Current Corporate Income Tax Developments (Part II) - 2008

By Karen J. Boucher, CPA; Shona Ponda, J.D.


EXECUTIVE SUMMARY

  • Illinois and Virginia passed laws requiring flowthrough entities to withhold on the income of nonresident owners.

  • Several states passed laws regarding the disclosure of reportable transactions and/or penalties for noncompliance with disclosure requirements.

  • New York reduced its Article 9-A and Article 32 corporate tax rates for tax years beginning after 2006.

  • Michigan replaced the Single Business Tax with the Michigan Business Tax.


During 2007, numerous state statutes were added, deleted, or modified; court cases were decided; regulations were proposed, issued, and modified; and bulletins and rulings were issued, released, and withdrawn. Part I of this article, in the March 2008 issue, focused on nexus, Sec. 338(h)(10) transactions, allocable/apportionable income, and tax base. Part II, below, covers some of the more important developments in apportionment formulas, unitary groups/filing methods, administration, flowthrough entities, and other significant corporate state tax issues.

Apportionment

A multistate corporation’s business income is apportioned among the states using an apportionment percentage for each state having jurisdiction to tax the corporation. To determine the apportionment percentage, a ratio is established for each of the factors included in the state’s formula. Each ratio is calculated by comparing the corporation’s level of a specific activity in the state to the total corporation activity of that type everywhere; the ratios are then summed, weighted (if required), and averaged to determine the corporation’s apportionment percentage for the state. The apportionment percentage is then multiplied by total corporation business income.

While apportionment formulas vary, many states use a three-factor formula that includes sales, payroll, and property factors. Because use of a higher-weighted sales factor generally provides tax relief for in-state corporations, most states accord more weight to the sales factor than to the other factors. Changes in the apportionment formula may also be used to provide relief or tax benefits to specific industries or to properly reflect the operations of a particular industry. Recent apportionment developments are summarized below.

Gross Versus Net Proceeds

• Arizona
The Department of Revenue (DOR) explained that only the net gain from the sale or other disposition of investments in short-term instruments should be included in the company’s sales factor for state corporate income tax purposes.1

• California
On remand from the California Supreme Court, a California court of appeal further remanded the General Motors 2 case (involving whether California should include the entire gross proceeds generated by certain treasury activities in its state franchise tax sales factor) back to the trial court for further proceedings consistent with the California Supreme Court’s decision in Microsoft Corp.3 Because neither the trial court nor the court of appeal had previous occasion to address the California Franchise Tax Board’s (FTB) alternative apportionment formula arguments, the California Supreme Court had remanded the case for further proceedings to allow the FTB to make its case.

In another decision, a state superior court held that the gross—as opposed to net—proceeds generated by certain treasury activities (Eurodollar time deposit short-term investments) should be taken into account for purposes of computing the sales factor under the state’s standard franchise tax apportionment formula. However, the court ultimately held that, in this instance, the standard apportionment formula did not fairly represent the extent of the taxpayer’s business activity in California.4

In a different decision, a California court of appeal held that the gross, as opposed to net, proceeds generated by returns of principal from short-term debt instruments held to maturity should be taken into account for purposes of computing the sales factor. However, the court also ultimately held that, in this instance, the standard apportionment formula did not fairly represent the extent of the taxpayer’s business activity in California.5

In another decision, a California superior court held that the buying and selling of commodities futures contracts does not qualify as “sales in-come” under general Uniform Division of Income for Tax Purposes Act provisions and thus cannot be considered “gross receipts” for state sales factor apportionment purposes.6

In addition, the FTB issued Technical Advice Memorandum (TAM) 2007-3 to its audit staff, discussing what information should be collected during an audit with respect to treasury activities as a result of the California Supreme Court decisions in Microsoft and General Motors.7

• Kansas
Relying on reasoning under the 2006 California Supreme Court rulings in General Motors 8 and Microsoft,9 the DOR explained that a company’s gross investment proceeds must be excluded from its sales factor denominator to prevent distortion.10

