NEW YORK CITY--MACRS
MODIFICATION UNCONSTITUTIONAL

By Leonard DiMeglio, CPA,
Coopers & Lybrand L.L.P.

In R.J. Reynolds Tobacco Co. v. The City of New York Department of Finance, the New York State Supreme Court (the State's lowest level court) recently found portions of New York City's depreciation modification rules to be unconstitutional. For years prior to 1994, the New York City Administrative Code requires a corporation to add back to corporate net income Federal accelerated depreciation deductions taken for property placed into service outside of New York. The court held that the statutory disallowance of Federal ACRS/MACRS depreciation on non-New York State property impermissibly discriminated against interstate commerce.

The court noted that because New York State and New York City have identical provisions with regard to the depreciation addback methodology, the unconstitutionality of the city's provision would apply similarly to the state.

In general, a taxpayer's entire net income under the New York State and City corporate tax statutes must be in conformity with the Federal taxable income that the taxpayer is required to report to the U.S. Treasury Department. Over the years, however, the state and city legislatures have enacted the following depreciation adjustments to Federal taxable income to arrive at entire net income:

* 1982 Corporations could not utilize ACRS depreciation allowed under IRC Sec. 168 and were required to adjust depreciation to reflect the traditional depreciation deductions provided by IRC Sec 167.

* 1985 Property placed in service within New York State after 1984 became eligible for depreciation allowed under IRC Sec. 168; however, similar property placed in service outside of New York State remained ineligible for such depreciation.

* 1994 All depreciable property acquired after 1993, wherever located, became eligible for depreciation allowed under IRC Sec. 168.

The court's ruling opened the "refund door" for any multistate business that filed either New York State or City corporate tax returns. Caution is advised, however, because the case could open up new audit exposures due to the mechanics of the ACRS/MACRS modification. Companies should review all open tax years to determine whether this case translates into a savings opportunity or tax liability. At this time, New York City has not decided whether to appeal the lower court decision. *

PENNSYLVANIA--AMNESTY
AND LEGISLATIVE UPDATE

By Philip L. Krevitsky, CPA, Coopers & Lybrand L.L.P.

The Pennsylvania amnesty program ended in January. The good news is they collected approximately $90 million, the sixth highest amnesty amount. The bad news is they were short $27 million from their projections.

Pennsylvania now will move into its enforcement phase. It is expected that there will be both civil and criminal prosecutions. Plans include filing charges against at least 30 individual and business taxpayers per week who are operating without a sales tax license, to both discipline the amnesty nonparticipants and show those who did participate that they made the correct decision. Pennsylvania tax officials may also target officers of delinquent corporations in their enforcement efforts.

Gov. Ridge characterizes the amnesty as part of his new, "business-friendly" approach. To continue this, he has proposed a tax cut package as part of his budget message. While it would be a step in the right direction, it will not go as far as business wants. The business wish list includes--

* removing sales tax from intercompany computer charges,

* eliminating the capital stock/franchise tax, and

* extending the number of years in which to carry over net operating losses, with no annual usage limit.

The Governor's proposal includes--

* a reduction of the capital stock/franchise tax from 12.75 mills to 12.5 mills.

* the elimination of the 1991 computer sales tax with regard to manufacturing, processing, agricultural, and public utility sectors of the economy, and

* the creation of a $30 million jobs-tax credit ($1,000 credit for each new job created). *

CONNECTICUT CORPORATE ESTIMATED TAX RELIEF

By Elizabeth Knoll, CPA, Eisner & Lubin, and Brian Duffy, CPA, O'Connor Davies & Company

The Connecticut Corporate Business Tax estimated tax calculations have always had a built-in pitfall: that a corporation might have a loss (or low income) at the beginning of the year with a dynamite last quarter or twelfth month. The Department of Revenue Services would assess underpayment of estimated tax penalties based upon 30%, 40%, 10%, and 20% of the actual tax liability. Connecticut Superior Court has ruled the assessment policy as invalid; corporations may pay their estimated tax declarations based upon the information available to them at the time they file
the declarations, without anticipating future events.

Fleet Credit vs. Miller and two similar cases were consolidated and decided by the Connecticut Superior Court, Tax Session Nos. 536970, 546573, 550637, Nov. 2, 1995. By affidavits and/or stipulation there were no (legal) questions of fact. The taxpayers established that, in the income years in question, their declarations of estimated tax and their estimated tax payments were made in good faith and on the basis of the information available at the time. The court ruled it was not necessary for the taxpayers to anticipate or predict the future income and pay estimated tax on that future income, and interest could not be imposed for underpayment of prior quarters' estimated tax on such future income.

The court specifically described the taxpayers' income as unanticipated or unpredictable. A cash basis corporation, for example, which had already invoiced the revenues in question could not claim that the customers generally paid late and collections were expected in the following year. The receipt of the income could not be considered either unanticipated or unpredictable, and penalty interest would be applicable.

The court gave an example of a corporation calculating the estimated tax and then paying a lesser amount. In that case, penalty interest would be applicable.

Future audit cases may require a corporation to prove their estimate calculations were reasonable and included all information available at the time the estimate was prepared.

Effective for years beginning on or after January 1, 1996, the legislature established a safe-harbor based upon the prior years tax (Sec. 12-242d). Taxpayers use the normal 30%, 40%, 10%, and 20% for the quarterly payments, but the tax liability base is 200% of the prior year's tax in 1996, decreasing to--

175% in 1997 (tax years beginning on or after 1/1/1997)

150% in 1998

125% in 1999

100% thereafter.

Corporate taxpayers should consider filing claims for refund for open years based upon the Superior Court ruling. The safe harbor is available for years beginning on or after January 1, 1996. Taxpayers should consider the risks of depending upon the court case rather than the safe harbor after the law's effective date. *

[Editor's Note: Forms CT-1120
ESA, ESB, ESC, and ESD are used to make installment payments of estimated tax.]

State and Local Editor:

Kenneth T. Zemsky, CPA

Ernst & Young LLP

Interstate Editor:

Marshall L. Fineman, CPA

David Berdon & Company LLP

Contributing Editors:

Henry Goldwasser, CPA

M. R. Weiser & Co LLP

Leonard DiMeglio,

Coopers & Lybrand

Steven M. Kaplan, CPA

Konigsberg Wolf & Co., PC