BEFORE THE DEPARTMENT OF REVENUE
OF THE STATE OF MONTANA
In the matter of the adoption of New Rules I (42.4.2801) and II (42.4.2803), the amendment of ARM 42.4.104, 42.4.201, 42.4.202, 42.4.208, 42.4.209, 42.4.303, 42.4.402, 42.4.1608, 42.4.1702, 42.4.2403, 42.4.2404, 42.4.2704, 42.4.2706, 42.4.2802, 42.4.2905, 42.4.3003, 42.4.3103, 42.4.3202, 42.4.3303, 42.4.4106, and 42.4.4107, and the repeal of 42.4.2707 relating to tax credits
NOTICE OF ADOPTION, AMENDMENT, AND REPEAL
TO: All Concerned Persons
1. On November 23, 2012, the department published MAR Notice Number 42-2-889 regarding the proposed adoption, amendment, and repeal of the above-stated rules at page 2347 of the 2012 Montana Administrative Register, Issue Number 22.
2. A public hearing was held on December 17, 2012, to consider the proposed adoption, amendment, and repeal. Jane Egan, of the Montana Society of Certified Public Accountants, and Nicole Rush, of the Montana Community Foundation, appeared and testified at the hearing. Liz Moore, Executive Director of the Montana Nonprofit Association, and Jeff Bretherton, Board of Directors Chairman of the Montana Community Foundation, submitted written comments prior to the hearing. The oral and written comments received are summarized as follows along with the responses of the department:
COMMENT NO. 1: With regard to ARM 42.4.208, Ms. Egan stated that the Montana Society of Certified Public Accountants (MSCPA) would like the department to consider allowing insulated garage doors on attached garages to qualify for the credit, whether the garage is heated or not, because they help conserve energy. An attached garage will keep cold or hot air from entering the house through the access door and conserve energy. She further commented that the wording "that does not consume energy" is unclear. If the meaning is that the garage needs to be heated, can the wording say that?
RESPONSE NO. 1: The department appreciates Ms. Egan's interest in this rulemaking action, and thanks her for the suggestion that insulated garage doors should qualify for the credit when installed on an attached garage. However, at this time, the department is declining to make that change. Information gathered from sources such as the Department of Environmental Quality, show that upgrading to an insulated garage door has, at best, only a minimal impact on the overall energy consumption of the living space. That means the investment would be considered "impractical or ineffective" as described in 15-32-106, MCA, and therefore the credit should be denied.
Better energy conservation can be obtained by improving the efficiency of the access door. The department will continue to determine if there are situations where installation of an insulated garage door would qualify for the credit, as the credit is intended, and what criteria would need to be met in order to qualify.
The department also appreciates Ms. Egan's comment and suggestion relative to the wording in ARM 42.4.208, but believes the amended language sufficiently clarifies the intention of the example.
COMMENT NO. 2: With regard to ARM 42.4.402, Ms. Egan commented that the change denies a credit to the beneficiaries for taxes paid to another state by a trust or estate. If the related income is taxed to Montana at the beneficiary level, the credit should certainly be allowed. The rule could also strictly be interpreted to deny the credit for taxes withheld for the beneficiary of a revocable living trust.
RESPONSE NO. 2: The department appreciates Ms. Egan's comments on this rule. The proposed amendment to ARM 42.4.402 does not deny a credit for income taxes paid to another state or country to Montana resident beneficiaries of an estate or trust. As provided in 15-30-2302, MCA, resident taxpayers, including those taxpayers who are beneficiaries of an estate or trust, are allowed to apply a credit towards their income tax liability equal to the amount of income taxes that they paid to another state or country.
If a resident trust pays income tax to another state, the income that was taxed by that other state is part of the trust's Montana taxable income and the fiduciary of the trust can apply the credit for those taxes paid against the trust's Montana tax liability. However, if the trust distributes the income from the other state to a beneficiary, the trust will not pay income tax at all on that distributed amount. Instead, the beneficiary will include the income in their taxable income and will pay the applicable income tax to that other state. If the beneficiary is a Montana resident, then the beneficiary can claim the credit for those taxes paid against their individual income tax liability.
COMMENT NO. 3: With regard to ARM 42.4.2704, Ms. Rush, Ms. Moore, and Mr. Bretherton all commented that in the explanation for the amendment, the department correctly notes that the credit cannot be allowed against the tax liability of partnerships or limited liability companies.
However, pass-through entities such as small business corporations, partnerships, and LLCs are permitted to make outright gifts to qualified endowments qualifying for the 20 percent credit. The credit passes through and is attributed to the owners of the entity, which can be individuals. Thus the rule should recognize and provide for the possibility that the credit for a direct contribution is allowed against the tax liability of the individual when the individual is an owner of the pass-through entity making the contribution.