Other Apportionment Developments

• California
The State Board of Equalization (SBE) held that an airline company appropriately used the standard industry apportionment formula for air transportation companies as set forth in state regulations because the standard industry formula did not result in income distortion. The FTB could not alter the standard industry formula by grouping the company’s aircraft by model because it failed to show that the standard industry formula resulted in income distortion.11

In another development, the FTB amended Regulation §25137-14, which details rules related to the apportionment of income earned by mutual fund service providers. The amended regulation generally sources receipts based on shareholder residency and includes a throwback sales rule that incorporates the Finnigan 12 rule.

In a Chief Counsel ruling,13 the FTB determined that the investment activities of third-party investors that managed investments on behalf of a corporate taxpayer under written agreement did not constitute an “income-producing activity” for purposes of computing the taxpayer’s corporate income tax apportionment formula sales factor because state regulations specify that activities performed “on behalf of” a taxpayer by independent contractors do not result in income-producing activities attributable to the taxpayer.

• Idaho
The State Tax Commission (STC) denied a retailer’s use of an alternative apportionment method on its state combined return that would have included a unitary financial affiliate’s intercompany interest income in the denominator of the sales factor and its intangible assets (such as commercial paper) in the denominator of the property factor.14 The STC explained that the retailer failed to show that the standard apportionment formula resulted in sufficient distortion of its in-state business activity and that “advocating a better method than the standard formula” is not enough to satisfy this requirement. The STC also held that because the retailer failed to show where the costs of performance associated with gains from the sale of its credit card business had occurred, the income was excluded from its sales factor numerator and denominator.

• Illinois
SB 1544 and 783, Laws 2007, source sales of services and certain financial services based on market (rather than costs of performance); change the apportionment for transportation services to a ratio of Illinois gross receipts to gross receipts everywhere; and change the sourcing of telecommunications services and investment income of financial institutions.

• Indiana
The Indiana Tax Court held that the sales factor throwback statute clearly provides that being “subject to tax” in another state includes being subject to a state’s franchise tax that is measured by either net income or some other standard (such as, in this case, the Michigan Single Business Tax for the privilege of doing business).15

• Kansas
SB 240, Laws 2007, allows single sales factor apportionment for qualifying manufacturers that construct a new facility in Kansas costing at least $100 million, employ at least 100 new employees at the new facility by December 31, 2009, and pay “higher-than-average” wages.

• Maine
Effective for tax years beginning after 2006, Ch. 240 (LD 499), Laws 2007, adopts a single sales factor apportionment formula (prior to this law change, the apportionment formula for corporate income tax purposes was a three-factor double-weighted sales apportionment formula) and generally adopts a market-sourcing approach for sales other than sales of tangible personal property.

• Michigan
The Michigan Supreme Court reversed the Court of Appeals and held that the state’s sales factor statute is valid, even to the extent that it sources to Michigan receipts from engineering services performed entirely outside Michigan for construction projects located in Michigan.16

• New York
AB 4310C, Laws 2007, accelerated the phase-in of the single sales factor for Article 9-A taxpayers to tax years after 2006.

In a separate development, the New York Supreme Court, Appellate Division, affirmed the Tax Appeals Tribunal’s decision that (1) sales by a nontaxpayer member of a combined reporting group must be included in the numerator of the receipts factor of the business allocation percentage (the Finnigan rule) and (2) film master tapes should not be reflected in the property factor at current fair market value, including reproduction rights, but rather at the historical costs of the tapes.17

• Oregon
On remand from the Oregon Supreme Court, the Oregon Tax Court held that while a subsequently promulgated rule permitting an alternative discretionary apportionment formula applied retroactively to the years at issue, the DOR could not require a unitary financial organization to deviate from the standard apportionment formula and include intangible personal property in its property factor computation.18 The Tax Court explained that the rule does not allow the DOR, on audit, to initiate and require adjustments to taxpayer returns filed in accordance with an existing substantive rule.

