Get business advice and guidance to navigate COVID-19. Click here

Alabama Denies Refund of Composite Payments Not Claimed Within Statute of Limitations

Owners of pass-through entities should pay close attention to the taxes that are paid on their behalf by the pass-through entity, because failure to take credit for those payments in a timely manner may prevent a future refund claim.

By Tina M. Chunn, SALT Senior Manager

On Dec. 27, 2019, the Alabama Tax Tribunal issued a decision in which it upheld[1] the Alabama Department of Revenue’s (“ADOR”) denial of Propeller Corporation’s (“Taxpayer”) refund claim.  The Taxpayer is a holding company formed and commercially domiciled outside Alabama with income from two partnership entities:  CTP Holdings LLC (“CTP”) and Pilot Travel Centers LLC (“PTC”), both of which engaged in business in Alabama.  For 2010 through 2015, the only income reported on the Taxpayer’s corporate income tax filing was derived from these two entities.

Alabama requires partnerships with nonresident members to file composite returns and pay income tax on behalf of those members calculated based on such member’s distributive share of Alabama-source income.[2]  If the nonresident member files its own Alabama income tax return, which it is allowed, but necessarily required to do, it may claim the composite income tax paid on its behalf as a credit.

In 2010 and 2011, CTP and PTC filed their Alabama composite partnership returns and remitted income tax on the distributive share of income paid to their nonresident taxpayers, including the Taxpayer. However, the Taxpayer did not claim a credit for these composite payments on its Alabama corporate income tax returns for those years.

In 2016, the Taxpayer realized that it had not claimed the credits for CTP’s and PTC’s composite payments from 2010 and 2011, totaling $76,154. The Taxpayer contacted the ADOR for guidance and was verbally advised to file amended returns for 2010 through 2015, to (i) report and claim the composite payment credit on its 2010 and 2011 corporate income tax returns and (ii) carryforward the credit to its 2015 return and request a refund of the overpayment.

After the Taxpayer filed these returns in 2016,[3] the ADOR denied the refund, asserting that the composite tax payments should be treated as a form of income tax withholding, and therefore, the statute of limitations expired for the composite tax payments claimed as a credit on the amended 2010 and 2011 returns.  The Taxpayer argues that the composite tax payments should be treated similarly to net operating losses and should not expire within the statute of limitations for refunds.

The Tax Tribunal Judge disagreed with the Taxpayer’s argument.  While the Alabama corporate income tax generally conforms to federal income tax methods, the petition for a refund or allowance of a credit is governed by an Alabama statute with no reference to a federal law.  In addition, there is no comparable IRC provision corresponding to Alabama’s composite return statute.

In this case, the Taxpayer did not claim the composite tax payments on its originally filed corporate income tax returns for tax years 2010 or 2011 or within the three-year statute of limitations that started to run on the original due date for the Taxpayer’s 2010 and 2011 corporate income tax returns.   Therefore, the Taxpayer’s 2015 claim for refund was properly denied by the ADOR.

As busy season gets into full swing, taxpayers – particularly those that are part of a pass-through tax structure – and their advisors should review any filings and documents to ensure that all amounts paid by a pass-through entity of which the taxpayer is a member is properly applied on the taxpayer’s income tax return.  The state composite/withholding rules for pass-through entity structures vary by state and can be confusing.

Aprio’s SALT team is experienced with reviewing these types of pass-through issues and can make sure that the pass-through entity and its members are in compliance with their multi-state composite/withholding obligations.  We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Tina Chunn at tina.chunn@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the January 2020 SALT Newsletter.

[1] Propeller Corporation v. State of Alabama Department of Revenue, Docket No. BIT 18-1099-LP, Alabama Tax Tribunal, December 27, 2019.

[2] Ala. Code 40-18-24.2(b)(1).

[3] The amended returns contained no changes to the Taxpayer’s income, apportionment, or tax liability.

X