Ms. Rush, Ms. Moore, and Mr. Bretherton suggested an amendment to include the word "individual" to read as follows: "The credit allowed against the tax liability of the corporation, estate, trust, or individual for a direct contribution from a corporation, partnership, limited liability company, estate, or trust is equal to 20 percent of the charitable contribution."
With regard to ARM 42.4.2704, Ms. Egan stated that the MSCPA concurs with the comments presented by the MNA and the MCF.
RESPONSE NO. 3: The department thanks Ms. Rush, Ms. Moore, Mr. Bretherton, and Ms. Egan for their comments and appreciates the opportunity to address their concerns. Unfortunately, the department is not able to incorporate the reference to individual income tax liability, because an individual is allowed to deduct 40 percent of the present value of the charitable gift portion of a planned gift, not 20 percent as the proposed language would establish.
The department is also not able to include the proposed language to acknowledge that a pass-through entity can distribute amounts of a qualifying contribution to its owners, because the proposed language would suggest that a C corporation and a limited liability company electing to be treated as a C corporation for income tax purposes can distribute contribution amounts to its shareholders. The proposed language would also conflict with how a beneficiary receives an amount of a qualifying contribution from an estate or trust.
ARM 42.4.2704(5) and (7) provide guidance to pass-through entities about how to distribute a qualifying contribution to its owners. The contribution is passed through to the owners in the same proportion as their distributive share of the entity's income or loss for Montana income tax purposes. ARM 42.4.2704(6) provides direction to estates and trusts about how to claim the credit and how to pass remaining qualifying contribution amounts to beneficiaries.
COMMENT NO. 4: With regard to ARM 42.4.2706, Ms. Rush, Ms. Moore, and Mr. Bretherton commented that the department is proposing to amend the rule to add a requirement that the tax-exempt organization, trustee, or bank or trust company (qualified organization) receiving the contribution must state in the receipt it provides to the donor that the contribution was placed in a permanent, irrevocable fund. The reasonable necessity for the amendment states that the department currently requires that the information be submitted when claiming the credit in order to verify that the gift was placed in a permanent, irrevocable fund as required by law, and this amendment simply informs taxpayers of that requirement.
However, contrary to the reasonable necessity statement for the proposed amendment, it does not appear that the department currently requires taxpayers to submit a receipt setting forth that the contribution was placed in a permanent, irrevocable fund when an outright contribution is made. ARM 42.4.2706 currently does not contain such a requirement, nor does the Form QEC. Paper filers of the Form QEC are not instructed to even attach all the information currently required by ARM 42.4.2706, such as the receipt, and in the case of a charitable trust, where the charity is yet to be named, a copy of disposition clause of the charitable trust. The Form QEC instructs electronic filers to not even submit the form.
Ms. Rush, Ms. Moore, and Mr. Bretherton requested that the proposed amendment not be adopted at all unless it is addressing a material problem identified by the department related to credits being taken for outright gifts made to permanent, irrevocable funds created by qualified organizations under separate governing documents. If the department has identified such a problem, but it has arisen in the situation where qualified organizations are not following the restriction of the taxpayer contained in taxpayers' separate gift documents accompanying their outright contributions, the department should report these violations to the Attorney General's office to be addressed rather than adopt the proposed amendment.
If the department has identified such a problem, but it has arisen in the situation where the taxpayer has not provided the qualified organization with a separate gift document containing the restriction, then they request that the proposed amendment be modified in (f) to permit those taxpayers who do make outright gifts to permanent, irrevocable funds created by their separate gift document, to submit the separate gift document rather than ensure the qualified organization timely and correctly provides a sufficient receipt as follows: "in the case of an outright gift, a copy of the separate gift document which accompanied the outright contribution, or the receipt in (a) must state that the contribution was placed in a permanent irrevocable fund as defined in ARM 42.4.2701."
Ms. Rush, Ms. Moore, and Mr. Bretherton further explained that the reason for the request is that, in their experience, most permanent, irrevocable funds holding outright gifts are created by the taxpayer, not the qualified organization, and the validity of a taxpayer's credit in such a case should not depend on whether the qualified organization makes the proper recitation in a receipt to the taxpayer.
Current rules provide that in the case of an outright gift, a permanent, irrevocable fund can be created either by the taxpayer in a separate gift document accompanying an outright contribution, or by the qualified organization under a separate governing document. Most taxpayers contributing outright gifts create the permanent, irrevocable fund by a separate gift document accompanying the outright contribution. The taxpayer can ensure that the separate gift document is provided and contains sufficient restriction, and submit that document to the department.