In another development, for tax years beginning after 2006, SB 179, Laws 2007, requires insurance companies to use single sales factor apportionment, rather than the previous three-factor apportionment formula, and authorizes insurers to petition for and the department to permit or require alternative apportionment if the existing formula does not produce fair and equitable apportionment (Or. Rev. Stat. §317.660).

In addition, several rules were amended or added during the year. Oregon Administrative Rule 150-314.665(2) was amended to provide that for sales factor purposes, “tangible personal property” means personal property that can be “seen, weighed, measured, felt, or touched, or that is in any other manner perceptible to the senses” and includes electricity, water, gas, steam, and prewritten computer software. New Administrative Rule 150-314.665(3) explains that the sale of customized software produced for a specific customer is considered to be the sale of a service and sourced based on greater cost of performance. Amended Administrative Rule 150-314.665(4) explains that intangible personal property is sourced to Oregon if the property is used in a business activity in Oregon.

• Pennsylvania
The Pennsylvania Supreme Court affirmed that the DOR’s method of multiplying the company’s average receipts per mile in the United States by the number of miles driven in Pennsylvania was inappropriate because it wrongly assumed that the average receipts per mile for transporting packages was the same for every state. Accordingly, the court affirmed the company’s use of a combined weight- and zone-based pricing system.19

• Rhode Island
H 5300Aaa, Laws 2007, adopted a throwback provision for sales of tangible personal property (RI Gen. Laws §44-11-14).

• South Carolina
Act 110 (SB 91), Laws 2007, allows businesses dealing in tangible personal property to use the single factor apportionment method on a phased-in tax savings basis for tax years beginning in 2007–2010 and lists items that constitute sales or gross receipts for purposes of computing the sales factor. Receipts from the sale of intangible property that are unable to be attributed to any particular state are excluded from the numerator and denominator of the sales factor (SC Code §12-6-2250).

• Texas
Amended rules provide that membership or enrollment fees paid for access to benefits are receipts from the sale of an intangible asset and are apportioned to the legal domicile of the payor. For reports due after April 20, 2006, receipts from the servicing of loans secured by real property are apportioned to the location of the real property that secures the loan being serviced.20

In another development, the Texas Supreme Court denied a motion of rehearing of its previous decision not to hear the Texas Court of Appeal’s earlier opinion, which held that the state’s franchise tax was unconstitutional as applied to the taxpayer at issue due to the interplay between P.L. 86-272 and the earned surplus throwback provision that caused the tax to be “internally inconsistent.”21

Filing Methods

• Arizona
The Arizona Tax Court ruled that a trademark subsidiary be included in the printing company’s combined return because its only assets were under exclusive license to the company and therefore were incorporated indivisibly into the printing products.22 However, the company could exclude its accounts receivable and investment subsidiaries from the combined return because they provided management services to the company that were deemed equivalent to services available on the open market and were therefore ascertainable using generally ac-cepted accounting principles.

• California
Regulation §25110(d)(2)(F) reflects the FTB’s view that certain types of “not effectively connected income” must be excluded from U.S. source income for water’s-edge purposes because including such income would be inconsistent with the legislative history of the underlying state statutes. It also explains how expenses related to effectively connected income must be determined.

• Idaho
Amended Tax Commission Administrative Rule 35.01.01.600 requires insurance companies that are members of a unitary group to be included in the state combined income tax return.

• Indiana
The DOR required23 a taxpayer that filed combined financial institutions’ tax returns to include two nonresident investment management subsidiaries and their respective incomes in its return because under facts stated in the taxpayer’s SEC Form 10-K, the subsidiaries were part of the taxpayer’s unitary business.

