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Montana Administrative Register Notice 42-2-869 No. 18   09/22/2011    
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BEFORE THE DEPARTMENT OF REVENUE

OF THE STATE OF MONTANA

 

In the matter of the adoption of New Rules I through IV and amendment of ARM 42.9.102, 42.9.106, 42.9.203, and 42.15.120 relating to pass-through entities

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NOTICE OF PUBLIC HEARING ON PROPOSED ADOPTION AND AMENDMENT

 

TO:  All Concerned Persons

 

1.  On October 17, 2011, at 3:00 p.m., a public hearing will be held in the Third Floor Reception Area Conference Room of the Sam W. Mitchell Building, at Helena, Montana, to consider the adoption and amendment of the above-stated rules.

Individuals planning to attend the hearing shall enter the building through the east doors of the Sam W. Mitchell Building, 125 North Roberts, Helena, Montana.

 

2.  The Department of Revenue will make reasonable accommodations for persons with disabilities who wish to participate in this public hearing or need an alternative accessible format of this notice.  If you require an accommodation, contact the Department of Revenue no later than 5:00 p.m., October 11, 2011, to advise us of the nature of the accommodation that you need.  Please contact Cleo Anderson, Department of Revenue, Director's Office, P.O. Box 7701, Helena, Montana 59604-7701; telephone (406) 444-5828; fax (406) 444-4375; or e-mail canderson@mt.gov.

 

3.  The proposed new rules do not replace or modify any section currently found in the Administrative Rules of Montana.  The proposed new rules provide as follows:

 

NEW RULE I  PASS-THROUGH ENTITIES – AUDIT ADJUSTMENTS  (1)  The department reports the details of audit adjustments resulting from an audit or other review of a pass-through entity's information return to the entity and the owners of the pass-through entity.

(2)  The department reports the details of audit adjustments resulting from an audit or other review of a pass-through entity's composite tax return to the pass-through entity.  The department does not report the details of audit adjustments to the eligible participants in the composite return because the pass-through entity is responsible for representing the eligible participants in appeals.

(3)  If the audit adjustments resulting from an audit or other review of a pass-through entity's information return affect the Montana tax returns filed by the partners, shareholders, or other owners of the pass-through entity, then the department may adjust an owner's tax return to reflect the audit adjustments that passed through to the owner.  If the department adjusts an owner's tax return, it will inform the owner of the details of the adjustments to its tax return, but the department will not report to the pass-through entity the details of the adjustments to the owner's tax return.

(4)  If the audit adjustments resulting from an audit or other review of a pass-through entity's information return affect Montana tax returns that partners, shareholders, and other owners have not filed, the department may request that the owners file tax returns.  If an owner does not file a tax return, the department may estimate the owner's tax liability in accordance with 15-30-2512, MCA.  The department will not report the details of the owner's estimated tax liabilities to the pass-through entity.

(5)  Except as provided in (6), for multi-tiered entity structures, the department will not report the details of audit adjustments resulting from an audit or other review of a pass-through entity's information return to a related entity, unless the related entity is an owner of the audited pass-through entity.  For example:

(a)  if an audit or other review of a first-tier entity results in an audit adjustment the department will report the details of the audit adjustments to the first-tier entity and the owners of the first-tier entity.  However, the department will not report the details of the audit adjustments to the owners of the second-tier entity, the third-tier or any higher-tier entity.

(6)  If a single member limited liability company that is considered a disregarded entity for federal tax purposes is an owner of the pass-through entity, the department may report the details of the audit adjustments directly to the disregarded entity's owner.

