Delaware General Assembly

AN ACT TO AMEND TITLE 30 OF THE DELAWARE CODE RELATING TO DELAWARE TAXES.

BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF DELAWARE :

"CHAPTER 16. PASS-THROUGH ENTITIES, ESTATES AND TRUSTS.

SUBCHAPTER I. IN GENERAL

§ 1601. Definitions.

Whenever used in this chapter, the following terms shall have the meanings ascribed to them in this section:

(a) ‘Pass-through entity’ means any person:

(1) which is classified as a partnership under the Internal Revenue Code [26 U.S.C. § 1, et seq.], or

(2) which is classified as an ‘S corporation’ for federal income tax purposes within the meaning of § 1361 of the Internal Revenue Code [26 U.S.C. § 1361],

(b) ‘Member of a pass-through entity’ or ‘member’ means a person treated for federal income tax purposes as either a partner in a partnership or a shareholder of an S corporation, but does not include a beneficiary of an estate or trust.

(c) ‘Distributive share’ means, with respect to any member and with respect to any taxable year of such member:

In the case of a pass-through entity that is classified as a partnership under the Internal Revenue Code, the distributive share of such member for such taxable year of the pass-through entity’s income, gain, loss or deduction, or items thereof, as appropriate, determined under § 704 of the Internal Revenue Code [26 U.S.C. § 704]; or

In the case of a pass-through entity that is an S corporation for federal income tax purposes, the pro rata share of such member for such taxable year of the pass-through entity’s income, gain, loss or deduction, or items thereof, as appropriate, determined under § 1377(a) of the Internal Revenue Code [26 U.S.C. § 1377(a)].

(d) ‘Resident estate’ means the estate of a decedent who at death was domiciled in this State.

(e) ‘Nonresident estate’ means an estate which is not a resident estate.

(f) ‘Trust’ means an entity classified as a trust for federal income tax purposes, other than a trust of which the grantor or another person is treated as the owner of the entire trust under §§ 672 through 679 of the Internal Revenue Code [26 U.S.C. §§ 672 – 679].

(g) ‘Resident trust’ means a trust:

(1) created by the will of a decedent who at death was domiciled in this State, or

(2) created by, or consisting of property of, a person domiciled in this State, or

(3) with respect to which the conditions of 1 of the following subparagraphs are met during more than one-half of any taxable year:

(A) the trust has only 1 trustee who or which is (i) a resident individual of this State, or (ii) a corporation, partnership or other entity having an office for the conduct of trust business in this State;

(B) the trust has more than 1 trustee, and 1 of such trustees is a corporation, partnership or other entity having an office for the conduct of trust business in this State; or

(C) the trust has more than 1 trustee, all of whom are individuals and one-half or more of whom are resident individuals of this State.

(h) ‘Nonresident trust’ means a trust that is not a resident trust of this State.

(i) ‘Beneficiary’ has the meaning ascribed to it by common law, including, without limitation, any heir, devisee, or legatee of an estate or beneficiary of a trust.

§ 1602. Taxable year.

The taxable year of a pass-through entity, estate or trust for purposes of this title shall be the same as its taxable year determined under the Internal Revenue Code. A change in the taxable year of a pass-through entity, estate, or trust under the provisions of the Internal Revenue Code shall effect a change of its taxable year under this title.

§ 1603. Accounting Method.

The accounting method of a pass-through entity, estate or trust for purposes of this title shall be the same as its accounting method determined under the Internal Revenue Code. A change in the accounting method of a pass-through entity, estate or trust under the provisions of the Internal Revenue Code shall effect a change of its accounting method under this title.

§ 1604. Adjustments.

An adjustment made to any item of income, gain, loss or deduction reported on the federal information or tax return of a pass-through entity shall effect an adjustment to such item of income, gain, loss or deduction under this title to the extent necessary to prevent such item from being duplicated or omitted.

§ 1605. Returns.

