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7/30/2012

Fannie/Freddie Face Liability for Billions in Transfer Taxes

In Short:

A recent Michigan case in which Fannie Mae and Freddie Mac were held liable for real estate transfer taxes on foreclosed properties sold to buyers may be the first of many such cases, and could cost the federal government billions of dollars if the entities are eventually found liable by the courts.

The Full Story:

Today’s tax quote: “Virtually all persons or objects in this country…may have tax problems.” Justice Potter Stewart

A fine illustration of Justice Stewart’s observation is the current problem being faced by the mortgage giants Fannie Mae and Freddie Mac, which in addition to the billions in federal subsidies they have required are now facing additional billions in possible state transfer tax liabilities.

In a case of first impression, a United States District Court has held that the Federal Housing Finance Agency (FHFA), Fannie Mae, and Freddie Mac are liable for real estate transfer taxes on foreclosed properties sold to buyers. See Oakland County v. Federal Housing Finance Agency, U.S. District Court for the Eastern District of Michigan, #11-12666 (March 26, 2012). Although federal law exempts these entities from “all taxation,” the Court held that the term “all taxation” does not refer to excise taxes such as Michigan’s real estate transfer tax, which are levied on the privilege of transferring property, and not on the property itself. The court also held that Fannie and Freddie are not federal instrumentalities for purposes of an exemption in the Michigan statute for transfers by the United States.

The potential for back taxes is enormous, particularly if the decision stands and is adopted by other courts. Estimates of damages in Michigan alone are $50 million to $100 million. FHFA, which took over control of Fannie and Freddie for the federal government in 2008, is expected to appeal.

The ruling is available at http://www.oakgov.com/treasurer/assets/docs/freddie_frannie_ruling.pdf.

The case has also sparked activity in other jurisdictions seeking to collect back transfer taxes from the housing entities or FHFA.

On July 25, 2012, the Board of Commissioners of Montgomery County in Ohio filed a class action lawsuit in the U.S. District Court for Southern District of Ohio on behalf of all 88 Ohio counties, seeking state and county transfer taxes from FHFA, Fannie, and Freddie. See Board of Commissioners of Montgomery County v. Federal Housing Finance Agency, Civil Action No. 3:12-cv-245. Citing the Michigan case, Montgomery County contends that FHFA is liable for transfer taxes on properties of which it is the grantor in all Ohio counties. In addition, it contends that FHFA is liable for transfer taxes on properties that Fannie and Freddie purchase from the mortgagor under their loan guarantees, since such properties are transferred to them on the county records systems. On such properties, apparently taxes would be due not only on the transfer from the lender to Fannie or Freddie, but on the latter’s subsequent sale to a third party.

Other states have also taken notice of the Michigan case. In Massachusetts, for example, a Register of Deeds has written to the State Attorney General urging her to pursue a similar action, and in Florida the Department of Revenue has addressed the issue in a new notice published in May.

The Florida DOR explains how documentary stamp taxes are to be applied in transactions involving Fannie Mae, Freddie Mac, and Ginny Mae in TIP No. 12B04-01, http://dor.myflorida.com/dor/tips/tip12b04-01.html.

Florida’s DOR has not adopted the Michigan court’s holding that federal laws exempting these entities from “all taxation” do not apply to real estate transfer taxes. However, the DOR holds that all transactions involving one of these entities and anyone not exempt from tax are subject to the documentary stamp tax, which must be paid by the nonexempt party. TIP 12B04-01 contains an example in which a lending institution that acquires property through foreclosure and then deeds it to FNMA, GNMA, or FHLMC is subject to the documentary stamp tax, and an example illustrating that when one of those entities deeds property to an individual or nonexempt entity, the recipient of the deed is subject to the tax.

Consequently, it would appear that Florida will collect the transfer tax, but not from one of the government entities, producing much the same result as the Michigan litigation except that the money would come from private pockets. The DOR also says it will monitor developments in the Michigan litigation, and react accordingly, suggesting that it too will seek to recover transfer taxes directly from these entities if the result in that case is ultimately upheld.

So far as is known, there has as yet been no move to address this problem in Congress, although given the enormous amount of money potentially at stake, Congressional attention would not be surprising.

Worldwide ERC® members should monitor this situation as it develops, and be aware of the potential transfer tax liabilities when dealing with foreclosed properties.

Posted by Peter K. Scott

Posted at 2:32 PM by Peter Scott | Category: Loans/Mortgages; Mortgage/Foreclosure ; State taxes | Permalink | Email this Post | Comments (0)

5/18/2012

Bill to Restrict Taxation of Workers Temporarily in a State Passes House

In Brief:

Legislation (H.R. 1864) that would prohibit states from taxing workers temporarily in the state, or requiring withholding by the employer, until the employee had worked there for more than 30 days has been passed by the U.S. House, and now moves to the Senate. Although prospects for the legislation in the Senate are uncertain, if enacted this year it
would go into effect on January 1, 2014.

The Full Story:

Advocates of standardizing what is now a very confusing patchwork of conflicting state rules concerning when workers become taxable, and subject to withholding, when working temporarily in a state scored a major victory on May 15, 2012, with passage by the House of Representatives of H.R. 1864, the “Mobile Workforce State Income Tax Simplification Act.” The bill can be accessed here: http://www.gpo.gov/fdsys/pkg/BILLS-112hr1864eh/pdf/BILLS-112hr1864eh.pdf.

Versions of this legislation have been introduced every year for several years, but had never achieved passage by either chamber of Congress. The bill now moves to the Senate, where its prospects are uncertain. However, it is encouraging that passage in the House was on a bipartisan voice vote, with little expressed opposition.

Under the bill, a worker would continue to be fully taxable in his or her state of residence on all income, but would not be taxable in any other state unless the employee worked there for more than 30 days during the year. Consistent with that standard, the employer would not have to begin withholding in the temporary assignment state until the employee had worked there for 30 days.