(7)  In multi-tiered entity structures, audit adjustments resulting from an audit or other review of a pass-through entity's tax return may affect the tax returns of entities and individuals that are not direct owners of the pass-through entity.  If audit adjustments pass through to these indirect owners the department may:

(a)  adjust the indirect owner's tax returns.  If the department adjusts an indirect owner's tax return, then the department will notify the indirect owner of the adjustments to its tax return, but the department will not report the details of the pass-through entity's audit adjustments that passed through to the indirect owner.  If the indirect owner wants the details of the audit adjustments that affected its return, the indirect owner will have to contact the pass-through entity that it owns an interest in for that information; or

(b)  estimate the indirect owner's tax liability in accordance with 15-30-2512, MCA.  If the department estimates an indirect owner's tax liability, the department will notify the indirect owner of the estimated tax liability.  The department will not report the details of the pass-through entity's audit adjustments that passed through to the indirect owner.  If the indirect owner wants the details of the audit adjustments that affected its return, the indirect owner will need to contact the pass-through entity that it owns an interest in for that information.

 

AUTH:  15-1-201, 15-30-3312, MCA

IMP:  15-30-2512, 15-30-3302, 15-30-3311, 15-30-3312, 35-1-1107, 35-8-405, 35-10-103, 35-10-402, 35-12-508, MCA

 

REASONABLE NECESSITY:  The department proposes the adoption of New Rule I to explain how the disclosure of confidential information affects the department's ability to provide information to pass-through entities and their owners.  With the increased number of pass-through entities filing and the complex nature of many of the multi-tiered structures involved, New Rule I is proposed to address confidentiality and information access issues that have been posed to the department in the course of its pass-through audit activity.

New Rule I identifies the information that can be provided to the different parties that may be affected by an audit of a pass-through entity, including indirect owners.  The rule will also provide guidance to the owners regarding the information that they are able to obtain from the department when the department conducts an audit or other review of a pass-through entity return.

Overall, the goal of the department in writing this rule has been to fulfill its responsibility to protect confidential information in the context of an audit or review of complex pass-through entity structures while providing information to owners.

 

NEW RULE II  PASS-THROUGH ENTITIES – STATUTE OF LIMITATIONS

(1)  The department may revise any return of an entity if, in the opinion of the department, it is incorrect in any essential respect.

(2)  If a revision to a pass-through entity's information return changes the owners' distributive share of Montana source income, gain, loss, deduction, or credit or item of income, gain, loss, deduction, or credit the department will review the owners' tax returns and determine if additional tax is due.  If additional tax is due, the department may assess tax, penalties, and interest as follows:

(a)  if the additional tax, penalties, and interest are due on a return filed by an individual, trust, or estate, it may be assessed within five years of when the return was filed; or

(b)  if the additional tax, penalties, and interest are due on a return filed by a C corporation, it may be assessed within three years of when the return was filed.

(3)  If a revision to a pass-through entity's composite return changes the amount of tax, penalties, and interest due on a composite return filed by the pass-through entity, the tax, penalties, and interest may be assessed within five years of when the composite return was filed regardless of whether the participants are individuals, foreign C corporations, or pass-through entities.

(4)  For purposes of (2) and (3), any return filed before the original due date is considered to be filed on the original due date.

(5)  If no return was filed by the taxpayer, the department may assess tax, penalties, and interest at any time.

(6)  There are various circumstances under which the statute of limitations described in (2)(a) and (3) may be extended as provided in 15-30-2605, MCA.  The statute of limitations described in (2)(b) may be extended as provided in 15-31-509, MCA.

 

AUTH:  15-1-201, MCA

IMP:  15-30-2605, 15-30-2606, 15-30-2607, 15-30-3302, 15-31-509, MCA

 

REASONABLE NECESSITY:  The department proposes the adoption of New Rule II to provide pass-through entities, their owners, and tax practitioners an explanation of how the statutes of limitations apply to the returns they file.  Montana law establishes different statutes of limitations for individuals, trusts, and estates (five years), and C corporations subject to the corporation license tax (three years).  The department does not interpret the statute that provides for a three-year period within which to assess additional corporation license taxes as applying to composite tax imposed under chapter 30 on S corporations and partnerships.  It is often confusing for owners of a pass-through entity, as well their tax practitioners, to know which statute of limitations applies to their specific tax type; therefore, the goal of New Rule II is to address and mitigate this confusion.