(a) Pass-through entities.

(1) Returns.-- Every pass-through entity having any income from sources within this State shall make a return to this State for the taxable year setting forth the information required by § 6031 or § 6037 of the Internal Revenue Code [26 U.S.C. § 6031 or § 6037] and such other information as the Director may prescribe pursuant to § 513 of this title. Such return may, to the extent prescribed by the Director, require the separate statement of any item of the pass-through entity’s income, gain, loss or deduction if the separate treatment of such item could affect the liability for tax under this title of any member.

(2) Copies to Members.-- A pass-through entity required to file a return pursuant to paragraph (1) of this subsection shall provide to each member a copy of such information shown on such return as the Director may prescribe pursuant to § 513 of this title.

(3) Time to file return.-- A return required to be filed pursuant to paragraph (1) of this subsection shall be filed:

(A) in the case of a pass-through entity classified as a partnership, on the 30th day of the fourth month following the end of such pass-through entity's taxable year, and

(B) in the case of a pass-through entity classified as an S corporation, on the 30th day of the third month following the end of such pass-through entity's taxable year.

(b) Estates and Trusts.

(1) An income tax return with respect to the tax imposed by Chapter 11 of this title shall be made to this State by:

(A) every resident estate or resident trust which (i) is required to file a federal income tax return for the taxable year or would be required to file a federal income tax return for the taxable year if the additions provided under § 1106 of this title were included in its federal gross income, and (ii) which has not distributed, or set aside for distribution, to nonresident beneficiaries its entire federal taxable income as modified by § 1106 of this title; and

(B) every nonresident estate or nonresident trust which (i) is required to file a federal income tax return for the taxable year or would be required to file a federal income tax return for the taxable year if the additions provided under § 1106 of this title were included in its federal gross income, and (ii) which has any income from sources within this State.

(2) Copies to Members.-- An estate or trust required to file a return pursuant to paragraph (1) of this subsection shall provide to each beneficiary of such estate or trust a copy of such information shown on such return as the Director may prescribe pursuant to § 513 of this title.

(3) Time to file return.-- A return required to be filed pursuant to paragraph (1) of this subsection shall be filed on the 30th day of the fourth month following the end of the estate's or trust's taxable year.

SUBCHAPTER II. TAXATION OF PASS-THROUGH ENTITIES AND THEIR MEMBERS

§ 1621. Taxation of pass-through entities; in general.

(a) Income tax.-- A pass-through entity as such shall not be subject to the income tax imposed by Chapter 11 or Chapter 19 of this title. Members of a pass-through entity shall be liable for the tax imposed by Chapter 11 or Chapter 19 of this title only in their separate or individual capacities.

(b) Incidence of business license and excise taxes.-- The incidence of the taxes imposed by Parts III through VI of this title and by Title 4 with respect to the activities of a pass-through entity engaged in business in this State shall fall upon the pass-through entity and not its members.

§ 1622. Character of items.

Each item of the income, gain, loss or deduction of a pass-through entity shall have the same character for a member of such pass-through entity under this title as it has for federal income tax purposes. Where federal income tax rules and principles are not determinative of the character or of the source of an item of income, gain, loss or deduction for purposes of this title, such item shall have the same character or source for a member of the pass-through entity as if the item were realized directly by such member from the source from which realized by the pass-through entity or incurred in the same manner as incurred by the pass-through entity. A member’s distributive share of any item of the income, gain, loss or deduction of a pass-through entity shall, solely for purposes of the immediately preceding sentence, be determined by application of the principles of § 704(b) of the Internal Revenue Code [26 U.S.C. § 704(b)], including, without limitation, the principles for determining whether an allocation of such item among the members of such pass-through entity has substantial economic effect.

§ 1623. Special rules for nonresident individual members and corporate members of pass-through entities.