Currently, employers face a different rule in every state. According to testimony submitted by the Council on State Taxation (COST) at a hearing of the Subcommittee on Courts, Commercial and Administrative Law of the House Committee on the Judiciary held on May 25, 2011, more than half the states technically require withholding to begin on the first day an employee earns wages there, while others have either time periods before withholding must begin, or minimum wage amounts before withholding must begin, or some combination of both. Similarly, the rules for when an employee becomes taxable also vary from state to state, and are not always consistent with the rules requiring withholding.

As a practical matter, this forces many employers who simply cannot keep up with or comply with different rules in multiple states to adopt “rules of thumb,” under which they arbitrarily begin state withholding after some standard period such as two weeks, or some standard amount of wages, such as $3,000. This occasionally leads to a dispute with a state.

H.R. 1864 would remedy the inconsistency by legislating a standard 30-day period both for taxability and withholding. There would be no income threshold. However, the 30-day limitation would not apply to entertainers, athletes, and other “public figures,” who generally are paid on a per event basis and would remain fully taxable in the state in which the income was earned. The legislation would define a “day” as any day on which the employee performs “more of the employee’s employment duties” in the state than in any other state, but would allocate all of the services to the nonresident state on any day in which the employee performs duties in both a nonresident state and the state of residence. Consequently, if an employee who lives in Michigan worked in the morning in Illinois, and in the afternoon traveled to Iowa and worked there, both employer and employee would have to determine in which nonresident state (Illinois or Iowa) more of the employee’s duties occurred. However, the bill also provides that the portion of the day devoted to travel will not count in making the determination.

One potential pitfall in the way the bill is constructed is that once the employee crosses the 30-day threshold, withholding would have to take place for all of the 30 days already worked there. A number of groups (for example, the AICPA) have testified that this rule will result in unfair cash-flow issues for employees, and should be changed to permit withholding adjustment over time, or to eliminate the retroactive withholding.

Not surprisingly, the states have consistently opposed this legislation. Although analysis by COST suggests that the overall revenue loss to the states would be minimal, the legislation would shift revenue from some aggressive states (such as New York) to others, so that there would be winners and losers. Moreover, the states object to the loss of control over their own tax systems, and to the some of the standards in the bill. For example, although they view the 30-day standard as an improvement over prior versions of the legislation that would have imposed a 60-day standard, as testified to by the Federation of Tax Administrators the states still think the 30-day threshold is too long. Moreover, they think the bill should also contain some minimum wage threshold as an alternative. For example, an employee might become taxable once he or she had been working an aggregate of 20 days in a state, or earned $20,000 there. Otherwise, high-wage employees would be able to earn very large amounts of money in a state before becoming taxable there.

The states also object to the standard in the bill for how employers would determine whether an employee had become taxable in a state. H.R. 1864 provides that an employer is permitted to rely on an employee’s determination of time in a state unless the employer has actual knowledge of fraud by the employee, and is not required to use its own records for this purpose even if uses them for other purposes, except under limited circumstances in which it maintains a “time and attendance system which tracks where the employee performs duties on a daily basis.” According to the FTA, the fraud standard is too weak, and the employer should not be able to rely on the employee’s determination if it has actual knowledge that the determination is incorrect, whether or not there is fraud. Further, it believes that if the employer maintains records of where the employee is, it should be required to use them.

There are also issues with the definition of a “day.” The FTA believes a day should be defined as any part of a day in which the employee performs services in a state, without the necessity to determine whether those services were the majority of services during that day.

There are other issues, as well, such as the treatment of income from bonuses, stock options, and other deferred compensation.

In the states, the Multistate Tax Commission (MTC) has been working on a model statute that it maintains would provide consistency if adopted by the states. However, such model statutes do not have to be adopted by any state, and can also be modified by any state adopting them, so it is unlikely that any consistency would actually result from the effort.

Despite some continuing issues with the legislation, passage by the full House marks a milestone in its multi-year evolution, and Worldwide ERC hopes that this time around it will finally receive favorable attention in the Senate, since it would greatly simplify the task faced by ERC members trying to track and properly withhold on employees working in diverse locations. However, Worldwide ERC members should not expect immediate relief even if the legislation passes this year. The law as written would not take effect until the second full year after its passage, which would be January 1, 2014 if the law is enacted during 2012.

Posted by Peter K. Scott

Posted at 8:31 AM by Peter Scott | Category: State taxes; Withholding/reporting/gross-up; Tax legislation | Permalink | Email this Post | Comments (0)

12/9/2011

Bill to Standardize Taxation of Workers Temporarily in a State Advances

In short:
A bill to prohibit states from taxing most workers temporarily in the state until the worker performed services there for more than 30 days passed the House Judiciary Committee on November 17, 2011, and was sent to the full House for consideration. Under the bill, employers would also not have to withhold until the 30-day standard is met, although once a worker exceeds 30 days in a state withholding would apply from the first day there.

The Full Story:
Today’s tax quote: “The smart money bets against tax reform-always and everywhere. But every once in a while-usually a long while-the smart money is wrong.” Joseph J. Thorndike.

Although fundamental tax reform has so far eluded the current Congress, a smaller incremental step forward occurred recently in a bipartisan vote of the House Judiciary Committee.

H.R. 1864, the “Mobile Workforce State Income Tax Simplification Act,” was approved November 17, 2011, by the House Judiciary Committee, and sent on to the full House for consideration. This represents a substantial step forward for congressional and business advocates of legislation to provide uniform rules for state taxation of workers who are temporarily present in a state. The bill, which reintroduces legislation that Congressman Johnson of Georgia has sponsored for several years, and which is supported by the Council on State Taxation (COST) as a much-needed way of standardizing what is now a very confusing patchwork of conflicting state rules, has not previously moved this far in the legislative process. As passed by the Committee, the new law would be effective on January first of the second year beginning after enactment, which would give states and employers time to conform their systems to it.

Under the bill, a worker would continue to be fully taxable in his or her state of residence on all income, but would not be taxable in any other state unless the employee worked there for at least 30 days during the year. Consistent with that standard, the employer would not have to begin withholding in the temporary assignment state until the employee had worked there for 30 days.