New Rule II also provides guidance for when the statute of limitations may be extended.  The language in New Rule II reflects the current department practice and is included to inform the public of that practice.

 

NEW RULE III  DISREGARDED ENTITIES – SOURCING GAIN OR LOSS ON THE SALE OF AN INTEREST  (1)  Gain on the sale of an interest in a single member limited liability company (LLC) that is a disregarded entity is sourced to Montana as if the single member LLC did not exist and the assets of the LLC are owned directly by the sole member (or sole member and spouse, if applicable).  The following example illustrates how this rule is applied:

(a)  Nonresident individual C is the sole member of LLC D.  LLC D is a single member LLC that is disregarded as a separate entity for tax purposes.  LLC D's only asset is rental property located in Montana.  If nonresident individual C sells his interest in LLC D, the transaction is sourced to Montana in the same way that the gain would be sourced if C owned LLC D's assets directly and sold them.

 

AUTH:  15-1-201, 15-30-2620, MCA

IMP: 15-30-2101, 15-30-2110, 15-30-3302, 15-30-3311, MCA

 

REASONABLE NECESSITY:  The department proposes the adoption of New Rule III to identify how the sale of an interest in a disregarded entity is reported on the owner's Montana tax return.  This will help ensure the proper reporting of income and avoid the attempted improper avoidance of Montana tax.

While current Montana law disregards the separate existence of disregarded entities, the department has previously not addressed in rule how this concept applies when the owner of a disregarded entity sells its interest in the entity instead of the assets of the entity.  New Rule III explains that the sale of an interest in a disregarded entity is to be sourced to Montana by the owner as though the owner sold the assets of the disregarded entity.  This rule provides additional guidance to both the taxpayers and their practitioners on how to report the sale of a disregarded entity because the sale is often reported incorrectly. By ensuring fair and accurate reporting of these sales, both the department and taxpayers and their tax practitioners strengthen and support an equitable tax administration process for all Montana businesses.

This language reflects current department interpretation and is included to inform the public of that interpretation.

 

NEW RULE IV  MULTI-TIERED PASS-THROUGH ENTITY STRUCTURES WITH MONTANA SOURCE INCOME – REPORTING REQUIREMENTS  (1)  A pass-through entity may have, in addition to income from its own operations or activities, income from one or more other pass-through entities.  This rule describes how the pass-through entity must classify its income from its own operations or activities as business or nonbusiness income and how it must report its income from other pass-through entities.  For purposes of this rule, "operations income" means the income of a pass-through entity from its own operations or activities and "flow-through income" means its separately and nonseparately stated distributable share of income from other pass-through entities.

(2)  Except as provided in (5), each pass-through entity has to separately determine whether its operations income is business or nonbusiness income as those terms are defined in ARM 42.26.206.  Once a pass-through entity determines the business or nonbusiness character of its operations income, the entity must then determine what part of this business and/or nonbusiness income is Montana source income.  Except as provided in (5) and (6), the operations income retains its character as business or nonbusiness income and as Montana source income regardless of how many other tiers of pass-through entities through which the income is passed.

(3)  Except as provided in (5) and (6), flow-through income of a pass-through entity, determined as provided in (1), retains its character as business and/or nonbusiness income and its character as Montana source income.

(4)  An entity in a multi-tiered pass-through entity structure may have flow-through income sourced to Montana under the subsections of the definition of "Montana source income" in 15-30-2101, MCA, that address partnership or S corporation income derived from Montana activity or property, reportable on Montana Schedule K-1, and also operations income sourced to Montana as a result of its own business activity under other subsections of that definition of "Montana source income," such as net income from a business, profession, or farming activities carried on in the state.  If this occurs the entity must allocate to Montana the flow-through income sourced to Montana and the entity must determine the portion of its operations income that is sourced to Montana as provided in (1) and allocate or apportion that Montana source income under the provisions of ARM 42.15.120.

