October 2009

Cash Crunch? How the
IRS Might be Able to Help

The following article was contributed by Tom Lacock and Jim Laudick of BKD LLP. Tom may be reached at tlacock@bkd.com or 317-383-4144. Jim may be reached at jlaudick@bkd.com or 317-383-4117.

Your business may have made estimated tax payments based on a more robust financial outlook. Depending upon the original due date of your return, or if you must extend the filing date of your return, it could be months before you get the refund that resulted from these payments.

Your business may qualify to file Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Taxes. To qualify, the corporation’s overpayment amount must be both more than $500 and at least 10 percent of the actual tax liability. The form must be filed within a rather small window. It cannot be filed until after the close of the tax year for which the estimated payments were made, but it must be filed on or before the original due date of Form 1120. If your business files its tax return by the original due date, then Form 4466 must be filed before the Form 1120. A copy of Form 4466 should be included with Form 1120 when it is filed.

The IRS has 45 days after Form 4466 is filed to act upon the filing. This could, therefore, provide some quick cash flow relief.

Corporations can carry back a loss generated in the current year and offset the tax paid in prior years, using Form 1139, Corporation Application for Tentative Refund. This form must be filed within 12 months of the end of the tax year in which the loss arose. In addition, the current-year tax return, which reports the loss, must be filed prior to filing the Form 1139. This claim is generally processed quickly, and the tax refund should be received shortly after filing (generally 90 days).

If your previous tax year, which just ended, resulted in a tax liability, and you can already tell the current tax year will generate an NOL, you can file Form 1138, Extension of Time for Payment of Taxes by a Corporation Expecting a Net Operating Loss Carryback. This form must be filed before the due date for paying the previous year’s tax liability. In normal circumstances, a corporation with an NOL may be able to carry it back to prior tax years and get a refund of the taxes already paid for the current year. Filing Form 1138 effectively shortens the time between paying the previous year’s tax liability and subsequently getting it refunded via the NOL carryback. However, the IRS could still charge penalties if you end up underpaying the previous year’s taxes.

If you believe your corporation can benefit from any of these options, contact your professional tax advisor. He or she can recommend a solution that best fits your needs.

Economic Development Programs
to Incentivize Manufacturing,
Wholesale & Distribution Companies

The following article was contributed by Lisa Leventhal, director in Katz, Sapper & Miller’s State and Local Tax Department. Lisa may be reached at lleventhal@ksmcpa.com or 317-580-2026.

		Many state and local jurisdictions have responded to recent economic hardships by aggressively pursuing businesses focused on growth and/or retention of current operations. Indiana, as well as other states and several local jurisdictions, has included advanced manufacturing and logistics companies in its list of targeted industries. Before trying to obtain economic incentive programs, companies can benefit by understanding a few key points:

Economic incentive programs can create a major impact on a manufacturing or logistics company’s bottom line. To take full advantage, companies must understand the programs and create a plan to obtain them.

If Indiana Voters Pass the
Circuit Breaker Resolution, What
is Next for Indiana Municipalities?

The following article was contributed by Gretchen Gutman of Taft Stettinius & Hollister LLP. Contact Gretchen at GGutman@taftlaw.com or 317-713-3500.

In the Fall of 2008, the Distressed Unit Board received petitions from the Beech Grove Public Library and the City of Gary and its included taxing districts. In addition, approximately 15 communities adopted local option income taxes in order to freeze property taxes. Superficially, it would appear that the 2008 legislation gave sufficient flexibility to local communities to take charge of their own destinies through fiscal management and the ability to redo the revenue stream to meet the needs of the community. But is that true?

What choices will municipalities have when constituents voice a desire for services that cost more than the available revenue? When this question is proposed to policymakers, the frequent response is to suggest the following: (1) Cut expenditures. (2) Adopt local option income taxes. (3) Petition the Distressed Unit Board.

Unfortunately, if you assume that the 2010 General Assembly will adopt the Joint Resolution passed in 2008 for a second time and the voters will ratify the insertion of the property tax circuit breakers into the State Constitution, relief from the Distressed Unit Board will suddenly end. The proposed constitutional amendment provides no authority for a board to override the constitutional caps. Nor does the proposed constitutional amendment authorize the Indiana General Assembly to enact legislation to provide other exceptions to the caps. Thus, political subdivisions will have one less avenue by which to request relief.