In another finding, the DOR ruled24 that a retailer with numerous subsidiaries successfully showed that, although its affiliates were engaged in a unitary relationship, the in-state affiliates could continue to file separate company adjusted gross income tax returns because the group conducted all of its business at arm’s length.

• Maryland
SB 2, Laws 2007, requires corporations that are members of a corporate group to file an information statement providing detailed information about their operations and the difference between their current Maryland tax liability and the liability that would result if Maryland had adopted a combined reporting filing method. These reports are to be filed annually for all tax years begin-ning after December 31, 2005; the first report will be due by July 1, 2008.

• New York
For Article 9-A purposes, AB 4310C, Laws 2007, requires combined reporting for tax years beginning after 2006 for Article 9-A taxpayers for any commonly owned corporations engaged in substantial intercorporate transactions, regardless of whether those transactions are priced at arm’s length. It generally requires real estate investment trusts (REITs) substantially owned by Article 9-A corporations to file combined returns with their owners. TSB-M-07(6)C (6/25/07) provides the department’s interpretation of this new law.

In another development, an administrative law judge (ALJ) held that a retailer had to include its wholly owned trademark subsidiary in its Article 9-A state franchise tax combined report, even though the retailer established that the royalties paid were made at arm’s length, because the subsidiary did not have sufficient economic substance and was formed strictly for state tax avoidance purposes.25

In contrast, in another decision, the Tax Appeals Tribunal upheld26 an ALJ’s decision that the state could not force combined reporting with the taxpayer’s marketing company on the grounds that the taxpayer successfully rebutted the presumption of distortion by showing that the intercompany transactions were priced at arm’s length under the standards provided by Sec. 482.

In a different decision, the New York Tax Appeals Tribunal affirmed27 that it was inappropriate to make a discretionary adjustment to an Article 32 banking corporation’s combined income by including the income earned and reported from its Article 9-A investment subsidiary.

• North Carolina
A North Carolina superior court held28 that a taxpayer was required to file its North Carolina corporate income tax return on a combined basis because its use of a complex REIT strategy that shifted profits earned in North Carolina and reduced its state corporate income tax liability had no real economic substance.

• Oregon
Amended Oregon Administrative Rule 150-317.705(3)(a) explains that while the presence of all three factors of unity (centralized management, economies of scale, and functional integration) demonstrates that a single trade or business exists, the presence of one or two of these factors may also demonstrate the flow of value requisite for a single trade or business. Subsequently, SB 178, Laws 2007, changed the definition of “unitary business” to having any one of the three factors of unity.

• Vermont
In Technical Bulletin TB-36 (3/16/07), the Vermont Department of Taxes provided basic information about how transactions between members of a unitary combined group are to be treated for purposes of determining the taxable business income of the unitary combined group and the Vermont apportionment percentage of the unitary combined group.

• Virginia
The Department of Taxation (DOT) held29 that an out-of-state intangible holding company (IHC) had to file a state consolidated return with its in-state parent company to avoid distortion resulting from the parent’s interest expense on intercompany loans with the IHC.

• West Virginia
SB 749, Laws 2007, requires unitary businesses to file combined returns for tax years beginning after 2008 and permits the department to include the income and associated apportionment factors of any persons that are not included in a filed combined report but are members of the unitary business, to properly reflect the apportionment of income of the entire unitary business.

Flowthrough Entities

• Alabama
The DOR ruled30 that a limited liability company (LLC) treated as a partnership and owned by individuals or entities in a multitiered partnership structure can file one Alabama aggregate composite return on behalf of all its nonresident owners, including corporations and flowthrough entities as well as upper-tier owner individuals and entities.

• California
The FTB explained31 that regardless of where an LLC’s trade or business is primarily conducted, it is considered to be doing business in California if any of its members, managers, or other agents conduct business in California on behalf of the LLC.