(5)  This rule does not apply to a partnership or disregarded entity whose operations are unitary with the business operations of a corporate partner or disregarded entity owner that is a C corporation whose apportionment factors are included in the computation of the C corporation's apportionment factors as provided in ARM 42.26.228.

(6)  Nothing in this rule prevents the department from determining the business or nonbusiness character of an entity's operations income or the Montana source character of its Montana flow-through income sourced to Montana.

 

AUTH:  15-1-201, MCA

IMP:  15-30-3302, 15-30-3311, MCA

 

REASONABLE NECESSITY:  The department proposes the adoption of New Rule IV to explain how Montana source income has to be reported as it passes through multi-tiered pass-through entity structures.  Pass-through entities engaged in business in Montana and in other states source their business income or nonbusiness income to Montana and other states as provided in ARM 42.15.120.  Pass-through entities, however, may also receive distributable shares of Montana source income from other pass-through entities.

New Rule IV provides guidance to taxpayers about how to report their Montana source income to Montana when they receive that income from a lower tier and explains that the character and source of the income is determined by the entity that earned it and that that character, once determined, never changes.  For example, pass-through entities should not apportion (i.e., include in their business income and apply their sales, payroll, and property factors to) Montana source income that they received as a distributable share of income from another pass-through entity.

In addition, the rule explains how a pass-through entity has to add together both its Montana source income derived from its own operations and activities, and any Montana source income that is included in its distributable share of income from another pass-through entity, in determining and reporting its Montana source income in its Montana information returns and in the Montana Schedule(s) K-1 it provides to its owners.

By adopting proposed New Rule IV, the department will maintain consistency and fairness in the way it taxes Montana source income that flows through pass-through entities.

 

4.  The rules proposed to be amended provide as follows, stricken matter interlined, new matter underlined:

 

42.9.102  PASS-THROUGH ENTITY INFORMATION RETURNS  (1)  Every pass-through entity with Montana source income is subject to the requirement in 15-30-3302, MCA, to file pass-through entity information returns.  Most pass-through entities are subject to an annual filing requirement.  In general, the status of a pass-through entity is the same as its status for federal income tax purposes.  Disregarded entities with Montana source income, whose separate existence is disregarded for federal income tax purposes, are subject to the information return filing requirements in this rule, even though no filing requirement may be imposed in the IRC.  Some disregarded entities are required to file information returns only on the happening of an event.  A pass-through entity falls into one of three categories:

(a)  partnership;

(b)  S corporation; or

(c)  disregarded entity.

(2)  Disregarded entities with Montana source income, whose separate existence is disregarded for federal income tax purposes, are subject to the information return filing requirements in this rule, even though no filing requirement may be imposed in the IRC.  Some disregarded entities are required to file information returns only on the happening of an event.

(2) remains the same but is renumbered (3).

(3)(4)  Partnership and S corporation returns can also be filed electronically through the Taxpayer Access Point (TAP) on the Department of Revenue's web site at revenue.mt.gov or the joint federal/state program using approved software vendors.

(4)(5)  Rules for automatic extensions to file the information returns are provided for in ARM 42.9.301 and 42.9.401 for each type of pass-through entity.  In addition, On on written application, and for good cause shown, the department may grant additional extensions for the filing requirements provided in this subchapter.

 

AUTH:  15-1-201, 15-30-2620, 15-31-501, MCA

IMP:  15-30-2602, 15-30-2603, 15-30-2616, 15-30-3302, 15-30-3311, 15-30-3312, 15-31-101, 15-31-111, MCA

 

REASONABLE NECESSITY:  The department proposes to amend ARM 42.9.102 to improve taxpayer convenience by informing partnerships and S corporations of additional options they now have to file their returns electronically.  The department is further proposing the amendments to the rule to improve its clarity and readability by separating language specific to disregarded entities from language that addresses pass-through entities in general.

