State corporate tax and bankruptcy: Is IRC conformity easier?
Common income tax issues
This article by Brian Sullivan of Deloitte Tax LLP discusses some of the common income tax issues encountered by corporate taxpayers in bankruptcy and out-of-court restructuring transactions, where the blanket adoption of the IRC at the state level creates additional complexity and uncertainty within state income tax regimes.
Blanket adoption of the IRC
In the spirit of consistency and ease of administration, most states that impose corporate income taxes begin their computation of taxable income with federal taxable income. One method commonly adopted by many states to accomplish that objective is to require a corporation to use the amount reported on its federal tax return as the starting point for the state tax calculation. Most states, however, have enacted legislation to conform to the Internal Revenue Code1 in some respect, either through rolling conformity or static conformity.2 Other states may not adopt the IRC but rather use the amount reported on Line 28 or Line 30 of the federal Form 1120 as their starting point for determining the amount of state taxable income. It has also been quite common recently for states to opt out of some federal tax provisions that states may view as either unfavorable or inconsistent with their income tax policies (for example, bonus depreciation (IRC section 168(k)), the expensing of depreciable business assets (IRC section 179), the domestic production activities deduction (IRC section 199), and the deferral of some cancellation of debt income (CODI) provided by IRC section 108(i)). Nevertheless, it is possible that the general conformity to the IRC provisions may have other unintended consequences, especially for corporate taxpayers experiencing a bankruptcy or debt restructuring transaction.
Presumably, the goal of general IRC conformity is to make the administration of a state income tax easier by using federal taxable income as a starting point and making only some state modifications that effectuate state tax policies. However, general conformity to the IRC may create situations in which a technical reading of the law produces potentially unintended results not contemplated by state tax policymakers. This article discusses some of the common income tax issues encountered by corporate taxpayers in bankruptcy and out-of-court restructuring transactions, where the blanket adoption of the IRC at the state level creates additional complexity and uncertainty within state income tax regimes.
by Brian Sullivan of Deloitte Tax LLP, originally published in Tax Analysts State Tax Notes on November 17, 2014
1Statutory and regulatory references to the code or IRC section are to the Internal Revenue Code of 1986, as amended, and all regulation section references are to the Treasury regulations thereunder.
2Rolling (or moving date) conformity refers to a state conformity statute that automatically adopts any changes to the federal law, while static (or fixed-date) conformity refers to a state conformity statute that adopts the federal law on a certain date (for example, January 1, 2011) and does not include any federal law changes enacted after that date.