Currently, employers face a different rule in every state. According to testimony submitted by COST at a hearing of the Subcommittee on Courts, Commercial and Administrative Law of the House Committee on the Judiciary held on May 25, 2011, more than half the states technically require withholding to begin on the first day an employee earns wages there, while others have either time periods before withholding must begin, or minimum wage amounts before withholding must begin, or some combination of both. Similarly, the rules for when an employee becomes taxable also vary from state to state, and are not always consistent with the rules requiring withholding.

H.R. 1864 would remedy that inconsistency by legislating a standard 30-day period both for taxability and withholding. There would be no income threshold. However, the 30-day limitation would not apply to entertainers, athletes, and other “public figures,” who generally are paid on a per event basis and would remain fully taxable in the state in which the income was earned. The legislation would define a “day” as any day on which the employee performs “more of the employee’s employment duties within such State than in any other State during the day,” but would allocate all of the services to the nonresident state on any day in which the employee performs duties in both a nonresident state and the state of residence. Consequently, if an employee who lives in Michigan worked in the morning in Illinois, and in the afternoon traveled to Iowa and worked there, both employer and employee would have to determine in which nonresident state (Illinois or Iowa) more of the employee’s duties occurred.

Another potential pitfall in the way the bill is constructed is that once the employee crossed the 30-day threshold, withholding would have to take place for all of the 30 days already worked there. A number of groups have testified that this rule will result in unfair cash-flow issues for employees, and should be changed to permit withholding adjustment over time, or to eliminate the retroactive withholding. However, the Judiciary Committee left that aspect of the bill intact.

Not surprisingly, the states have consistently opposed this legislation. Although analysis by COST suggests that the overall revenue loss to the states would be minimal, the legislation would shift revenue from some aggressive states (such as New York) to others, so that there would be winners and losers. Indeed, one of the two Judiciary Committee members to oppose the bill was Rep. Nadler (D. NY), who argued that the bill would cost New York an estimated $100 million annually in lost tax revenue. The states also object to the loss of control over their own tax systems, and to the some of the standards in the bill. For example, although the 30-day standard is an improvement over prior versions of the legislation that would have imposed a 60-day standard, the Multistate Tax Commission (MTC, which is a federation of the states’ tax officials) still thinks the 30-day threshold is too long. Opponents have also suggested that the bill may not pass Constitutional muster under the federal government’s authority to regulate interstate commerce.

In asking the Committee to defer action, MTC cited its own adoption in July of model legislation that is also aimed at standardization of tax treatment in the states. Under the model statute advocated by MTC, the employee would become taxable, and withholding would be required, once the employee had worked in a state for more than 20 days. Although MTC had previously argued for a monetary as well as days-worked standard (for example, an employee might become taxable once he or she had been working an aggregate of 20 days in a state, or earned $20,000 there), the model statute does not contain any minimum monetary standard. The model statute has been adopted so far only by North Dakota, but MTC argues that many more states will follow.

The states also object to the standard in the bill for how employers would determine whether an employee had become taxable in a state. H.R. 1864 provides that an employer is permitted to rely on an employee’s determination of time in a state unless the employer has actual knowledge of fraud by the employee, and is not required to use its own records for this purpose even if uses them for other purposes, except under limited circumstances in which it maintains a “time and attendance system that tracks where the employee performs duties on a daily basis.” Under the MTC model statute, the employer would be subject to penalty unless it met one of three standards that rely on actual records of the whereabouts of the employee.

There are also issues with the definition of a “day.” The MTC model statute treats a “day” as any part of a day in which the employee performs services in a state, without the necessity to determine whether more of those services were performed in that state during that day than in any other.

Unfortunately, model statutes do not have to be adopted by any state, and can also be modified by any state adopting them, so it is unlikely that true consistency would actually result from the effort, even if the Congress agreed in full with the standards in the model statute. As a result, the Judiciary Committee agreed in a bipartisan voice vote to proceed with a federal standard. That action was supported by letters from the American Institute of Certified Public Accountants (AICPA), and from a group of over 100 major corporations.

Despite state objections, the two sides seem to be getting somewhat closer together. Moreover, it is encouraging that the legislation has for the first time been approved by the House Judiciary Committee. Although similar legislation has been introduced several times previously, it has never been put to a vote in either the House or Senate. Worldwide ERC hopes this time around, it will receive more attention, since it would greatly simplify the task faced by ERC members trying to track and properly withhold on employees working in diverse locations.

Posted by Peter K. Scott

Posted at 3:56 PM by Peter Scott | Category: State taxes; Withholding/reporting/gross-up | Permalink | Email this Post | Comments (0)

10/20/2011

North Carolina Law Change May Affect Use of Blank Deed

In Short:

A 2010 amendment to the North Carolina law governing the excise tax on conveyances has caused some buyer attorneys in that state to resist use of the blank deed in relocation home sale transactions. Worldwide ERC members should be aware that on occasion they may have to use two deeds, and pay two transfer taxes.

The Full Story:

Today’s tax quote: “The fact that the incidences of …taxation may have been taken into account by arranging matters one way rather than another, so long as the way chosen was the way the law allows, does not make a transaction something else than it truly is.” Felix Frankfurter (U.S. Supreme Court Justice).

However, this is apparently not a principle that is accepted by all buyer attorneys in North Carolina.

One of the most commonly accepted practices in conducting relocation home sales is the use of one deed, rather than two, to complete both sales. This is accomplished by use of a so-called “blank deed,” or a “deed-in-blank.” When the home is sold by the transferee to the employer or a relocation management company (RMC) acting on the employer’s behalf, the transferee signs a deed conveying the property with the name of the buyer left blank. When the RMC resells the home, it fills in the name of the outside buyer. Thus, the only recorded deed runs from transferee to outside buyer.

In most states, this process saves one set of conveyancing fees (recording or transfer taxes), and is also more efficient in that it requires only one document rather than two.

