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TAX CLINIC

also supported by the Service’s position In late 2017, the law known as the Tax and Virginia adopt the IRC as of a cer-
in Rev. Proc. 2022-19, which states Cuts and Jobs Act (TCJA), P.L. 115-97, tain date and generally enact legislation
it will not treat any disproportionate made numerous significant changes to each year to advance their IRC con-
distribution as violating the one-class- the IRC that directly affected state and formity. A few states such as Arkansas,
of-stock requirement, so long as the local taxes. In March 2020, the Corona- Colorado, and Oregon follow a selec-
governing provisions provide for identi- virus Aid, Relief, and Economic Security tive conformity or distinctive approach
cal distribution and liquidation rights (CARES) Act, P.L. 116-136, was quickly by adopting only selective portions of
among the shares of stock (see also id., enacted to provide tax relief in response the IRC, with the state tax code con-
Example 2). to the COVID-19 pandemic. The forming to, or decoupling from, specific
CARES Act included temporary, and in IRC provisions.
The risk for taxpayers some cases permanent, changes to some Rolling conformity states generally
The letter ruling seems to suggest that of the key TCJA provisions. Subsequent automatically adopted the TCJA and
facts and circumstances outside the four major federal laws such as the Consoli- CARES Act, but in many cases, states
corners of an S corporation’s governing dated Appropriations Act, 2021 (CAA), evaluated and eventually decoupled
provisions can be considered in deter- P.L. 116-260; the American Rescue Plan from certain aspects of these laws.
mining if a second class of stock exists. Act of 2021 (ARPA), P.L. 117-2; and Likewise, while most static confor-
Without more information from the the Inflation Reduction Act of 2022, mity states have advanced their IRC
government on whether, or when, facts P.L. 117-169, were enacted, albeit with conformity date past the TCJA and
and circumstances can be applied to a somewhat less dramatic impacts on state CARES Act enactment dates, these
governing document analysis, there may and local taxes. states have not wholly followed the
be significant hazards for taxpayers. In response to these provisions, TCJA and CARES Act provisions. For
It is important to highlight Rev. states have taken a variety of approaches those states that decide to conform to
Proc. 2022-19, which allows taxpayers concerning federal conformity, and they the TCJA and CARES Act, doing so
to self-correct nonidentical governing have adopted a considerable amount of does not guarantee that such laws apply
provisions if certain requirements can legislation and interpretive guidance. for all years in which such provisions
be met. It is likely the taxpayer in Let- Given the numerous approaches taken were in effect. For example, in April
ter Ruling 201822003 would be eligible and the ability of each state to develop 2022, Kentucky enacted legislation that
for relief under Rev. Proc. 2022-19. its own position on what constitutes a advanced its IRC conformity date from
That being said, it seems unlikely the feasible corporate tax structure, the poli- Dec. 31, 2018, to Dec. 31, 2021, for tax
government will grant letter ruling cies adopted by the states are far from years beginning on or after Jan. 1, 2022
relief for second-class-of-stock issues uniform, tend to be very complex, and in (Ky. Ch. 212 (H.B. 8), Laws 2022). As
if there is only one shareholder, leaving some cases vary in a particular state from a result, Kentucky generally adopts the
taxpayers potentially at risk if they can- year to year. This item reviews the most CARES Act beginning with the 2022
not otherwise meet the requirements of significant provisions of the TCJA and tax year, which means that the tempo-
Rev. Proc. 2022-19. CARES Act affecting state corporate tax rary changes to the TCJA made under
From Jeff Alberty, CPA, J.D., Denver regimes and discusses state conformity the CARES Act generally do not apply.
issues that should be addressed by corpo- A few states continue to follow
rate taxpayers. a version of the IRC prior to the
State & Local Taxes CARES Act or even prior to the TCJA.
State conformity approaches California adopts the IRC as of Jan.
Significant state conformity As a threshold question, taxpayers must 1, 2015, and Texas adopts the IRC as
issues for corporate taxpayers consider how a state generally conforms of Jan. 1, 2007, so these states do not
Analyzing state conformity to the Inter- to the IRC. To the extent the IRC conform to most provisions in the
nal Revenue Code (IRC) always has been changes, state conformity varies based TCJA or CARES Act. Minnesota and
a challenge to corporate income taxpayers on the manner in which each state’s New Hampshire both adopt the IRC
tracking the issue on a multistate basis, laws interact with the IRC. Rolling as in effect on Dec. 31, 2018, prior to
due to historically different state ap- conformity states such as Illinois, New the CARES Act. Michigan adopts the
proaches on this issue. But the confluence Jersey, New York, and Pennsylvania au- IRC as in effect on Jan. 1, 2018, but
of tax reform and the pandemic in the tomatically adopt the IRC as currently taxpayers may elect to use the current
past four years has made this challenge in place. Static conformity states such IRC that incorporates the TCJA and
especially daunting. as Florida, Georgia, North Carolina, CARES Act.

24 February 2023 The Tax Adviser