(a) Nonresident individual members of pass-through entities.-- In determining the tax liability under Chapter 11 of this title of a nonresident individual member of a pass-through entity, there shall be included in such member’s modified Delaware source income such member’s distributive share of the items of income, gain, loss and deduction of such pass-through entity entering into such member’s federal adjusted gross income, as modified by § 1106 of this title, as is derived from sources within this State as determined by the application of § 1124 of this title to such member in the same manner as if such items had been realized directly by such member.

(b) Nonresident individual members’ modifications.-- Any modification described in subsection (a), (b) or (c) of § 1106 of this title which relates to an item of pass-through entity income, gain, loss or deduction shall be made in accordance with a nonresident individual member's distributive share, for federal income tax purposes, of the item to which the modification relates, but limited to that portion of such item as is derived from or connected with sources in this State.

Corporate members of pass-through entities.--

A corporation that is a member of a pass-through entity doing business or having real or tangible personal property in this State shall be subject to the provisions of Chapter 19 of this title; provided, however, that this subsection shall not be interpreted as precluding a corporation that is a member of a pass-through entity from qualifying for exemption from taxation under Chapter 19 pursuant to § 1902(b)(8) of this title.

In determining the tax liability under Chapter 19 of this title of a corporation that is a member of a pass-through entity doing business or having real or tangible personal property in this State,

Such corporation’s federal taxable income shall be increased or decreased, as the case may be, by its distributive share of such pass-through entity’s items, if any, described in subsection (a) of § 1903 of this title;

Such corporation’s distributive share of any item of such pass-through entity that is described in any of paragraphs (1) through (5) of subsection (b) of § 1903 of this title shall be included in the entire net income of such corporation only if such item is properly allocable to this State under such paragraph of subsection (b) of § 1903 of this title; and

In applying paragraph (6) of subsection (b) of § 1903 of this title to such corporation, (A) the entire business of such corporation shall not be treated as having been transacted or conducted within this State if any part of the business of such pass-through entity was transacted or conducted outside this State, and (B) the 3 ratios described in such paragraph (6) of such corporation shall be determined by including in each such ratio such corporation’s distributive share of each relevant item of such pass-through entity.

SUBCHAPTER III. TAXATION OF ESTATES, TRUSTS AND THEIR BENEFICIARIES.

§ 1631. Imposition of tax.

The tax imposed by Chapter 11 of this title on individuals shall apply to the taxable income of estates and trusts.

§ 1632. Computation and payment.

The taxable income of an estate or trust shall be computed in the same manner as in the case of an individual pursuant to Chapter 11 of this title, except as otherwise provided by this subchapter. The tax shall be computed on such taxable income and shall be paid by the fiduciary.

§ 1633. Tax not applicable.

The following persons shall not be subject to tax under Chapter 11 of this title:

(a) Associations taxable as corporations.-- An association, trust or other unincorporated organization which is taxable as a corporation for federal income tax purposes.

(b) Exempt associations, trusts and organizations.-- An association, trust or other unincorporated organization which by reason of its purpose or activities is exempt from tax on its income under the laws of the United States or this State.

(c) Real estate mortgage investment conduits.—An entity that is a real estate mortgage investment conduit (as defined in § 860D of the Internal Revenue Code of 1986 [26 U.S.C. § 860D], as amended).

(d) Designated and qualified settlement funds.-- A trust that is a designated or qualified settlement fund (as defined in § 468B of the Internal Revenue Code of 1986 [26 U.S.C. § 468B], as amended, or Treas. Reg. § 1.468B-1 [26 C.F.R. § 1.468B-1]) shall be characterized as a trust for all purposes of this title and shall not be subject to tax under this chapter.

(e) Real estate investment trusts.-- An entity that is a real estate investment trust, as defined in § 856 of the Internal Revenue Code of 1986 (26 U.S.C. § 856), as amended.

(f) Pass-through entities.-- An association or other unincorporated organization that is a pass-through entity.

§ 1634. Fiduciary adjustment.