There was a period following the Amdahl case in the Tax Court, and before Worldwide ERC was successful in obtaining Rev. Rul. 2005-74, during which the IRS was arguing that the blank deed was inconsistent with there being two separate, independent sales, and that sale costs were taxable to the employee. During that period, Worldwide ERC recommended that the blank deed not be utilized. However, following IRS acceptance of the blank deed in Rev. Rul. 2005-74, that recommendation was rescinded.

Over the years questions have arisen in a number of states as to the effect of the blank deed, and common practice is not to use it in some states. This subject is discussed in some detail in the Worldwide ERC MasterSource under the heading “Blank Deed: State Issues, and Use after Rev. Rul. 2005-74. http://www.worldwideerc.org/gov-relations/us-tax-legal-resources/tax-legal-mastersource/Pages/tax-blank-deed-state-issues-and-RevRul2005-74.aspx. At present, the list of states in which, for various reasons, use of two deeds rather than one is the common practice, includes Connecticut, Delaware, Kentucky, Nevada, New Hampshire, New York, Oklahoma, Pennsylvania, Texas, and Washington.

Until recently, North Carolina was solidly in the “one-deed” category. However, Worldwide ERC has learned that buyer attorneys in that state are increasingly reluctant to accept the blank deed, due to concern about a change in the North Carolina law that went into effect in 2010.

North Carolina imposes an excise tax on each “instrument” by which any interest in real property is conveyed, which is collected when the instrument is recorded. The North Carolina law can be found at http://www.ncga.state.nc.us/EnactedLegislation/Statutes/HTML/ByArticle/Chapter_105/Article_8E.html.This statute, like similar statutes in other states, has always been interpreted to require a tax only on recording of a deed, and not on sale of the property from employee to RMC with a contract but no recorded “instrument.” Therefore, only one tax was due, unless a deed from employee to RMC was recorded.

The amendment to the law in 2010 was not focused on this issue. Rather, it was an “Act to Assist Counties and the Department of Revenue in Obtaining Accurate Real Property Sales Information Needed for Property Tax Appraisals.” The Act added information required to be included in each recorded deed. However, it also added the following language: “It is the duty of the person presenting the instrument for registration to report the correct amount of tax due.”

Worldwide ERC is informed that some buyer attorneys are now nervous about reporting only one tax due, and sometimes cannot be persuaded that the statute does not require a tax on an unrecorded contract of sale. That is, they are unwilling under the revised law to take any risk that the state may someday come back and say that two taxes were due and that the attorney is liable for having incorrectly reported the amount of tax due.

Consequently, although blank deeds continue to be used effectively in North Carolina for the most part, Worldwide ERC members should be aware that they may face occasional resistance, and in some cases may only be able to overcome it by preparing and filing a second deed, and paying a second excise tax. Worldwide ERC will monitor the situation, and provide additional information if the situation changes.

Posted by Peter K. Scott

Posted at 3:16 PM by Peter Scott | Category: Home Purchase programs; State taxes | Permalink | Email this Post | Comments (0)

6/24/2011

Short Takes: The QRM Battle and the Effect of the NJ Bulk Sales Act

In this blog, I will give an update on three issues that are affecting – or that might affect—domestic home sale programs: the ongoing fight over QRM (Qualified residential Mortgage) regulation and the broad reach of the New Jersey Bulk Sales Act.

The QRM

Dispute I have discussed the QRM issue previously, but it is useful to keep the facts and implications at the top of mind. This time last year, the concept of a QRM did not exist in the law; it was introduced in the 2000 plus page Dodd-Frank (Wall Street Reform and Consumer Financial Protection) Act. That Act fundamentally changed the mortgage business, and, among other requirements, mandated that banks and other securitizers of mortgages retain five percent of the value of the loan on their books, as a form of risk retention. The idea is that mortgagees will be much more careful in their underwriting if they have some “skin in the game”, i.e., if they have a financial interest in the health of the mortgage going forward. Thus there will be two basic mortgage types available after the rules (that are currently being debated) are adopted by the Federal Reserve.

Interestingly, the FHA and VA government backed loans are exempt from these requirements. And the proposed regulations will also exempt the GSEs from the requirements. However, as the federal government continues to pour money into the otherwise insolvent Freddy Mac and Fanny Mae are not likely to continue to remain structured as they are currently, so this is at best a short term fix which will not stem the long term problem. Eventually the private mortgage security market must again flourish (albeit in a more safe and effective form) if the real estate market is to recover in the US.

The issue with non-QRM loans is that only the largest banks can afford to keep the five percent retention; in the banking world the amounts retained will diminish the amount the bank can lend, thus allowing only the largest and most well capitalized to issue these loans, and even then at greater cost. One estimate, though speculative, is that non QRM loans may add as much as three points to the cost of the loan; whatever the number, they will almost surely be significantly more expensive because of the opportunity costs faced by securitizers that must hold back the required reserve.

But the biggest objection lies in the definition of a QRM. The Act describes the characteristics necessary for a loan to qualify as a QRM, the two relevant to this discussion are the need for strict underwriting to ensure the creditworthiness of the buyer, and the need for a down payment, thus keeping the loan to value ratio low so as to ensure the value of the collateral covers the loan balance.

No one disputes the need for good solid underwriting of mortgages. Of all of the causes of the 2008 housing collapse, poor underwriting is probably at the very root of the debacle. There are proposed regulations regarding some underwriting requirements – especially the debt to income ratios -- that are onerous and are not economically necessary; however, those regulations are not as imminent and will be dealt with after the most glaring and onerous requirement: the large down payment requirement.

The proposed regulations require a 20% down payment for a QRM, a requirement that is supposed to make the loan safer for the issuer, and this must be combined with sound underwriting practices. Unfortunately, the hard cold facts do not justify this conclusion; in fact, the CoreLogic statistics discussed in the whitepaper I will examine below show that it is underwriting, not size of down payment, that determines whether a loan is likely to go sour. Unfortunately, the current proposed regulations require a 20% down payment for a QM loan, and 25% equity for a QRM refinancing.