 

42.9.106  STATEMENT, COMPOSITE RETURN, OR WITHHOLDING, OR WAIVER FOR PARTNERS, SHAREHOLDERS, MANAGERS, AND MEMBERS THAT ARE SECOND-TIER PASS-THROUGH ENTITIES  (1)  A partnership and S corporation  Except as provided in (2), a first-tier pass-through entity with one or more owners that are also pass-through entities (second-tier pass-through entities), during any part of the tax year for which an information return is required by this chapter, must for each second-tier pass-through entity:

(a)  file a composite return as provided in ARM 42.9.202 and include the second-tier pass-through entity in the filing; or

(b)  obtain from the second-tier pass-through entity and file with its information return the second-tier pass-through entity owner statement on form PT-STM, Montana Second-tier Pass-through Entity Owner Statement establishing that its Montana source income will be fully accounted for in individual income or corporate license or income tax returns filed with the state; or do each of the following:

(c)(i)  remit to the department an amount equal to on the second-tier pass-through entity's account, determined as provided in (4), the highest marginal rate in effect under 15-30-2103, MCA multiplied by the second-tier pass-through entity's share of Montana source income with the forms CLT-4S or, PR-1, or DER-1 Pass-through Through Entity's Information Return; and

(d)(ii)  provide Form PT-WH or Montana Schedule K-1 to the second-tier pass-through entity setting forth the amount of withholding remitted to the department which can be passed through to its owners and used as a withholding payment against the tax liability of the owner of the second-tier pass-through entity upon filing a Montana individual income or corporation license tax return that may be claimed as a refundable credit against the Montana income tax liability of the owners who file individual, corporation license, or other income tax returns as explained in (7).

(2)  A disregarded entity with one or more owners that are also pass-through entities (second-tier pass-through entities), during any part of the tax year for which an information return is required by this chapter, must for each second-tier pass-through entity:

(a)  obtain from the second-tier pass-through entity and file with its information return the second-tier pass-through entity owner statement on form PT-STM, Montana Second-tier Pass-through Entity Owner Statement.  This statement establishes that the owner's Montana source income will be fully accounted for in individual income or corporate license or income tax returns filed with the state; or

(b)  remit an amount on the second-tier pass-through entity's account, determined as provided in (4) with the form DER-1, Disregarded Entity Information Return; and

(c)  provide form PT-WH or Montana Schedule K-1 to the second-tier pass-through entity setting forth the amount of withholding remitted to the department which can be passed through to its owners and used as a withholding payment against the tax liability of the owner of the second-tier pass-through entity upon filing a Montana individual income or corporation license tax return.  The department may waive the requirements to remit tax or pay composite tax on behalf of the second-tier pass-through entity for the current tax year as set forth in (1) if the second-tier pass-through entity:

(a)  completes and submits the Form PT-STM for the year to the department at least 45 days before the original due date of the first-tier pass-through entity's tax return; and

(b)  establishes to the satisfaction of the department that its distributive share of Montana source income for the current year will be fully accounted for in individual income, corporation license, or other income tax returns filed with the state.

(3)  The pass-through entity is required to attach new statements, form PT-STM, each year.  The department will notify the first and second-tier pass-through entities of its decision to waive or not waive the requirement to file a composite return or remit within 30 days after receipt of the completed Form PT-STM.  The department will generally waive the requirement if it can determine that all of the income for the three most recent tax years has been reported on timely filed tax returns and that all tax due under those returns has been paid.

(4)  The amount that must be remitted by the due date described in (5) is the highest marginal rate in effect under 15-30-2103, MCA, multiplied by the share of Montana source income of the second-tier pass-through entity reflected on the first-tier pass-through entity's information return.  The department may grant a conditional waiver that lasts longer than one year on written request included with the Form PT-STM if, in addition to the conditions provided in (3), the second-tier pass-through entity:

(a)  agrees to notify the department if the ownership of the second-tier pass-through entity and, if applicable, the ownership of any higher-tier pass-through entities changes;

(b)  agrees to remit the amount provided under (1) within 60 days after notice from the department that its distributive share was not fully accounted for on corporation license, individual income, or other tax returns filed with the department; and

(c)  agrees to be subject to the personal jurisdiction of the state for the collection of the remittance.