The FTB also explained32 that for California purposes, a series (division) within a Delaware Series LLC will be considered a separate business entity if (1) the holders of interests in that series are limited to the assets of that series upon redemption, liquidation, or termination and may share in the income of only that series; and (2) under state law, the payment of the expenses, charges, and liabilities of that series is limited to assets of that series. Each series that is a separate business entity and registered or doing business in California must file its own California tax return and pay the annual tax; it may also be subject to a fee based on total annual income.

In another development, AB 198, Laws 2007, provides that for tax years beginning after 2006, the LLC fee will be based on income sourced to California, and, if the fee related to years before 2007 is finally adjudged as discriminatory or unfairly apportioned, the fee of a disfavored tax-payer will be recomputed only to the extent necessary to remedy the discrimination or unfair apportionment not otherwise relieved by existing law.

In a case involving a corporate member, the SBE held33 that a corporation that sold its interest in an LLC must include its proportionate share of the LLC’s apportionment factors in its combined report, even though the LLC’s tax year end did not occur on the sale date, because state regulation requires such inclusion for LLCs treated as partnerships for federal income tax purposes and provides at least two options to determine the LLC’s apportionment factors, including interim closing of the partnership’s books or proration.

• District of Columbia
The U.S. Supreme Court denied review of whether the District’s unincorporated business (UB) tax was validly levied upon the nonresident members of real estate partnerships conducting business within the District to the extent that it imposed a tax on the net income distributed directly to the nonresident individuals. During 2006, the District of Columbia Court of Appeals held34 that the UB tax could be imposed on four real estate partnerships conducting business within the District, of which four non-residents were members.

• Indiana
Effective January 1, 2008, SB 500, Laws 2007, requires all partnerships and S corporations to file a composite tax return on behalf of all nonresident individual partners, regardless of whether the nonresident individual partner has other Indiana source income.

Ruling in favor of the taxpayer, the DOR agreed35 that a multistate taxpayer filing a combined state adjusted gross income tax return must include income from its four unitary partnerships in its sales factor denominator. The taxpayer was also allowed to eliminate intercompany sales from its sales factor.

• Illinois
SB 1544, Laws 2007, requires some flowthrough entities to withhold on the distributable income of nonresident owners. However, SB 783, Laws 2007, permits nonresident owners to file a certificate to exempt a flow-through entity from the withholding requirement, if the owners agree to file all required returns and timely pay taxes and to be subject to personal jurisdiction in Illinois.

In another development, the DOR issued a publication explaining the tax obligations involved in dealing with distributions from partnerships and S corporations.36

• Louisiana
Amended Rule 61.1.1401 changes partnership withholding requirements to prevent a partner that is a partnership itself from being included on a composite return. Such partners must separately file state returns and report all Louisiana source income, including income from the partnership, in their separate returns.

• Maine
Amended Rule No. 805 (18-125 ME Code R. 805) establishes procedures for filing state composite income tax returns by partnerships, estates, trusts, and S corporations on behalf of partners, beneficiaries, or shareholders. Generally, a tiered partnership may file a single composite return on behalf of the nonresident partners of a tiered partnership group if each partnership and nonresident partner or shareholder is otherwise eligible to participate in the filing of a composite return.

• Massachusetts
The Appellate Tax Board ruled37 that an out-of-state taxpayer’s distributive share of income from a Massachusetts limited partnership was subject to apportionment rather than 100% allocable to Massachusetts.

• Missouri
The DOR ruled38 that an LLC treated as a partnership for federal income tax purposes that became owned by a multitiered partnership structure could file a state composite return on behalf of its nonresident partner individuals, partnerships, S corporations, C corporations, estates, and trusts, as long as these nonresident and upper-tier partners were not otherwise required to file a Missouri state income tax return. To the extent any such partners are required to file a Missouri state income tax return in their own right, they must do so and must be excluded from the LLC’s composite return.