This high down payment will force a large number of borrowers into the more expensive non QRM market, and the higher interest will disqualify many of these potential buyers; the rest will end up paying much higher costs. Because of this, the effects of these regulations will likely adversely impact on all segments of the home buying population.

An unusual coalition, led by housing related trade associations (notably the NAR and MBA) along with forty other groups have formed a coalition to inform the regulators and the Congress of the potentially devastating effect the rules – especially the down payment rules—will have on the fragile and slowly recovering real estate market. And because of the widespread affect these regulations could have, many groups representing low and moderate income consumers have joined the coalition because they, too see that their constituencies will be adversely affected. Worldwide ERC has also joined, and is providing our expertise and perspective from the employee mobility perspective.

The coalition has published a first whitepaper that analyses the existing data and shows the real potential sad effects on housing affordability and thus on housing recovery. It is a must read for those interested in the current market; it can be downloaded at : http://www.realtor.org/wps/wcm/connect/684ee3804725232285c88f0e6e9f088e/QRM_White_Paper_FINAL_6_2_11.pdf?MOD=AJPERES&CACHEID=684ee3804725232285c88f0e6e9f088e .

As a quick summary, the whitepaper concludes:

“The proposed QRM rule is narrowly drawn, producing a requirement that is misaligned with three key pillars of Congressional intent:

For consumers, the QRM was intended to provide creditworthy borrowers access to well underwritten products. Although Congress intended for QRMs to be broadly available, the regulators acknowledge that they crafted this rule to make the QRM “a very narrow slice” of the market.
Despite specific Congressional rejection of down-payment requirements in the QRM legislative provisions, a fact attested to by the QRM sponsors, the regulators have insisted upon a punitive down payment requirement, even when confronted with ample historical loan performance data that shows down payment is not a primary driver of a loan’s performance provided the loan has been properly underwritten and has consumer-friendly features.
For the housing market, the statutory intent of the QRM was to provide a framework for responsible liquidity provided by private capital that would be broadly available to support a housing recovery. However, the QRM definition in the proposed rule is so narrow that the vast majority of both first-time and existing homeowners will face potentially significantly higher interest rates, or have to postpone purchases and refinances.
For the structure of the housing finance market, the QRM was intended to help shrink the government presence in the market, restore competition and mitigate the potential for further consolidation of the market. Again, the proposed rule is likely to have the opposite impact."

It is for this reason that such a varied group, including Worldwide ERC, has joined to inform the Congress and regulators of the unintended consequences of the regulations as they have been proposed.

New Jersey Bulk Sales Act
Lawyers are familiar with “bulk sales acts” which are state laws that prescribe a method whereby a business can sell all of substantially all of its inventory or assets to buyers – usually in the process of going out of businesses. Bulk sales laws most often require the seller to file notifications to creditors (and often the state), and after a period if there is no objection, the inventory or assets are sold free of liens. The idea is to protect the creditors of the business from having assets sold out from under their liens and to protect buyers from later claims that the goods they purchased are subject to prior claims. In most cases these laws do not apply to residential real estate.

But they do in New Jersey, and this can affect home sale purchases in that state.

Since 2007, the New Jersey Sales and Use Tax Act (NJSA 54:32B-1 et seq.), the New Jersey Division of Taxation has had the authority to apply the Act to residential real estate sales where the property has been used in conjunction with a trade or business. Covered properties cannot be sold free and clear without the required bulk sales notice given to the Division at least 10 days prior to the closing. Failure to do so may subject the buyer to liability for any unpaid taxes owed by the seller.

From the legal perspective, the operative language lies in the regulations promulgated by the Division of Taxation, which define “business assets” subject to the Act as (among other categories): “…realty if a use of the realty is to support a business on its premises which includes, but is not limited to, renting space to another.” In the relocation context, the breadth of this definition would include primary residences that were temporarily rented, instead of sold, during a relocation; residences in which an occupant such as a spouse conducted a home based business; and in fact, any residence which, as the regulations state, “support” a business on its premises.

The mechanics are not difficult, but are time consuming. The owner (seller) of a covered property must file and deliver to the buyer a Purchase and Asset Transfer Tax Declaration form (form TTD); the buyer must then prepare and deliver to the Division of Taxation the form TTD it received from the seller, a Notification of Sale, Transfer or Assignment in Bulk (form C-9600) which it fills out, and a copy of the fully executed purchase agreement. This must be received by the Division at least ten days before the closing date. If no taxes are owed by the seller to New Jersey, the Department issues a Letter of Clearance, and the settlement can proceed as usual. If taxes are owed, an escrow must be set up and funded from the proceeds of the sale; these funds can only be released when all tax liability is released by the Department. It is only at this point that the buyer is free from any liability for the seller’s unpaid taxes.

Needless to say, this significant increase in paperwork, along with the potential liability of the buyer, as slowed down New Jersey sales; it is especially noticeable in all two sale transactions, because there must be at least a ten day wait to close on covered properties in order to make certain that there is no hold up in the transaction, and no residual buyer liability.

There are some steps that are necessary to make New Jersey relocation sales smoother and cleaner, but the ten day time delay is inevitable. Here are some tips:

First, try to identify properties that have been overtly used in connection with a business (rental, home business, etc.), so that the proper form can be prepared in advance, and provided to the closing attorney and the buyer.

Second, make certain the contract has provisions reflecting the requirements of the law: i) that the buyer and seller will comply with the Act, ii) that the buyer may file the proper forms 10 days before settlement, and that any state required escrow will be held until the obligation to the state is released, and iii) the seller indemnifies the buyer for its tax obligations under the sale.

Needless to say, this requirement certainly ads to the necessity of having counsel involved in the sale process sooner rather than later.

This process is only required for real estate located in New Jersey, and hopefully no other state will adopt such a broad definition of bulk sale assets.

