactions or uses occurring on or before, December 31, 1994.

The entire amount of tax owed had to be paid upon application for amnesty, unless the taxpayer certified that making the full payment would create a severe financial hardship. In hardship situations, the taxpayer still had to pay half the tax owed upon application for amnesty and the remainder on or before March 15, 1997.

Any taxpayer granted amnesty under the 1985 amnesty program did not qualify under the new program. Also not benefitting from the pending amnesty was any person who was (a) a party to any criminal investigation conducted by any agency of the state or (b) subject to a civil or criminal investigation, the subject of which is the cause of the penalty for which the amnesty is sought.

Family Farm Preservation. "The Farmer's Protection and Farm Preservation Act of 1996" portion of the budget bill introduces a 25% credit to both the corporation and personal income taxes for the rehabilitation of historic barns. To qualify, the barns must be at least 50 years old and cannot be used for residential purposes immediately before the rehabilitation. The rehabilitation expenditures cannot be used to make the barn suitable for residential purposes.

For taxable years beginning after 1996, the bill also permits local authorities to exempt historic barn rehabilitation expenditures from real property and school taxes. The exemption would be for 100% of the increase in value caused by the rehabilitation in the first year. The exemption then decreases by 10% each year for the next nine years.

Beginning in 1997, a new credit is added to the corporate and personal income tax laws for agricultural property taxes paid by eligible farmers. To qualify, a taxpayer's farming income must be at least two-thirds of federal gross income. The credit is equal to the school district property taxes paid on a base amount of acreage plus one half of the property taxes paid on the acreage owned in excess of the base amount. In 1997, the base amount is 100 acres; in 1998, 175 acres; and after 1998, 250 acres. The base acreage allowance is split between related parties and the bill contains elaborate related party rules similar to those found in IRC sec. 267. The agricultural property tax credit phases out between $100,000 and $150,000 of net income. Property qualifying for this credit must be used for agricultural purposes and includes land and improvements (except to the extent the improvements are used for residential purposes).

Increase to Household and Dependent Care Credit (Sections 201 - 206). Under the bill, the household and dependent care credit is increased from its current rate of 20% of the federal child care credit to as much as 30% of the federal credit in 1996 and 60% of the federal credit thereafter. There is a phase out of that portion of the credit which exceeds 20% of the federal credit to the extent New York adjusted gross income (NYAGI) exceeds $10,000, with full phase out of the excess over 20% occurring at $14,000 of NYAGI. The credit is made refundable, except for nonresidents. Also, the bill answers the question of how married taxpayers are to file for the credit if they are not required to file a federal return. These taxpayers may receive the credit only if they file a joint New York return.

Sales Tax Moratorium (Sec. 221). New York experimented with a sales tax moratorium on the sale of clothing and footwear costing less than $500. The moratorium ran from January 18 to January 24, 1997, at the election of the local taxing district. Cities exceeding one million people were authorized to extend the moratorium to city sales taxes as well.

Miscellaneous Changes. A number of miscellaneous changes are also included in the bill.

The 1994/1995 law included a credit for 5 percent of the value of closely held businesses up to $15 million. This amounts to a credit of up to $750,000. Also, the 1994/1995 law increased the unified tax credit to a maximum $2950, thereby sheltering an estate of up to $115,000. The 1995/1996 law includes a deduction for up to $250,000 in the value of a principal residence from the estates of decedents dying on or after June 7, 1995. The deduction applies regardless of the location of the principal residence.

A significant simplification to the New York estate tax would be to use the approach many other states have relied on, the "pick-up" tax. This tax would charge a decedent's estate an amount equal to the federal estate tax credit for death taxes paid to states. A proposal has been developed to shift the New York State estate tax to take advantage of the "pick-up" tax approach. Such an approach was endorsed by Governor Pataki on January 9, 1997.

The Society praises the efforts of Governors Pataki and Cuomo and the legislature to reduce the impact of the estate tax as an incentive to flee New York State. The Society's 1996 New York State Tax Legislative proposals urge the passage of a "pick-up" tax.

Only if these primary factors lead the auditor to conclude there is a New York domicile or if they are inconclusive, should the auditor turn to a list of "other factors" such as active involvement in community organizations, the address used for bank statements, and analysis of telephone services at each residence.

