United States

Alabama: Bank Can Deduct Dividends Paid by an Alabama REIT

Feb 20, 2017
From KPMG TaxWatch

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The Alabama Tax Tribunal recently ruled that a bank taxpayer was allowed to deduct dividends paid to it by an Alabama-organized REIT in computing financial institution excise tax (FIET). Under Alabama law, a financial institution can deduct dividends received from a corporation organized and existing under the laws of Alabama. The Department of Revenue argued that the taxpayer was not entitled to the deduction because the REIT from which the dividends were received was not a “corporation.” In other words, the Department argued that when “an entity makes the election to be taxed as a REIT ... it elects to be treated by the tax law as something different than an ordinary corporation.” The Department also argued that, if the deduction were allowed, the dividend income would escape taxation altogether because the REIT itself was allowed a deduction for dividends paid. In the Department’s view, this would be an absurd result that the Legislature could not have intended.

The ALJ noted at the outset that the Department's claim that a REIT cannot also be a corporation was a “red herring.” In sum, a bank taxpayer is allowed the deduction if the entity that pays the dividends is a corporation. The REIT was a corporation organized and existing under Alabama law. Alabama’s definition of a REIT included a corporation meeting certain conditions, one of which was that the corporation could not be a financial institution or a bank. Although the REIT at issue made loans, to qualify as a bank a substantial part of an entity’s business must consist of both receiving deposits and making loans. Thus, because the REIT did not receive deposits it was not a bank. The ALJ also rejected the Department’s argument that it must disallow the deduction to avoid the dividend income from going untaxed. As support for this position, the Department argued that when the FIET deduction statute was enacted in 1935, the drafters could not have envisioned REITs that would be allowed to deduct their paid out dividends. The ALJ noted that the Legislature is presumed to know the law and the effect a newly-enacted statute will have on existing law. Thus, it must be presumed that when the Legislature enacted the REIT Act in 1995, it was aware that dividends paid to a financial institution by a REIT incorporated and existing under Alabama law could be deducted by the REIT for income tax purposes, and also by the financial institution for FIET purposes. The ALJ noted that it is up to the Legislature, not the Tribunal, to amend Alabama’s tax laws. Please contact Varoon Laddha at 404-979-2047 with questions on Ameris Bank f/k/a Southland Bank v. Ala. Dep’t of Revenue.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.