A potential alternative that might function like a Distressed Unit Board is to seek a judicial mandate ordering the delivery of services. This certainly would not be looked upon favorable by state legislators. The approach has so little precedent that it is unclear how it would work. However, it is pretty clear that courts do not have inherent power to levy taxes. Federal judges have ordered jails to be constructed, however; those cases have been brought challenging federal law and not state law. State judges have the authority of a writ of mandamus; however, they are not vested with the power to collect taxes previously levied.

Obviously, the techniques of cutting expenditures and raising income taxes are old tricks with a long history. In 1973, legislators passed legislation to raise the sales tax from two percent to four percent and authorized a local option income tax (county adjusted gross income tax) to implement "Doc" Bowen's property tax relief program. Sound familiar?

In the press and around the water cooler a fourth idea gets discussed from time to time. Why not just declare bankruptcy?

Bankruptcy – What Does It Mean for a Municipality?
Established during the Great Depression, the purpose of Chapter 9 of the Federal Bankruptcy Code was to provide a financially-distressed municipality with protection from creditors while it developed and negotiated a plan for adjusting its debts. Under Title 9, reorganization of the debts of a municipality is typically accomplished either by extending debt maturities, reducing the amount of principal or interest, or refinancing the debt by obtaining a new loan.

Although similar to other chapters of the Bankruptcy Code in some respects, Chapter 9 is significantly different in that there is no provision in the law for liquidation of the assets of the municipality and distribution of the proceeds to creditors. Such a liquidation or dissolution would undoubtedly violate the Tenth Amendment and the Supreme Court's decisions in cases upholding municipal bankruptcy legislation.

Who is Eligible?
Only a "municipality" may file for relief under Chapter 9 (11 U.S.C. § 109(c)). The definition is broad enough to include cities, counties, townships, school districts, and public improvement districts. It also includes revenue-producing bodies that provide services which are paid for by users rather than by general taxes, such as bridge authorities, highway authorities, and gas authorities.

Section 109(c) of the Bankruptcy Code sets forth four additional eligibility requirements for Chapter 9:

1) The municipality must be specifically authorized to be a debtor by state law or by a governmental officer or organization empowered by state law to authorize the municipality to be a debtor.

2) The municipality must be insolvent, as defined in 11 U.S.C. § 101(32)(C).

3) The municipality must desire to effect a plan to adjust its debts.

4) The municipality must either:

A) Obtain the agreement of creditors holding at least a majority in amount of the claims of each class that the debtor intends to impair under a plan in a case under Chapter 9.

B) Negotiate in good faith with creditors and fail to obtain the agreement of creditors holding at least a majority in amount of the claims of each class that the debtor intends to impair under a plan.

C) Be unable to negotiate with creditors because such negotiation is impracticable.

D) Reasonably believe that a creditor may attempt to obtain a preference commencement of the case.

Indiana has not passed legislation authorizing a municipality to be a debtor. Therefore a political subdivision in Indiana is not eligible to take advantage of the provisions of Chapter 9. Thus, Indiana is different than 18 other states. See Table 1.

Is There Another Way?
Because Indiana has not passed legislation authorizing a municipality to file bankruptcy, the next logical question would be: Is there another way to get relief from liabilities when there is insufficient revenue?

State Receivership
Indiana has passed legislation that permits the appointment of a receiver. Roughly speaking, a receivership is a state law alternative to bankruptcy. Under IC 32-30-5, a receiver may be appointed by a state court to oversee an action by a vendor to vacate a fraudulent purchase of property or by a creditor to subject any property or fund to the creditor's claim, in all actions when it is shown that the property, fund or rent, and profits in controversy are in danger of being lost, removed, or materially injured, in actions in which a mortgagee seeks to foreclose a mortgage, and in four other categories of actions.

An argument could be made that because the statute does not specifically prohibit the appointment of a receiver for a municipality, a municipality could fall under this statutory scheme. However, the question is what remedy would be available?