Auditors are instructed in the guide not to take actions which would discourage people from visiting or shopping in New York or using New York banks or professional services. Nonetheless, the NYSSCPA remains concerned that the Department's nonresident audit program, if too assertively conducted, will have just that effect.

In 1996, the North Eastern Tax Officials Association, NESTOA, completed an agreement that should reduce or eliminate the likelihood of taxpayers' being claimed as domiciliaries of more than one of the signing states. NESTOA includes the states of New York, New Jersey, and Connecticut together with Delaware, Maine, Maryland, Massachusetts, New Hampshire, Pennsylvania, Rhode Island, and Vermont, and the District of Columbia.

Although the agreement was approved by the states chief tax administrators, in many states, including New York, it needs to be codified by the legislature. The Department of Taxation has proposed legislation to gain this legislative endorsement under bill number S. 5208.

The agreement, if enacted will reduce or eliminate the problem of a taxpayer's being taxed on the same income in more than one state. Effected taxpayers are those whom more than one state claim as domiciliaries and those who are domiciled in one state and statutory residents of another state. Some of the states will require enabling legislation before the agreement can become completely effective.

The agreement has three objectives. First, taxpayers should be considered domiciled in only one state and, second, the states should apply uniform sourcing rules.

Under the agreement, the tax administrators have agreed to incorporate the following concepts in their tax policy relating to effected individuals:

Generally speaking, the agreement follows New York's approach concerning domicile and sourcing of income.

The guideline details the Department's position and supporting case law on a number of issues such as—

The guideline also contains two appendixes which digest all of the case law in the area and lists dozens of frequently asked questions with the Department's answers to those questions.

Among the changes made to the previous rules are the following:

The proposed rules contained a provision for informal discovery procedures. At the suggestion of commentators, the provision was dropped in the belief that discovery procedures are inappropriate for an administrative forum.

The new rules took effect immediately upon adoption, with two exceptions which became effective 30 days later.

CPAs who practice before the tribunal are well advised to study the rules carefully, as proper representation of their clients may well depend on how the appeal is conducted as well as the underlying facts and law involved.

The New York State Department of Taxation and Finance, under the leadership of Commissioner Michael H. Urbach, CPA, has embarked on an ambitious plan to revamp the state's tax regulations. The effort is being carried out under the authority of the executive order of Governor Pataki, which directs all state agencies to identify those regulations "which have unduly burdened the economy of the State of New York and caused job losses or which are more demanding than required to meet legislative goals."

Some ideas being explored by the Department of Taxation and Finance include the following:

The Society commends the Department, the Commissioner, and the Governor for undertaking this effort to improve the state's tax system by clearing away deadwood and creatively exploring ways to facilitate compliance with tax law by more efficient means.

Fulfilling an election pledge of Governor Pataki to get tough on deadbeat parents and empowered by legislation passed in 1995, the New York State Department of Taxation and Finance on March 1, 1996, began requiring employers to notify the state of the identity of new hires within 15 days of hire. The date of hire is deemed to be the date the federal form W-4 is signed by the employee.

The information required by the state is: the date the form W-4 was signed; the name, address, and social security number of the employee; and the name, address, and employer identification number of the employer. The requirement can be satisfied with the filing of a copy of the Form W-4 with the state. The information is to be sent to DTF New Hire Notification, P.O. Box 15119, Albany, NY 12212-5119.

New York is one of over 20 states with programs in place to gather information on parents failing to pay child support. While few quibble with the goals of the program, many take issue with the implementation. The notice from the state was received by many employers barely a month before its effective date. There was little or no publicity other than the notice. Many employers were notified about the significance of the new rules by their CPA.

In any event, the filing of the W-4 information with the state should be added to the "new employee checklist" of all New York employers and a routine should be established to forward the W-4 information to the state either on a weekly basis or with the hiring of each new employee.

The NYSSCPA raised several issues with the Department of Taxation and Finance regarding the notice. The first concern was the hardship worked on employers to have so short a period of advance notice before it became effective. The second was the appearance that employers were not consulted in determining the filing deadlines under the notice. A more streamlined reporting approach was recommended.

On December 24, 1996, the New York State Tax Appeals Tribunal sent downstate practitioners a holiday present when it announced that Governor Pataki authorized it to begin a pilot program of holding hearings at the offices of the New York State Housing Finance Agency, 641 Lexington Avenue.

The test ran from January through March 1997. A determination will be made whether to continue.