ADOR Proposes Substantial Rule Change For Partnerships

State and Local Tax Alert: Alabama Edition

Client Alert

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The ADOR has proposed a number of amendments to its rule governing the filing of partnership tax returns, Form 65. The new rule, as proposed, inserts language conforming with Alabama’s recently enacted “factor presence nexus” statute (Ala. Code § 40-23-67). The rule did not, however, assert that non-resident partners of partnerships and LLCs doing business in Alabama would automatically have nexus with Alabama by virtue of their distributive shares of the entity’s apportionment factors. That assertion would bring into focus multiple constitutional concerns. See our recent article in State Tax Notes, “Blurred Lines: State Taxation of Nonresident Partners.”

As written, the new rule purports to require a single member LLC, disregarded for federal and therefore Alabama income tax purposes, to file a separate Alabama tax return, despite the state’s strict conformity with the IRS’ “check-the-box" regulations that treat a SMLLC that doesn’t elect corporate status as merely a division, branch, or sole proprietorship, depending on the status of its member. However, Holly Coon of the ADOR responded to that concern posed by Eric Yauch of State Tax Notes: “We don’t consider this to be a significant change in the way Alabama taxes income earned by partnerships.…”

The proposed amendment also streamlines the current rule pertaining to adjustments to be made for income computation purposes. This simplification is accomplished by using a blanket term “reconciling items” in lieu of specifying the list of items that must be added back for Alabama income computation purposes, such as excess depreciation. The amended rule also confirms that any related member’s interest or intangible expenses deducted for federal income tax purposes is subject to Alabama’s add-back statute (Ala. Code § 40-18-35(b)) in computing Alabama income tax.

Thankfully, the amendment also seeks to bring filing extensions for Alabama partnership returns in line with that of federal partnership returns. The ADOR will automatically grant extensions of time to file partnership returns in the event an extension has been granted by the Internal Revenue Service, dispensing with the need to file a separate request with the agency.

A public hearing on the proposed rule is scheduled to be held in Room 1203 of the ADOR’s headquarters in Montgomery on Thursday, October 6, 2016, at 2:00 pm.