While there are judicial utterances in other states to the contrary, it has been generally held that in the absence of special statutory authority the judiciary has no power to appoint a receiver or other agent to take over the duties of a municipality or improvement district in respect of the collection and distribution of taxes or special assessment. Two principal reasons have been advanced by the courts for holding that in the absence of state statute a court has no power to appoint a receiver to collect local assessments. First, the power of taxation belongs to the legislature not the courts. Second, the existence of a statutory system for raising funds to meet the cost of improvements precludes a court from appointing a receiver to collect the assessments. In other words, the appointment by a court of a receiver to collect taxes is in fact a usurpation of legislative power.

The primary purpose of a receivership is to liquidate and not rehabilitate an entity. As a result, it is an inadequate financial management tool for municipalities.

Conclusion
The way in which political subdivisions in Indiana generate tax revenues will change dramatically in the next few years. The options available to municipalities are not necessarily appealing. If the State Constitution is modified to add circuit breaker limits, opportunities to seek relief from entities like the Distress Unit Board will no longer be available. And as this article discusses, Indiana's law does not permit a political subdivision to voluntarily file a Chapter 9 Bankruptcy.

Policymakers have concluded that future increases in revenue should come from income taxes rather than property taxes. However, if after trimming costs and reducing service levels, there isn't enough income tax revenue to meet the growing demand for services, policy makers will need to consider new approaches. Now, is the time to begin discussions and to think about new policies to help municipalities cope with the new realities. Policies developed through calm deliberations have a better chance of a good outcome than policies blossoming out of a crisis.

Real Estate Property
Tax Appeals in Indiana

The following article was contributed by Andrea Hermer and Michael Lang, attorneys with Dann Pecar Newman & Kleiman, P.C. You may contact Andrea at ahermer@dannpecar.com or 317-632-3232, extension 116.  You may contact Michael at mlang@dannpecar.com or 317-632-3232, extension 188.

There is a common misconception held by many Hoosier taxpayers about the impact Indiana’s property tax reform legislation (HB 1001) will have on real estate tax appeals. That misconception is that real estate tax appeals will be less needed and less likely due to many of the reforms adopted by the Indiana Legislature. However, in order to receive the relief and benefits intended by
Indiana’s property tax reforms, it is more important than ever for Indiana businesses and other taxpayers to be vigilant in achieving the true and correct assessed value for their real property. In fact, obtaining complete relief under many of the property tax reforms is dependent upon it.

Circuit Breaker Caps do not Eliminate or Diminish the Need for Property Tax Appeals.  The Circuit Breaker caps adopted as part of the reforms limit the net property tax liability for property owners so that property owners do not pay more than a specified percent of the gross assessed value of their property. The Circuit Breaker caps were phased in over a two-year period and vary depending upon the category or class of property being taxed. The Circuit Breaker caps set for commercial/business real property (other than long term care homes and multi-family housing) are 3.5 percent of the property's gross assessment taxes payable in calendar year 2009 and 3.0 percent of the property's gross assessment for taxes payable in calendar 2010 and thereafter.

Because Circuit Breaker caps are based upon the gross assessed value of property, it is critical that your property’s assessed value is accurate and reflect the fair market value of your property for the applicable assessment period. For example, if the gross assessed value of your manufacturing facility is $1,000,000.00, your net tax liability for 2010 cannot exceed $35,000.00. However, if the true fair market value of your manufacturing facility is $700,000.00 (i.e. facility is over assessed by $300,000.00), then the Circuit Breaker cap limiting your net tax liability for property taxes should be significantly lower, and set at $24,500.00. The county auditor is required to provide a tax credit for the amount that exceeds the Circuit Breaker. As illustrated in the example above, if your property is overassessed and you fail to appeal the overassessment of your property, then your net liability for property taxes will remain at the higher Circuit Breaker cap, essentially providing you little to no relief and certainly not the full scope of relief intended by Indiana’s property tax reforms.