Although most qualified organizations are accustomed by federal tax law to providing receipts to donors, they are not accustomed to including this additional recitation. Taxpayers should not have to risk having their credit denied because a qualified organization did not timely and properly include the statement in the receipt. A taxpayer restriction in a separate gift document creates a legal obligation on the qualified organization to hold the contribution pursuant to that restriction, (72-30-209, MCA). If the qualified organization does not honor the restriction, the taxpayer's credit should not be impacted. Instead, the Attorney General should compel the qualified organization to honor the taxpayer's restriction.
Ms. Rush, Ms. Moore, and Mr. Bretherton requested that regardless of the department's decision on this issue, the requirements of ARM 42.4.2706 be included in the Form QEC to give taxpayers better notice of the information that needs to be attached to their tax returns to qualify for the credit.
Ms. Egan stated that the MSCPA concurs with the comments regarding ARM 42.4.2706 presented by the MNF and the MCF. She further requested that the proposed amendment not be adopted unless it addresses a material problem. If an amendment must be made, then taxpayers making outright gifts intended to qualify for the credit should be permitted to attach to their return the separate gift document which accompanied their gift, and the requirements of ARM 42.4.2706 be included on Form QEC.
RESPONSE NO. 4: The department appreciates the opportunity to address the questions submitted by Ms. Rush, Ms. Moore, Mr. Bretherton, and Ms. Egan.
The department has updated the 2012 Form QEC to include the requirements of ARM 42.4.2706, in an effort to provide taxpayers with better notice of the information the department needs to verify the credit. The department believes that it is important that the donor and qualified organizations communicate the intent of the law and suggest that the donor provide the qualified organization the list of items that should be included in the receipt at the time of the donation. The list is included in the 2012 Form QEC instructions.
Although the department understands the concerns relating to obtaining a receipt from the qualified organization, the department still feels a receipt should be obtained and that both the donor and the qualified organization understand that the gift must be made to a permanent, irrevocable fund. Whether there has been a material problem or not, the department believes this requirement will help ensure the credit is properly claimed by the taxpayer, and allowed by the department. It should also be noted that the requirement that an individual must make a planned gift to a permanent, irrevocable fund, has been a statutory requirement, as set forth in 15-30-2328, MCA, since this credit was enacted in 1997.
As stated in the 2012 Form QEC instructions, when a taxpayer files electronically, they represent that they have retained the required documents in their tax records and will provide them upon the department's request.
3. As noted at the hearing, the department is further amending ARM 42.4.104 for better clarity and to add an example as follows:
42.4.104 ENERGY GENERATING SYSTEMS (1) through (4) remain as proposed.
(4) The cost for repair or replacement of a component installed in an existing system is not eligible for the credit
regardless of whether the repair or replacement changes the output of the energy system.
(5) The cost of additional components installed to expand the output of an existing system is eligible for the credit
provided that the additional components do not repair or replace any portion of the existing system. For example, if a taxpayer expands their solar photovoltaic energy system from one module to four modules, the energy credit is only available for the three new components, not all four.
(6) through (9) remain as proposed.
AUTH: 15-1-201, 15-32-105, 15-32-203, MCA
IMP: 15-6-224, 15-6-225, 15-32-102, 15-32-105, 15-32-115, 15-32-201, 15-32-202, MCA
4. Therefore, the department amends ARM 42.4.104, as shown above, and adopts New Rule I (42.4.2801) and II (42.4.2803); amends ARM 42.4.201, 42.4.202, 42.4.208, 42.4.209, 42.4.303, 42.4.402, 42.4.1608, 42.4.1702, 42.4.2403, 42.4.2404, 42.4.2704, 42.4.2706, 42.4.2802, 42.4.2905, 42.4.3003, 42.4.3103, 42.4.3202, 42.4.3303, 42.4.4106, and 42.4.4107; and repeals ARM 42.4.2707 as proposed.
5. An electronic copy of this notice is available on the department's web site at www.revenue.mt.gov. Select the "Laws and Rules" link in the left hand column, and click on the "Rules" link within to view the options under the "Current Rule Actions – Published Notices" 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. While the department also strives to keep its web site accessible at all times, in some instances it may be temporarily unavailable due to system maintenance or technical problems.
/s/ Cleo Anderson /s/ Mike Kadas
CLEO ANDERSON MIKE KADAS
Rule Reviewer Director of Revenue
Certified to Secretary of State February 4, 2013