TWIST - April 26, 2021

Welcome to TWIST for the week of April 26th, featuring Sarah McGahan from the Washington National Tax State and Local Tax practice.

The first development I’m going to cover today is an Illinois Independent Tax Tribunal decision addressing whether a corporation was excluded from the Illinois unitary group because it was a so-called 80/20 company. Under Illinois income tax law, a unitary business group does not include the income of those members whose business activity outside of the United States makes up 80 percent or more of the member’s total business activity. The business activity of the entity is measured by means of the property and payroll factors. The corporation at issue owned a disregarded LLC that employed the corporate group’s expatriates. The Department argued, and the Tribunal ultimately agreed, that the corporation at issue was not excluded as an 80/20 company because of the LLC’s foreign employees. In the Tribunal’s view, the LLC was not the employer of the expatriated employees in light of economic realities, and the LLC had no economic substance and should be disregarded.

In other news, two additional states, Arizona and Vermont have recently updated their conformity to the Internal Revenue Code. Finally, the Texas Comptroller recently published proposed revisions to the regulation addressing the franchise tax research and development activities tax credit. The revisions are extensive and, in some instances, will limit the taxpayers that may qualify for credits. At this point, the Comptroller is soliciting comments on the proposed changes.