Posted at 5:39 PM by Richard Mansfield | Category: Dodd-Frank ; Loans/Mortgages; Real Property sales and Condition ; State taxes | Permalink | Email this Post | Comments (0)

6/1/2011

New Bill Would Restrict Taxation of Workers Temporarily in a State

Today's tax quote: "Don't tax you. Don't tax me. Tax the fellow behind the tree." Russel B. Long

To many companies, it seems that states have for years been attempting to tax "the fellow behind the tree" in the form of workers who temporarily stray within their borders.

Congressional advocates of legislation to provide uniform rules for state taxation of workers who are temporarily present in a state have introduced H.R. 1864 (Coble, R. NC and Johnson, D. GA). The bill reintroduces legislation that Congressman Johnson has sponsored for several years, and which is supported by the Council on State Taxation (COST) as a much-needed way of standardizing what is now a very confusing patchwork of conflicting state rules.

Under the bill, a worker would continue to be fully taxable in his or her state of residence on all income, but would not be taxable in any other state unless the employee worked there for at least 30 days during the year. Consistent with that standard, the employer would not have to begin withholding in the temporary assignment state until the employee had worked there for 30 days.

H.R. 1864 would remedy that inconsistency by legislating a standard 30-day period both for taxability and withholding. There would be no income threshold. However, the 30-day limitation would not apply to entertainers, athletes, and other “public figures,” who generally are paid on a per event basis and would remain fully taxable in the state in which the income was earned. The legislation would define a “day” as any day on which the employee performs “the preponderance of the employee’s employment duties” in the state, but would allocate all of the services to the nonresident state on any day in which the employee performs material duties in both a nonresident state and the state of residence. Consequently, if an employee who lives in Michigan worked in the morning in Illinois, and in the afternoon traveled to Iowa and worked there, both employer and employee would have to determine in which nonresident state (Illinois or Iowa) the preponderance of the employee’s duties occurred.

Another potential pitfall in the way the bill is constructed is that once the employee crossed the 30-day threshold, withholding would have to take place for all of the 30 days already worked there. A number of groups (for example, the AICPA) have testified that this rule will result in unfair cash-flow issues for employees, and should be changed to permit withholding adjustment over time, or to eliminate the retroactive withholding.

Not surprisingly, the states have consistently opposed this legislation. Although analysis by COST suggests that the overall revenue loss to the states would be minimal, the legislation would shift revenue from some aggressive states (such as New York) to others, so that there would be winners and losers. Moreover, the states object to the loss of control over their own tax systems, and to the some of the standards in the bill. For example, although the 30-day standard is an improvement over prior versions of the legislation that would have imposed a 60-day standard, as testified to by the Federation of Tax Administrators the states still think the 30-day threshold is too long. Moreover, they think the bill should also contain some minimum wage threshold as an alternative. For example, an employee might become taxable once he or she had been working an aggregate of 20 days in a state, or earned $20,000 there. Otherwise, high-wage employees would be able to earn very large amounts of money in a state before becoming taxable there.

There are other issues, as well, such as the treatment of income from bonuses, stock options, and other deferred compensation.

Despite state objections, the two sides seem to be getting somewhat closer together. Moreover, it is encouraging that the legislation received a hearing in the House, and will be moved forward to the full Judiciary Committee at some point. Although similar legislation has been introduced several times previously, it has never been put to a vote in either the House or Senate. Worldwide ERC hopes this time around, it will receive more attention, since it would greatly simplify the task faced by ERC members trying to track and properly withhold on employees working in diverse locations.

Posted at 4:05 PM by Peter Scott | Category: State taxes; Withholding/reporting/gross-up | Permalink | Email this Post | Comments (0)

4/28/2011

States Hunt for Revenue and (Re)Discover the Real Estate Services Tax?

It is no secret that many states are scrambling for income in the face of seriously declining tax revenues and increasing demands for services. The Great Recession has been the perfect storm blending slim resources, no reserves, and high demand for unemployment, retirement and Medicare benefits into a cash draining catastrophe that many formerly free spending state legislatures are now forced to confront. Raising taxes or imposing new taxes is clearly the wave of the future. And our industry is not going to be immune.

Service taxes are, not surprisingly, levied on services provided to consumers, and are common to some degree in almost all states; they are often considered as an adjunct or extension to sales taxes, and commonly have the same tax rate as sales taxes. However, in most states professional services are exempt, and the applicability of these taxes is restricted by statute. Many other states have similar taxes that have an effect on prices and consumer behavior like the service tax; these are often styled as “gross receipt taxes” which are charged on a service business’ total revenue from services, “excise taxes” which are applied to the gross receipts of specified services (such as phone service), or a “use tax” on services not otherwise taxed. A few states use different terms such as Transaction Privilege Tax (Arizona), or Business and Occupational Gross Receipts Tax (Delaware) for the same type of tax. All of these taxes are really a tax on the consumer of the services, and are almost universally passed on to the buyer, either directly as a stated charge (as sales taxes are shown on receipts) or indirectly through increases in prices for the services. Generally states do not specify how the tax is to be identified and collected, most are silent on this issue.

In the EU and parts of Asia, taxes on services are routine in many industries and professions, which are subject to VAT rules. I will not discuss those taxes in the blog, however.

Taxes on services are beginning to impact the domestic employee mobility industry in several ways, primarily in real estate sales. States have always taxed the transaction, either by means of recording fees or direct levies on the sales price. As to the latter, at least thirty-five states plus D.C. impose a tax on the transfer of real property located in the state. In California, Louisiana and Ohio, real estate transfer taxes are imposed only at the local level. In Delaware, Maryland, Michigan, New Jersey, Pennsylvania, Washington and West Virginia, at least some localities may impose a tax in addition to the state transfer tax. None of these statutes are new, and while some of the tax rates are quit high – New York and Washington, for example -- the industry routinely expects to pay these taxes on the sale of a transferring employee’s house.

What we are beginning to find now, however, is the application of a service tax on the real estate commission, which has traditionally been an excluded item even in those states which otherwise tax services rendered to consumers.

The three states currently imposing these taxes are New Mexico, Hawaii, and South Dakota.