(5)  The due date for the remittance described in (1)(c) and (2)(b) is the due date of the first-tier pass-through entity's information return.  The department's waiver is conditioned upon there being no change in material facts, including a change of ownership of the second-tier pass-through entity and, if applicable, the ownership of any higher-tier pass-through entity changes, and is automatically revoked on the happening of any such change.

(6) remains the same.

(7)  The amount remitted by the first-tier pass-through entity on behalf of the second-tier pass-through entity is claimed as a refundable credit by the taxpayer who ultimately reports their distributive share of the second-tier pass-through entity's Montana source income.  For example:

(a)  a first-tier pass-through entity remitted tax on behalf of a second-tier pass-through entity, X.  X has two owners, an individual and another pass-through entity, Y.  The individual owner will report his or her distributive share of the remitted tax as a refundable credit on an individual Montana income tax return.  The other owner, Y, will report Y's distributive amount of the remitted tax to its owner.  Y has one owner, a trust. The trust will report its distributive share of the remitted tax as a refundable credit on its Montana income tax return for trusts and estates.

(8)  This rule is effective for tax years beginning after December 31, 2011.

 

AUTH:  15-1-201, 15-30-2620, MCA

IMP:  15-30-3302, 15-30-3312, 15-30-3313, MCA

 

REASONABLE NECESSITY:  The department is proposing amendments to ARM 42.9.106 to reflect a procedure change that more accurately represents the statute.  Given the national growth of complex pass-through entity structures with nonresident owners, current practices are not sufficient to ensure proper tax collection, and hold owners of these multi-tier structures accountable.  Because of these trends, the revenue intended to be collected by the Legislature is going uncollected, resulting in tax dollar shortfalls for the state of Montana and inequities for those taxpayers, predominately Montana residents, who pay the right amount of tax.  By adopting this change in procedure, the department brings practices and rules into closer conformity with statute while providing administration convenience and reduced cost for Montana practitioners, including the members of the Montana Society of CPAs.  As was discussed recently with the state tax practitioners, the amendments allow multi-tiered structures who are compliant with tax filings and payments to receive a waiver of the requirement of the first-tier entity to pay tax on behalf of second-tier entities for multiple years as long as the entities remain compliant.

The proposed amendments describe the tax filing and tax remittance requirements of first-tier pass-through entities when one or more of the owners of the first-tier pass-through entity is a second-tier entity.  If the second-tier entity is not able to establish that all of the Montana source income received from the first-tier entity is eventually reported on tax returns, the first-tier entity must pay tax on behalf of the second-tier for its share of Montana source income (by remittance of a composite tax payment).  If the second-tier entity is able to establish that all of its Montana source income is accounted for on tax returns, then the department may waive the requirement that first-tier entity pay tax on behalf of the second-tier entity.  By doing this the department will be able to ensure that the second-tier entity correctly identifies all owners and verifies that they are reporting income.  These amendments also illustrate to the public how the tax filing and tax remittance requirements are applied to multi-tiered structures.

Multi-tiered pass-through entities are increasing both in number and complexity, and with this the department has noted a marked increase in nonfiling by the owners of upper-tier entities.  In the past, the department has not experienced these problems with Montana pass-through entities that are not part of multi-tiered structures; however, the dramatic increase in multi-tiered structures has necessitated a response that will guarantee that the tax intended to be collected by the Legislature is rightfully paid.  This amendment will ensure the proper collection of revenue for the state of Montana and will substantially contribute to an efficient tax administration process that ensures fair and equitable taxation of all Montana businesses.

The proposed amendments also provide for a delayed effective date for the rule, which will begin with the tax year after December 31, 2011, so that taxpayers, tax practitioners, and software vendors have sufficient time to learn of and make provisions for complying with the department's change in procedure.

 

42.9.203  COMPUTATION OF COMPOSITE TAX  (1)  The composite tax, required to be remitted to the department with the composite tax return, is the sum of each electing eligible participant's composite tax liability.

