SALT Test 2
property under construction is sourced....
-Source and include when start depreciating
Here's where the Uniform Division for Income Tax Purposes Act comes into play for states who are members of the MTC....
1. Three factor apportionment of business income 2. Allocation of nonbusiness income Even if are not a MTC state, most states have some variation
•Key indicators of a unitary business are...
1. functional integration (especially vertical integration) 2. centralization of management (especially horizontal integration) 3. economies of scale.
Four types of nexus common for income tax:
1.Physical (assets or employees in the state) 2.Agency 3.Affiliate 4.Economic
•Finnigan Rule: Finnigan v California Board of Equalization which provides that if one member of a unitary business has nexus with a state, then ...
ALL members will be deemed to have nexus - many states have adopted this
•Corporation has main office in state 1. •Sales approval and operations are in state 2. •Only activity in state 3 is a salesman, covered by PL 86-272 so not taxable in state 3. State 2 has a throwback rule.
All sales in State 3 get sourced to state 2 where they originated
Business or Non-business? •Dividends from a minority investment in a supplier?
BUSINESS
Business or Non-business? •Interest on temporary investments of cash for a retail business?
BUSINESS
Business or Non-business? •Royalties from book copyrights received by a book publishing company as result of purchasing another book publishing company?
BUSINESS
Business or Non-business? •Sale of a subsidiary?
BUSINESS
unitary business
Business that is conducted both inside and outside the state as one unit in determining the taxable values attributable to the state, regardless of how many or what types of legal entities the business is divided into.
•Three unities test: From ___________________________________________ Contribution/dependency focus 1. Unity of ownership: own or control >50% 2. operations in the state are dependent on operations of business activities outside the state 3. intercompany loans and sales, sharing of staff contribution and dependency
Edison California Stores v McColgan (1947)
Business or Non-business? Dividends received on investment portfolio of manufacturing company
NON-BUSINESS
Business or Non-business? •Investment income on the proceeds of sale of a subsidiary?
NON-BUSINESS
Business or Non-business? •Royalties received from a patent acquired by a book publisher when they purchased the company that held the patent?
NON-BUSINESS
NOL •Pre-apportionment approach:
Taxable income includes the federal NOL deduction and the net number is then apportioned
NOL •Post-apportionment approach:
Taxable income is apportioned first and then the state NOL is deducted after apportionment.
•Double throwback rule applies if ... •These sales are assigned to the state where they were shipped from if the seller was taxable in that state, or will go to the state where the salesperson who made the sale operates -Think about internet sales here
a seller has goods shipped by a third party directly to a purchaser in a state where the seller is not taxable
•The Joyce rule: most states have adopted Joyce v California Board of Equalization ruling permits ...
a state to consider only a member's in-state activities (Separate accounting) to be used as part of the unitary business income
•If U.S. parent and foreign subsidiary are in a unitary business, the foreign subsidiary's dividends ....
are included in the U.S. parent's apportionable business income
• If the foreign subsidiary's business activities are not part of the U.S. parent's unitary business, the foreign subsidiary's dividends ...
are nonbusiness income that are allocated to state of commercial domicile
-Inventory in transit sourced to ... -Some states have throw out rule for in transit
buyer's destination
•Stock options are usually ________________ in payroll total, but the bargain element is included upon exercise of the option •Think about where you want to locate highly compensated employees (which usually have stock options)
excluded
•Portable property: railway cars, containers, 18 wheelers? -Sourced based on.... -Airplanes, satellites, ships usually have special factors
how long in each location
Unitary Business •Business that is conducted both inside and outside the state as one unit in determining the taxable values attributable to the state, regardless of ... •Companies filing a consolidated return can be separated, and companies not filing consolidated can be deemed unitary and combined
how many or what types of legal entities the business is divided into.
Components of a corporation's nonbusiness income, _________________________________, is directly assigned to a certain state
net of related expenses
•Separate company reporting: each separate legal entity having nexus in a state files a tax return as an entity. - DOWNSIDE: Intercompany transactions are ... •Arkansas generally uses the separate company reporting approach for filing purposes.
not eliminated and income subject to tax in one entity may be taxed again to a second entity that owns the first entity.
•Allocable income is only assigned to _______________, usually where the income producing asset is located- nexus would exist because the asset is located there.
one state
•Apportioned income must meet either one of 2 tests •Transactional test: Income is business income if is arises from transactions and activity in the .... •Functional Test: Income from tangible and intangible property is business income if the acquisition, management and disposition of the property is ....
regular course of a trade or business an integral part of taxpayer's regular trade or business
Federal Conformity: 3 methods
rolling, static, and selective
•Capital gains from sales of stocks, bonds and intangible assets •Interest and dividends these are normally allocated to...
state of commercial domicile
•Throwback concept: If the income is not taxable in the state where the property is located, allocated to ....
state of commercial domicile
Common types of nonbusiness income and the rules for allocating them to specific states are Allocate interest and dividends to .... - - Allocate rental income to ....
the state of commercial domicile -(except interest on working capital, which is business income) the state where the property generating the rental income is located.
•Allocate capital gains/losses from investment property and intangible personal property to ...
the state of commercial domicile.
•Allocate royalties to ...
the state where the property is used - this usually creates nexus. If not, allocate royalties to the state of commercial domicile.
•Allocate capital gains/losses from selling rental property to ...
the state where the rental property was located.