The New Mexico statute imposes a gross receipts tax on most real estate commission (subject to some deductions) and can be found at http://www.tax.newmexico.gov/SiteCollectionDocuments/Publications/FYI-Publications/FYI-105__GROSS%20RECEIPTS%20and%20COMPENSATING%20TAXES%20-%20AN%20OVERVIEW%202009.pdf. The statute prevents double taxation by excluding from the taxable receipts that portion of the commission which is attributable to value already subject to the gross receipts tax, such as new construction and repairs. The rate varies because counties and localities can add to the basic rate, but it ranges from approximately 5% to 8%.

The Hawaii tax is unique in that it is both a sales and excise tax applicable at all levels of production like a VAT; it is currently 4% (except in Oahu which has imposed a .5% surcharge). The regulations can be found at http://hawaii.gov/tax/har/har_237.pdf. The legislature just defeated a proposal to increase the rate by .5%.

South Dakota imposes a tax of 4% on nearly all sales of personal property and on the gross receipts of any business which provides services. The definition of “service” includes any activity “engaged in for other persons for a fee, retainer, commission, or other monetary charge” including, of course, real estate commissions, which are not exempt. The regulations can be found at http://legis.state.sd.us/rules/DisplayRule.aspx?Rule=64:06:01:07 .

None of these statutes is a new one, and I bring them to the discussion in order to analyze how they affect the cost of real estate transactions in a typical home purchase program. If more states adopt similar taxation regimes, there will likely be a cost impact on these programs.

The touch point of theses taxes in home sale programs is the sale from the employer to the ultimate purchaser; to the extent that the tax is passed on or built into the commission, it is owed by the employer and thus increases the cost of the sale. The listing agreement should deal with the allocation of the cost, either directly by requiring the payment of visible (i.e. enumerated) taxes, or indirectly by including them in the fee charged. In many cases, however, it is local custom and practice which dictates the allocation between the broker and the seller, absent a provision in the listing agreement. It is a better practice to specify the amount and payer of the tax, in the listing agreement and to list it separately on the HUD-1 if it is collected at settlement as a separate charge.

Parenthetically, there are similar taxes on other settlement services in various states. For example New York has imposed a tax on some title products, which is routinely listed on the HUD-1 and most often included in the calculation of the Title Services amount shown on line 1101.

The Hawaii general excise tax (GET) makes a good place to start an analysis because it has been in place for decades, and because its impact is often greater than the others because of the high cost of housing in the Aloha State.

The GET is a gross receipts tax on businesses; the entity receiving the income from services is the entity that is required to pay the tax to the state government. Unlike a sales tax, which requires merchants to levy and collect a tax at the point of sale, the GET does not contain any specifics other than the obligation for payment. Thus, the tax can be passed on to the consumer -- which is almost universally the case -- either directly as an itemized charge, or indirectly by being included in the service fee charged. As far as the state is concerned, so long as the required taxes are paid, how they are collected is irrelevant.

In real estate transactions in Hawaii, the custom and practice appears to be that the GET is added as a visible charge in addition to the commission, and is paid at settlement; interestingly, the GET addition is itself subject to the tax because the tax is not being “collected” by the broker, and the broker is required to pay the GET on its total gross receipts which includes the GET surcharge paid by the seller. Absent a written agreement to the contrary, it also appears that it is the local custom and practice that the seller (the consumer of the services) pay the fee, similar to other sales and service taxes levied by the law. The same result is found in New Mexico and South Dakota.

Over the past couple of decades, several other states have flirted with imposing some sort of service tax on the real estate commission; they were successfully convinced not to do so by effective lobbying by real estate groups (including the National Association of REALTORS ®) which showed that such taxes are regressive and they act as a drag on real estate sales by adding additional costs to the transaction.

Hopefully these convincing economic arguments will keep other states from imposing additional taxes on the real estate transaction. But today’s economic reality will make the commission an attractive target for cash-strapped state legislatures.

Posted at 3:22 PM by Richard Mansfield | Category: Real Property sales and Condition ; Relocation Program Risk Management Strategies; State taxes | Permalink | Email this Post | Comments (0)

3/14/2011

States Pursue Hidden Offshore Accounts, Seek to Address Budget Deficits

Today’s tax quote: “Taxpayers who neglect paying tax on offshore income out of ignorance must be educated. Taxpayers who do it on purpose need to be scared.” -- Martin A. Sullivan.

Much has been written about the efforts of the IRS to pursue taxpayers hiding money overseas, and the IRS has recently embarked on another program to persuade such taxpayers to come forward by August 31, 2011 or be prosecuted. The federal government now has in place an extensive network of tax information exchange agreements with other governments, under which it can receive a great deal of information about any taxpayer, and is still working through the fruits of its agreement with the Swiss government to turn over information about Americans with accounts in Swiss bank UBS.

Less discussed have been similar efforts in the states, but states have also been headed in the same direction. At least seven states have created their own offshore disclosure initiatives modeled after that of the IRS, with at least two obtaining information on how to proceed independent of the federal government.

For example, New York has already collected $52 million from 964 such taxpayers since 2009. This exceeds the amount New York collected through its general tax amnesty program last year. Connecticut reports that it has assessed and collected about $4.2 million so far from 91 taxpayers, and Wisconsin is working through some 34 disclosures made to it.

About 15,000 taxpayers came forward under the IRS’s first disclosure program, and IRS has generated about $400 million from closing some 2,000 of those cases to date. Generally, coming forward at the federal level also generates a requirement to file an amended state return, and many states are aggressively pursuing this unexpected source of revenue. Nearly all states have in place some sort of overall voluntary disclosure program, and as noted, seven (New York, Connecticut, Alabama, Hawaii, New Jersey, Minnesota, and Wisconsin) have their own limited state disclosure programs separate from that of the IRS that focus on offshore accounts.

Other states are considering focusing on them as well. For example, new California Governor Brown included such an initiative in his 2011 budget proposal.

