Testimony On HB 1661 From Former Senior DRA Official Val Berghaus

The purpose of the recent changes to the Interest and Dividends (I&D) tax (the so-called “LLC tax”), so says the Department of Revenue Administration, is “to bring fairness and parity” to the taxes. ” In the view of the Commissioner, the new laws “closes the loophole” in the tax’s treatment of LLC’s. The old I&D taxes, enacted in 1923, go about changing the real way investment property was to be taxed in New Hampshire. The distinction between taxable and nontaxable parties was elaborated in the former I&D tax by incorporation of the concept of “transferable” versus “not transferable” shares.

This concept created the demarcation between who was a taxable person and who not. It had been known that corporations almost experienced stocks that could readily be transferred without considerable impediment always. However, other forms of organization such as partnerships, associations and trusts might also have interests which were freely alienable like corporations and therefore ought to be treated similarly. Alternatively, non-corporate organizations which acquired beneficial passions not symbolized by transferable stocks would be subject to the I&D taxes on their receipt of interest and dividend income the same as individuals and fiduciaries.

This distinction makes sense. Since non-transferrable stocks have no intrinsic value, these are not capable of alienation. Of course the underlying resources symbolized by the stocks may have value and could be sold or transferred, but that is not a similar thing. Contrast this with transferable stocks of stock which might be sold on the marketplace and thus acquire value in addition to the assets they signify.

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In 1993, about the time that LLC’s were set up in New Hampshire laws, the I&D taxes was amended to include them along with partnerships, trusts and associations. Because of this the same dividing line was put on LLC’s as to these non-corporate entities. Thus, if an LLC had transferable stocks it was exempt from taxes on its receipt of interest and dividend income.

Its owners, however, would be taxable on dividends they received using their LLC exactly like if it were a company. On the other hand if the LLC’s stocks weren’t transferable, then it paid tax on interest and dividend income received because of it just as do partnerships, associations, trusts, fiduciaries and individuals.. 219 (1880). For 86 years the I&D taxes been around without successful challenge that its treatment of taxpayers violated this rule.

Yet the DRA recently – substituting its own wisdom – seems to have figured it did and then the tax was unfair to some taxpayers. Either the DRA grossly misinterpreted the primary precept or various other definition of tax “fairness” – not readily apparent on its face or effectively explained – was designed.

The DRA must have recognized that its radical proposal to change the I&D taxed fundamentally modified the original impost’s limitation to the taxation of only unaggressive investment income. It was never designed in 1923, or for just about any 12 months thereafter until 2009, to tax gained income or income from capital increases.