•Sales shipped into a state in which the corporation doesn't have nexus are not included in the numerator or the denominator •This helps address the double taxation that can result •Only Maine and West Virginia have a throw out rule for all types of sales, some have adopted for various other sales •Arkansas has not adopted this for tangible personal property.
throw out rule
•Rents and gains from tangible personal property are allocated:
where property is located
•Rents, royalties and gains from realty are allocated:
where property is located
Three unities test: From Butler Bros. v McColgan (1942) CA Supreme court case
• 1. Unity of ownership: own or control >50% • 2. Unity of operation: sharing of functions like HR, accounting • 3. Unity of Use: centralized management, intercompany financing
Allied-Signal, Inc. v Director, Division of Taxation 1992
•Bendix, a Delaware corp. domiciled in Michigan sold its interest in a 20.6% investment in ASARCO (Allied Signal was successor to Bendix) • $211.5 million gain was NOT apportionable income because Bendix and ASARCO were not unitary •AND the investment in ASARCO did not serve an operational purpose- was a passive investment, not current operational purpose •Could have included this as apportionable income even if not unitary, but operational purpose was deciding factor •Interest earned on ST deposits is apportionable as operational function income •IF the income is part of the working capital of the unitary business •Bendix held ASARCO stock for over 2 years- was not a ST investment to help provide working capital •so must be non business income and no apportionment to NJ
____________________________: Tax incentives are often conditioned on the taxpayer meeting and maintaining certain hiring or investment thresholds. •If the requirements are not met, the taxpayer may be required to reimburse the state
•Clawback provisions
Payroll factor excludes:
•EXCLUDES: •payments to independent contractors •payments made to employees who produce nonbusiness (allocated) income
•Container Corp of America v CA Franchise Tax Board 1983
•Flow of value beyond mere flow of funds: vague? •Sharing or exchange of value that can't be easily quantified or separately identified •Sharing of management •Also developed worldwide unitary concept
________________________________________________________ •SCOTUS ruled that it is unconstitutional for states to allow a DRD for domestic corporations and not from foreign corporations •Violates Commerce Clause
•Kraft General Foods, Inc. v Iowa Department of Revenue (1992)
MeadWestvaco Corp. v Illinois Dept of Revenue 2008
•Mead Corporation sold is Lexis/Nexis business for $1 Billion gain •MeadWestvaco is the successor to Mead- Ohio Corp. •Illinois Appeals court: Mead and Lexis were not a unitary business, but the gain should be apportioned because Mead's investment in Lexis served an operational purpose. •Why did IL want the gain apportioned? •SCOTUS said that the operational function stated in Allied Signal was not a new or additional basis for apportionment separate from unitary principle •An asset can be part of the unitary business even if a unitary relationship does not exist between two particular businesses in the group. •Said that if not unitary, cannot require apportionment solely based on operational function idea •Did not determine if Mead and Lexis were unitary because lower court said they were not.
Mobil Oil Corp. v Commissioner of Taxes, 1980
•Mobil-NY corporation, highly integrated business •VT activities were wholesale and retail marketing of petroleum products (similar to Exxon case) •Foreign dividends treated as non business income (allocated)on Mobil's return •Mobil said to treat as apportioned business income would violate Due Process and Commerce Clause •Court said: Due Process: minimal connection and rational relationship and that the unitary business principle should be determinative •Court : to allocate would require proving that the dividend income was earned in the course of activities unrelated to the sale of petroleum products in VT •Discrete business enterprise? No •Would the fact that the dividends were foreign make them unrelated? No •Dividend income was apportionable, not proven to be from discrete business activities unrelated to Mobil's highly integrated business in the US •Court said foreign dividends are not always apportionable- depends on each unitary business determination, functional test •Dismissed the discrimination argument under the Commerce Clause
selective federal conformity method
•Only use certain federal provisions •Arkansas has selective conformity
Underwood Typewriter Co. v Chamberlain 1920
•SCOTUS Apportionment case- used just the property factor -Property in Connecticut/property everywhere •$1.4 M in profits, and using the property apportionment resulting in 47% of the profits being apportioned to Connecticut. •Actual net profits in the state were only $43,000 or .0023% •Gross distortion? •Held amount of net income allocated to the taxing state greatly exceeded the portion actually received there- didn't matter •(focus was on the FORMULA, not the results) • •The apportionment formula will not be struck down unless it is inherently arbitrary or produces an arbitrary result. •Not arbitrary so gross distortion not found to be relevant
source intangibles...
•Source to commercial domicile or •Source based on location and use
Exxon Corp. v Wisconsin Dept. of Revenue 1980
•Vertically integrated petroleum company, Delaware incorporation •3 Functional business units: marketing, exploration and production •Separate accounting: any transfers between depts was "sales" •WI: marketing only, resulting in losses •WI said marketing operation was integral part of a unitary business so total income should be apportioned, not just the marketing business so over $4 mill apportioned to WI •Court said Exxon was highly integrated, and marketing was integral part •$4 m > $(loss)
Rolling federal conformity method:
•automatically implement federal tax changes as they are enacted, unless the state specifically decouples from a provision.
Static federal conformity method:
•incorporates wholesale updates of the federal tax code, but to the IRC as it existed at a specific point in time, rather than adopting all changes on a rolling basis. Sometime conform to outdated version of IRC for many years