Taxpayers are coming forward to both the federal and state governments because the aggressive search for such scofflaws has in fact “scared” many them, as Martin Sullivan recommends. While someone turning himself in will face substantial taxes, civil penalties, and interest, he will be allowed to escape criminal prosecution. A number of taxpayers who did not avail themselves of the opportunity to disclose have already been prosecuted.

As for the states, the effort to find such taxpayers is hardly surprising, given the dire budget straits of many of them. A new report from Ernst & Young illuminates the problems faced by the states. According to the report, for fiscal 2011 all states combined were facing projected deficits of more than $121 billion. In addition, some of the actions taken to address the 2011 deficits had the effect of simply shifting some of the problem into fiscal 2012, in which states are already reporting nearly $105 billion of projected deficits.

The problems are particularly acute in a few states. The E&Y report says that of the $121 billion total deficit, some $89 billion is in 10 states (California, Illinois, New Jersey, New York, Texas, North Carolina, Arizona, Wisconsin, Minnesota, and Florida), and that the first five of those states are also projected to run some $52 billion of the reported 2012 deficits.

Viewed in another way, some of the same states appear in the top ten. E&Y calculated projected state deficits as a percentage of general fund revenues. That illustrates the size of the budget adjustments needed to close the gap. For 2012 New Jersey leads that group, with a 38% gap between revenues and expenditures, followed closely by Nevada at 36%, Illinois at 26% (down from 69% after substantial tax hikes in 2011), Oregon at 25% and Minnesota at 25%. E&Y projects that these gaps will in fact grow larger due to the elimination of most federal stimulus funds in 2012.

Faced with these challenges, states can be expected to search hard for additional revenue sources. Attacking hidden offshore accounts is one such initiative that, based on the federal experience, is likely to raise a lot of money. Given the amount of information available to them, Americans with overseas sources of income have little excuse for ignorance of their responsibilities, and both the federal and state governments are giving them good reason to be scared if they fail to properly report.

Posted at 10:16 AM by Peter Scott | Category: State taxes | Permalink | Email this Post | Comments (0)

1/21/2011

Illinois Enacts Tax Increases to Reduce Deficit

Posted at 8:36 AM by Peter Scott | Category: State taxes | Permalink | Email this Post | Comments (0)

12/28/2010

Delaware Provides New Form to Implement Real Estate Sales Estimated Tax

The Delaware Division of Revenue has finally made available a form that will be used to implement its new law requiring that nonresident sellers of Delaware real estate pay an estimated income tax on the gain from the sale in order to record the deed. Form 5403 is available at http://revenue.delaware.gov/services/current_bt/5403.pdf.

The new Delaware regime was the subject of a previous Mobility LawBlog posted October 19, 2010. Since then, Worldwide ERC has worked with the Delaware Division of Revenue to develop the form and instructions necessary for ERC members to comply with the new law. Although the law goes into effect for sales after December 31, 2010, the form was not finalized and made available until Christmas week.

Basically, the law requires that nonresident sellers of Delaware real estate compute gain on the sale, and pay an estimated income tax at 6.95% on either the gain on sale or the net cash received, at the option of the seller. A nonresident corporation is one that is neither organized under Delaware law nor registered to do business there. The definition of a nonresident individual is less clear. The statute says that a nonresident individual is one who was not a resident of Delaware “for the individual’s entire tax year.” ERC has argued that this means that the individual is treated as a resident unless he or she was a nonresident for the entire year. Since the instructions for Form 5403 are silent on this issue, it would be reasonable for any individual selling a principal residence in Delaware to consider him or herself a resident for the year of sale. Interestingly, while the Form 5403 requires an entry of the date of sale, the form does not include the date on which it is executed.

The statute provides that no tax is required if the gain is exempt, or is excluded from tax. Consequently, most individual sellers of principal residences, whether or not considered “residents,” will be able to claim the exclusion under section 121 for gain on sale of a principal residence ($250,000 single, $500,000 married filing jointly, for those who have owned and used the home for two years out of the preceding five, with a partial exclusion for those who do not meet the two-year requirement). Form 5403 includes a box in section 5 in which to claim the gain as excluded. Most individual sellers will be able to check that box to avoid estimated tax. If not, transferees should be advised to check the “resident” box.

The practical application of the law will require that every seller of Delaware real property prepare and submit the Form 5403 to the Recorder of Deeds along with the deed for recording. If the form is not submitted, along with payment of estimated tax by any nonresident seller required to pay it, the deed will not be recorded. Consequently, Worldwide ERC members buying and selling property in Delaware, whether or not registered to do business there, will need to complete Form 5403 for every sale.

Fortunately, ERC was able to correct a fundamental error in the calculation of gain that appeared on the draft form. As the form was originally proposed, and as late as mid-December, section 6 of the form (in which gain is calculated) omitted any credit for the seller’s adjusted basis, except for mortgages and other liens. As finalized, however, the form correctly calculates gain so that even nonresident corporations (for example, RMC’s) who sell transferee homes will rarely, if ever, owe any estimated tax, because there is no gain on the sale.

The bottom line is that while the form and instructions are not perfect, they typically will simply require additional paperwork. Companies and RMC’s buying and selling transferee homes in Delaware will generally need to obtain a completed Form 5403 on their purchase from the transferee, and complete their own Form 5403 on the sale. Delaware is usually considered a “two-deed” state, for reasons related to the conceivable application of its False Claims act in the manner attempted in the Florida Qui Tam action several years ago. If two deeds are being used, then two Forms 5403 will be necessary, one for recording of each deed. If companies are using the blank deed, it is not clear how the Delaware recorders will approach the receipt of a deed for recording that runs from the transferee to the ultimate buyer, but with a Form 5403 only from the RMC or other corporate seller. For that reason, the most conservative practice may be to obtain a Form 5403 from the transferee in every case.

The Delaware Division of Revenue has promised to monitor the implementation of the law, and make changes in the form or instructions should they prove to be necessary. ERC members are requested to let us know if problems arise.

Posted at 8:56 AM by Peter Scott | Category: State taxes; Real Property sales and Condition | Permalink | Email this Post | Comments (0)

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