(a) Fiduciary adjustment defined.-- The fiduciary adjustment shall be the net amount of the modifications described in § 1106 of this title (including subsection (c) of § 1106 if the estate or trust is a beneficiary of another estate or trust) which relate to items of income or deduction of an estate or trust.

(b) Shares of fiduciary adjustment.-- The respective shares of an estate or trust and its beneficiaries (including solely for the purpose of this allocation, nonresident beneficiaries) in the fiduciary adjustment shall be in proportion to their respective shares of the federal distributable net income of the estate or trust. If the estate or trust has no federal distributable net income for the taxable year, the share of each beneficiary in the fiduciary adjustment shall be in proportion to the beneficiary's share of the estate or trust income for such year, under local law or the terms of the governing instrument, which is required to be distributed currently and any other amounts of such income distributed in such taxable year. Any balance of the fiduciary adjustment shall be allocated to the estate or trust.

§ 1635. Taxable income of resident estate or resident trust.

The taxable income of a resident estate or resident trust means its federal taxable income modified by the addition or subtraction, as the case may be, of its share of the fiduciary adjustment determined under § 1634 of this title.

§ 1636. Nonresident beneficiary deduction for resident estates or resident trusts.

(a) Allowance of deduction.-- A resident estate or resident trust shall be allowed a deduction, against the taxable income otherwise computed under Chapter 11 of this title, for any taxable year for the amount of its federal taxable income, as modified by § 1106 of this title, which is, under the terms of the governing instrument, set aside for future distribution to nonresident beneficiaries.

(b) Rules of application.-- The following rules shall apply in determining whether or to what extent income is set aside for future distribution to nonresident individual beneficiaries:

(1) If all or part of the federal taxable income of the estate or trust, as modified by § 1106 of this title, is distributable in future taxable years (whether or not added in the meantime to estate or trust corpus for estate or trust accounting purposes), to or for the benefit of a named individual beneficiary or beneficiaries, or a class of individual beneficiaries, and if on the last day of the taxable year of the estate or trust, 1 or more of such named individual beneficiaries, or 1 or more members of the first-named class of individual beneficiaries, is living, then the portion of the federal taxable income of the estate or trust, as modified by § 1106 of this title, considered set aside for future distribution to nonresident beneficiaries shall be computed:

A. In the case of a named individual beneficiary or beneficiaries, by first determining the share or shares of each such beneficiary as if the estate or trust had terminated on the last day of the taxable year and then determining the portion of such income realized by the estate or trust during the taxable year while the beneficiary was a nonresident of this State; and

B. In the case of the first-named class of beneficiaries, by first determining who the members of the class would be and the share of each such member if the estate or trust had terminated on the last day of the taxable year and then determining the portion of such income of each such share realized by the estate or trust while such member was a nonresident of this State.

(2) If all or part of the federal taxable income of the estate or trust, as modified by § 1106 of this title, is distributable in future taxable years (whether or not added in the meantime to estate or trust corpus for estate or trust accounting purposes) to or for the benefit of a named individual beneficiary or a class of individual beneficiaries, and if on the last day of the taxable year of the estate or trust no named individual beneficiary or none of the members of the first-named class of individual beneficiaries is then living, then the portion of the federal taxable income of the estate or trust, as modified by § 1106 of this title, considered as set aside for future distribution to nonresident beneficiaries, shall be determined in the manner provided in paragraph (1) of this subsection, except that it will be presumed:

A. In the case of a named individual beneficiary or beneficiaries, that each such beneficiary was living and residing in the state where the putative parents resided during the taxable year; and

B. In the case of the first-named class of beneficiaries, that members of the class were living and residing with the person the relationship to whom determines or defines the membership in the class.

(4) For purposes of determining under paragraphs (1) and (2) of this subsection the share of each beneficiary of an estate or trust in the federal taxable income, as modified by § 1106 of this title, the discretion in any person over the distribution of such income (whether or not acting in a fiduciary capacity and whether or not subject to a standard) shall be presumed not to have been exercised, unless such discretion was irrevocably exercised as of the last day of the taxable year.

