Another Major Tax Victory For Business Sellers

Eliminating State-Level Income Tax Is More Broadly Available

WEBWIRE – Wednesday, September 13, 2017

The U.S. Supreme Court once wrote that power to tax is the power to destroy. Destroying our primary source of jobs growth via taxation is not what America needs. This is a major tax victory for business sellers and for America.

Roughly 70 percent of economic growth and jobs growth comes from middle market companies, which are typically first-generation and family-owned. In spite of the importance of these companies to the U.S. economy, they are threatened by taxes upon their sale. Depending on the specifics of a sale, as much as 40 percent of the sale price might go to taxes.

In the 1990s, tax planners identified that certain types of trusts would allow a family to hold assets in another state for income tax purposes. For residents of high income tax states, holding assets in zero tax states -- whose trust laws allow for the creation of such trusts -- was an attractive proposition. Since then, the IRS has issued over 80 favorable rulings that confirm the tax character of these trusts.

In some cases, the states in which these families lived attempted to tax these trusts. But, time after time, these states own courts have overturned their respective state’s power to tax them. Very recently, Minnesota. Citing provisions in the U.S. Constitution, the Minnesota Tax Court granted summary judgment in favor of the taxpayer. In 2016, the North Carolina Court of Appeals affirmed the overturning of that state’s attempt to tax a non-resident trust. This is on the heels of a 2015 case in Ohio in which taxation of a non-resident was overturned.

According to Forbes columnist Todd C. Ganos, who specializes in tax mitigation for business sales, “The U.S. Supreme Court once wrote that power to tax is the power to destroy. Destroying our primary source of jobs growth via taxation is not what America needs. This is a major tax victory for business sellers and for America.” The full text of Mr. Ganos’ Forbes article on the subject can be found here.

With this taxpayer victory, Minnesota is added to the list of dozens of states that do not tax non-resident trusts. As such, families holding their business ownership via a qualifying trust in a qualifying state -- such as Nevada and South Dakota -- have the ability to sidestep state-level income tax on the sale of their companies.