Another consequence of Indiana’s Circuit Breaker caps is that local governments can no longer merely adjust the tax rate in order to equalize their tax revenues with their operating budgets. Now, local governments are required to demonstrate an actual increase in the assessed value of the property located within their jurisdictions in order to equalize their tax revenues or keep pace with their operating budgets. If the assessed value of property does not keep pace with local government operating budgets, then local governments will have to address revenue shortfalls by cutting local operating expenses or other alternative means. As you see and hear frequently in the news today, the impact Indiana’s property tax reforms have had on local government operating revenues have been substantial, with local governments receiving substantially less revenue from property taxes, a trend that is anticipated to continue. This means assessors may be more aggressive in calculating property assessments which, in turn, means property owners must pay attention to and be willing to devote more resources in challenging those assessments.

Trending does not Eliminate or Diminish the Need for Property Tax Appeals. Another measure passed as a significant part of Indiana’s property tax reforms is what is commonly referred to as “trending.” Under Indiana’s property tax reforms, assessments are to be reassessed every four years instead of ten years with annual trending updates occurring between statutory reassessment periods. Trending means that assessors will use statistical analysis to adjust every property’s assessment each year, rather than assessed values remaining the same between statutory reassessment periods. This means that most property owners will see changes in the assessed value of their property on an annual basis. This requires that taxpayers review their tax bills and “trended” assessments on an annual basis to ensure that the assessed values reflect only the fair market value of their property. It is also important to note that any assessments that were inaccurately determined will be further skewed by the trending process. These mistakes can cause the tax bill for taxpayers to be much higher than they should be. For example, if your property is already overassessed, trending will compound the problem year after year until corrected because the property's assessment will likely increase each year in near lockstep with similar properties around it. Accordingly, it remains as important as ever for taxpayers to make sure that their properties’ assessments are accurate.

Indiana Businesses Need to be Vigilant in Reviewing Their Tax Bills and Assessments on an Annual Basis to Ensure That They are Paying Only Their Fair Share of Property Taxes. Taxpayers should review their tax bills and any reassessments of their property as soon as issued. At a minimum, you should be looking for any objective errors disclosed by the tax bill or reassessment such as incorrect computation of net tax liability, omission of any applicable credits, and incorrect classification of property. The county auditor should automatically apply and adjust the Circuit Breaker caps to your tax bill. However, in a mass appraisal tax system, such as Indiana's, nothing should be taken for granted. As part of Indiana property tax reforms, the Indiana Department of Local Government finance has published a “Special Message to Property Owner” form (Form 53569). This form must accompany issued tax bills and provides the taxpayer with an itemization of relevant tax information including, but not limited to, showing all applicable tax credits, tax rates, and assessed value of property along with comparison of prior years assessed values. You should also check the gross assessed value of your property to confirm that it is reflective of the market value for the applicable assessment period. With respect to any property assessment which has increased more than five percent (5%), the county auditor or township assessor now have the burden of proof. Prior to this change, the burden of proof was on the taxpayer with respect to any appeal or property assessment. Because Indiana’s property tax reforms incorporate annual “trending,” it is important to check the assessed value (as trended up or down) for your property on an annual basis. If there are any mistakes in your tax bills or if you believe the assessed value of your property is too high, you may initiate an appeal with the local assessor within 45 days of the date of the tax bill or, in years of reassessment, within 45 days of the date of notice of reassessment (Form 11).

IMA Meeting Calendar

OSHA 10-Hour Certification Course
Nov. 4-5, 2009
IMA Conf. Center,
Indianapolis

EPA's Final Mandatory Reporting of Greenhouse Gases Rule, Legislative Initiatives & Legal Challenges
Nov. 12, 2009
Online Webinar

OSHA 10-Hour Certification Course
Dec. 2-3, 2009
IMA Conf. Center, Indianapolis

IMA Legislative Briefing & Reception
Jan. 26, 2010
Westin Hotel, Indianapolis

To register for any IMA conference, click the link and register online; or contact IMA at 317-632-2474 or 800-462-7762. Additional information is available by contacting Angie Glass at the above numbers or at aglass@imaweb.com.

TaxTalk is published by the
Indiana Manufacturers Association
One American Square, Suite 2400,
Box 82012, Indianapolis, IN 46282
Phone: 317-632-2474
  Toll Free: 800-462-7762    
Fax: 317-231-2320
IMA Web Site: www.imaweb.com
Editorial Layout: Charlene Hickey, chickey@imaweb.com