(5) For purposes of determining under paragraphs (1) and (2) of this subsection when federal taxable income, as modified by § 1106 of this title, was realized, the following rules shall apply:

A. Interest income shall be considered realized when payable;

B. Dividend income shall be considered realized on the day the dividend is payable;

C. Gains and losses from the sale or exchange of property shall be considered realized or deductible, as the case may be, on the settlement date of the sale or the effective date of the exchange; and

D. Commissions on income or principal shall be deemed deductible on the date charged.

(6) The Director is authorized to establish more detailed rules to apply paragraphs (1) through (4) of this subsection in any manner not inconsistent with the provisions of such paragraphs.

§ 1637. Credit for income tax of another state.

A resident estate or resident trust shall be allowed the credit provided under § 1111 of this title for resident individuals, except that references in that section to resident individuals shall for purposes of this section be deemed to refer to a resident estate or resident trust.

§ 1638. Accumulation distribution credit for resident beneficiary of trust.

(a) Allowance of credit.-- A resident beneficiary of a trust whose taxable income includes all or part of an accumulation distribution by such trust as defined in § 665 of the Internal Revenue Code [26 U.S.C. § 665] shall be allowed a credit, against the tax otherwise due under Chapter 11 of this title, for all or a proportionate part of any tax paid by the trust for any preceding taxable year which would not have been payable if the trust had in fact made distribution to its beneficiaries at the times and in the amounts specified in § 666 of the Internal Revenue Code [26 U.S.C. § 666].

(c) Limitation on credit.-- The credit under this section shall not reduce the tax otherwise due from the beneficiary to an amount less than would have been due if the accumulation distribution, or the beneficiary's part thereof, were excluded from the beneficiary's taxable income, as modified by § 1106 of this title.

(d) Transition rule.-- The credit under this section shall apply to accumulation distributions defined by § 665 of the Internal Revenue Code [26 U.S.C. § 665] in effect for the applicable taxable period.

§ 1639. Taxable income of a nonresident estate or nonresident trust.

(a) General rules.-- For purposes of Chapter 11 of this title, in the case of a nonresident estate or nonresident trust:

(1) Items of income, gain, loss and deduction mean those derived from, or connected with, sources in this State.

(2) Items of income, gain, loss and deduction entering into the definition of federal distributable net income include such items from another estate or trust of which the first estate or trust is a beneficiary.

(3) The source of items of income, gain, loss or deduction shall be determined under rules or regulations prescribed by the Director in accordance with the rules of § 1124 of this title, as if the estate or trust were a nonresident individual.

(b) Determination of taxable income.-- For purposes of Chapter 11 of this title, the taxable income of a nonresident estate or nonresident trust consists of:

(1) Its share of items of income, gain, loss and deduction which enter into the federal definition of distributable net income;

(2) Increased or reduced by the amount of any items of income, gain, loss or deduction which are recognized for federal income tax purposes but excluded from the federal definition of the distributable net income of the estate or trust; and

(3) Less the amount of the deduction for its federal exemption.

§ 1640. Share of a nonresident estate, nonresident trust or its beneficiaries in income from sources within this State.

The share of a nonresident estate or nonresident trust, and the share of a nonresident beneficiary of any estate or trust, of items of estate or trust income, gain, loss and deduction for purposes of § 1124 of this title shall be determined as follows:

(1) To the amount of items of income, gain, loss and deduction which enter into the definition of distributable net income, there shall be added or subtracted, as the case may be, the modifications described in § 1106 of this title to the extent they relate to items of income, gain, loss and deduction which also enter into the definition of distributable net income. No modification shall be made under this section which has the effect of duplicating an item already reflected in the definition of distributable net income.