(2)  The composite return liability of each eligible consenting participant is the product obtained by calculated as follows:

(a)  determining the tax that would be imposed, using the rates specified in 15-31-121, MCA, for C corporations, and using the rates specified in 15-30-2103, MCA, for all other eligible participants, on the sum obtained by subtracting the allowable standard deduction for a single individual, an amount adjusted annually, and one exemption allowance, from the participant's share of the entity's income from all sources as determined for federal income tax purposes; and compute the entity's composite tax ratio by:

(i)  calculating the entity's federal income from all sources as determined for federal income tax purposes;

(ii)  calculating the entity's Montana source income;

(A)  if the entity is only doing business in Montana, the entity's Montana source income is the net taxable income after Montana additions and deductions to income as allowed in 15-30-3302, MCA; or

(B)  if the entity is engaged in multistate business, the entity's Montana source income is determined as provided in [NEW RULE IV]; and

(iii)  dividing the entity's Montana source income by the entity's federal income from all sources;

(b)  multiplying that amount by the ratio of the entity's Montana source income to the entity's income from all sources for federal income tax purposes.  subtract the allowable standard deduction for a single individual and one exemption allowance from each participant's share of the entity's federal taxable income as determined for federal income tax purposes.  Determine the tax that would be imposed on the result using the rates specified in 15-31-121, MCA, for C corporations and the rates specified in 15-30-2103, MCA, for all other eligible participants; and

(c)  multiply the amount determined in (b) by the composite tax ratio computed in (a).

(3)  Tax credits may not be claimed against composite tax.

(4)  When shareholders and partners elect to be included in the composite return, the entity must apply their share of mineral royalty tax withheld for mineral rights owned by the entity to the composite tax liability.

(3)(5)  The entity is required to make quarterly estimated tax payments as prescribed by 15-30-2512, MCA, computed separately for each participant included in the filing of a composite return on the total composite tax liability as computed in (1).

Example:  Assume an S corporation's federal return shows income from all sources of $60,000, $20,000 of which is Montana source income, and that an eligible participant's share of the S corporation's federal income is one-fourth, or $15,000.  The eligible participant's composite return liability is:

 

Participant's share of entity income from all sources

$ 15,000

Standard deduction (2009)

(3,500)

Exemption allowance (2009)

(2,110)

$ 9,390

 

Assume the tax on the $9,390, using the rates set forth in 15-30-2103, MCA, is $237.

 

Participant's composite return liability would be $237 x $20,000/$60,000 = $79.

 

AUTH:  15-1-201, 15-30-2620, 15-30-3312, MCA

IMP:  15-30-2103, 15-30-2512, 15-30-3302, 15-30-3312, 15-31-121, MCA

 

REASONABLE NECESSITY:  The department proposes to amend ARM 42.9.203 to provide pass-through entities and their return preparers more information about the composite tax calculation.  The department is proposing to amend (2)(a) and (2)(b) to provide a more specific calculation of the composite return liability of each eligible consenting participant.

This proposed amendment also stipulates that tax credits are not applied to the composite tax.

Additionally, this rule explains that owners who elect to be included on the composite tax return will have their share of mineral royalty tax that the pass-through entity withheld applied to the composite tax.  The proposed amendment to (5) explains that the quarterly estimated tax payments for composite tax are determined on the total composite tax liability, not the separate tax liabilities of eligible participating owners.  This procedure change will support a more accurate and fair tax administration process.