(2) The amount determined under paragraph (1) of this section shall be allocated among the estate or trust and its beneficiaries (including, solely for the purposes of this allocation, resident beneficiaries) in proportion to their respective shares of federal distributable net income. The amounts so allocated shall have the same character as for federal income tax purposes. Where an item entering into the computation of such amounts is not characterized for federal income tax purposes, it shall have the same character as if realized directly from the source from which realized by the estate or trust or incurred in the same manner as if incurred by the estate or trust.

(3) If the estate or trust has no federal distributable net income for the taxable year, the share of each beneficiary in the net amount determined under paragraph (1) of this section shall be in proportion to such beneficiary's share of the estate or trust income distributed in such year. Any balance of such net amount shall be allocated to the estate or trust.".

Ҥ 1624. Special rules for certain tax credits of pass-through entities.

In general.-- The credits allowed by Chapters 18 and 20 of this title against the taxes imposed by Chapters 11 and 19 of this title on account of activities and investments of a pass-through entity shall be passed through to its members in proportion to their respective distributive shares of such entity’s taxable income on the last day of such entity’s taxable year.

Qualifications for credits.-—The qualification of a pass-through entity for any credit allowed by Chapter 18 or Chapter 20 of this title shall be determined by treating such entity as the taxpayer for purposes of Chapter 18 or Chapter 20, as the case may be.

Limitations on credits.-- In the case of any credit allowed to a pass-through entity by Chapter 18 or Chapter 20 of this title, the limitations imposed by Chapter 18 or Chapter 20, as the case may be, shall be applied:

(1) at the level of the pass-through entity in the case of a limitation based on (i) the value of property contributed or money invested, (ii) the total allowable credit per taxpayer per year, or (iii) the number of persons employed; and

(2) at the level of each member of the pass-through entity in the case of a limitation on the total amount of tax against which such credit may be applied.

(e) Multiple pass-through entities. -- Whenever two or more pass-through entities together undertake any qualified activity at the same qualified facility as those terms are used in subchapter II or subchapter III of Chapter 20 of this title, and such combination of pass-through entities is not itself a pass-through entity under this chapter, the qualified employees, qualified investment, and number of Delaware resident employees of such pass-through entities shall be aggregated to determine eligibility for, and computation of, credits or reductions of tax under those subchapters. Participation of the pass-through entities in the aggregate credits shall be determined by the share of each pass-through entity based upon the following:

(1) in the case of credits calculated with respect to an increase in qualified employees, upon the ratio of new qualified employees in such pass-through entity to all new qualified employees in all the pass-through entities comprising the aggregate, such ratio not to exceed 1 or be less than zero; and

(2) in the case of credits calculated with respect to the amount of a qualified investment, upon the ratio of qualified investment in such pass-through entity to all qualified investment in all the pass-through entities comprising the aggregate. In order to claim credits resulting from such aggregation under this subsection, the entities must first file a ‘Request for Aggregation’ with the Director and obtain the Director’s approval to aggregate. The Request shall identify the entities to be aggregated, the qualified activity to be engaged in, the location of the qualified facility, the amount of qualified investment, the number of qualified employees, the proposed participation of each pass-through entity in credits determined under this subsection, and other information required by the Director to determine the aggregated entity and its eligibility for credits.”

"(13) 'Taxpayer' means an individual, pass-through entity as defined in § 1601 of this title, or corporation."

"§ 2024. Credit against personal income tax.

Notwithstanding any reference in this chapter to Chapter 19 of this title, any taxpayer not subject to taxation under Chapter 19 of this title may claim the credits allowable under § 2011, § 2021, § 2041, or § 2070 of this title (including adjustments thereto under §§ 2042, 2043 and 2044 of this title) against the tax imposed by Chapter 11 of this title; provided, however, that the amount of credit claimed by an individual under Chapter 11 of this title shall not exceed 50% of the amount of tax imposed upon such individual by Chapter 11 of this title for such taxable year.".

Approved July 18, 2000