 

42.15.120  INTENT BUSINESS AND NONBUSINESS INCOME – APPORTIONMENT OR ALLOCATION  (1)  For purposes of the reporting requirements for individuals, trusts, estates, income taxes and pass-through entities that have Montana business or nonbusiness income and determining their Montana tax liability, the department adopts by reference the following rules contained in ARM Title 42, chapter 26 – Corporate Multistate Activities, subchapters:

(a)  1 - General Provisions, as it existed on December 21, 2001;

(b)  2 - Income Allocation and Apportionment, as they existed on December 27, 2002, except ARM 42.26.204, 42.26.228, and 42.26.229;

(c)  4 - Special Rules Related to Installment Sales, as they existed on December 21, 2001;

(d)  6 - Railroads, as they existed on December 21, 2001;

(e)  7 - Trucking, as they existed on December 21, 2001;

(f)  8 - Airlines, as they existed on December 21, 2001;

(g)  9 - Special Rules for Construction Contracts, as they existed on December 21, 2001;

(h) 10 - Publishing Companies - Apportionment, as they existed on April 23, 2004; and

(i)  11 - Television and Radio Broadcasting, as they existed on April 23, 2004.

(2)  The taxpayer may petition for or the department may require an alternative method of reporting activity in the state as provided in 15-1-601, MCA.

(2)(3)  When applying the rules referred to in (1) for individual income tax purposes, the terms "individual" "individual," "trust," "estate," or "entity" shall replace the term "corporation," and the provisions of Title 15, chapter 30, MCA, shall replace references to Title 15, chapter 31, MCA.

(4)  The reporting requirements in [NEW RULE IV] are in addition to and not in lieu of any rules referred to in (1) and the provisions of the Multistate Tax Compact as adopted in 15-1-601, MCA.

 

AUTH: 15-30-2620, MCA

IMP: 15-1-601, 15-30-2111, MCA

 

REASONABLE NECESSITY:  The department proposes to amend ARM 42.15.120 to provide guidance to multistate pass-through entities with a tax filing requirement in Montana.  The proposed amendments change the title of the rule to more accurately describe the subject matter and modify the language in (1) so that the public can better understand what is required for multistate businesses filing Montana tax returns.

The proposed amendments also identify the relief provision that allows taxpayers who may have circumstances which are not addressed by the provisions in ARM Title 42, chapter 26 or 15-1-601, MCA, to petition the department for approval of an alternative method of reporting its activity in the state.

 

5.  Concerned persons may submit their data, views, or arguments, either orally or in writing, at the hearing.  Written data, views, or arguments may also be submitted to: Cleo Anderson, Department of Revenue, Director's Office, P.O. Box 7701, Helena, Montana 59604-7701; telephone (406) 444-5828; fax (406) 444-4375; or e-mail canderson@mt.gov and must be received no later than October 21, 2011.

 

6.  Cleo Anderson, Department of Revenue, Director's Office, has been designated to preside over and conduct the hearing.

 

7.  An electronic copy of this notice is available on the department's web site at www.revenue.mt.gov.  Locate "Legal Resources" in the left hand column, select the "Rules" link and view the options under the "Notice of Proposed Rulemaking" heading.  The department strives to make the electronic copy of this notice conform to the official version of the notice, as printed in the Montana Administrative Register, but advises all concerned persons that in the event of a discrepancy between the official printed text of the notice and the electronic version of the notice, only the official printed text will be considered.  In addition, although the department strives to keep its web site accessible at all times, concerned persons should be aware that the web site may be unavailable during some periods, due to system maintenance or technical problems.

 

8.  The Department of Revenue maintains a list of interested persons who wish to receive notices of rulemaking actions proposed by this agency.  Persons who wish to have their name added to the list shall make a written request, which includes the name and e-mail or mailing address of the person to receive notices and specifies that the person wishes to receive notices regarding particular subject matter or matters.  Notices will be sent by e-mail unless a mailing preference is noted in the request.  Such written request may be mailed or delivered to the person in 5 above or faxed to the office at (406) 444-4375, or may be made by completing a request form at any rules hearing held by the Department of Revenue.

 

9.  The bill sponsor contact requirements of 2-4-302, MCA, do not apply.

 

 

/s/  Cleo Anderson                           /s/  Dan R. Bucks

CLEO ANDERSON                         DAN R. BUCKS

Rule Reviewer                                 Director of Revenue

 

Certified to Secretary of State September 12, 2011

 

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