• New Jersey
Amended regulations clarify39 that the general statutory requirement for a foreign corporation that does business in the state to obtain a certificate of authority and file an annual report with the Division of Revenue is separate from, and independent of, the requirement for such taxpayers to file a state tax return or pay a tax to New Jersey. The amendments also set out the procedure for obtaining New Jersey S corporation status for a foreign corporation that is not required to obtain a certificate of authority to transact business within the state but that is subject to the state corporation business tax.

• New York
The New York Department of Taxation and Finance explained40 the revised regulations relating to the computation of the Article 9-A tax for corporate partners effective for tax years beginning after 2006.

In another development, the New York Department of Taxation and Finance explained41 that due to an expiring state tax law, for tax years beginning after December 31, 2006, single-member LLCs that are disregarded entities for federal income tax purposes no longer have to file the annual state fee payment form (Form IT-204-LL, Limited Liability Company/Limited Liability Partnership Filing Fee Payment Form) or pay the $100 filing fee.

• New York City
A city tribunal affirmed42 that a corporation must look through a partnership to value its share of a partnership’s assets (aggregate approach) rather than to its investment in the partnership interest (entity approach).

• North Carolina
In Final Decision No. 2007-28 (9/14/07), the DOR ruled that an out-of-state holding company that invests in various partnerships that lease automobiles and other equipment was required to include its pro-rata share of an in-state LLC’s apportionment data in its North Carolina corporate income tax apportionment calculation because the income from its investment in the LLC (which was treated as a partnership for federal tax purposes) constituted apportionable business income subject to the state’s corporate income tax.

• Tennessee
Responding to the Tennessee Court of Appeals decision in Hilloak Realty Co.,43 which held that a limited partnership could add back certain unused federal depreciation in calculating its gain on the sale of real property, SB 2223, Laws 2007, eliminated certain adjustments to a taxpayer’s basis in depreciable property for state excise tax purposes.

• Texas
For purposes of computing its margin tax, a lower-tier entity in a tiered partnership arrangement may exclude from total revenue any revenue reported to an upper-tier entity that is subject to the margin tax.44

• Virginia
SB 1238, Laws 2007, requires passthrough entities to withhold and remit to the tax commissioner an amount equal to 5% of the allocable Virginia taxable income of all nonresident owners. The DOT provided guidance explaining the new law.45

• Wisconsin
The DOR explained46 that beginning with tax year 2006, estates and trusts (including grantor trusts) are no longer eligible to participate in composite returns.

In another development, 2007 Act 20 provides that retroactive to tax years beginning after 2005, a nonresident’s share of distributable income from a passthrough entity is not subject to withholding if the nonresident files an affidavit with the DOR agreeing to file a Wisconsin income tax return.

Administration

• Arizona
For the purpose of adjusting Arizona gross income due to changes in federal taxable income, SB 1233, Laws 2007, defines “final determination” as the point at which both parties have exhausted their appeal rights relative to the tax year in question and stipulates that a partial agreement, closing agreements, jeopardy, or advance payment assessment are part of the final determination and must be submitted to the DOR.

• Arkansas
HB 1484, Laws 2007, extends to 90 days the period within which a taxpayer must report changes in federal taxable income (prior law required taxpayers to report within 30 days).

In another development, the Arkansas Supreme Court held47 that redacted legal opinions can be disclosed in response to a Freedom of Information Act request.

• California
The FTB explained48 how taxpayers should file protective refund claims relating to pending court cases challenging a state law preventing filing refund claims to contest an amnesty penalty (on other than computational errors).

In another development, SB 788, Laws 2007, permits the FTB to conduct audits of annual water’s-edge returns on a discretionary basis. Prior law required the FTB to examine the annual filings of taxpayers that made water’s-edge elections for any potential noncompliance and, if noncompliance was found, to conduct a detailed examination of those filings, regardless of the net revenue benefit to the state.

• Kentucky
HB 316, Laws 2007, withdraws the state’s consent to suit in matters related to changing the filing method from single to unitary relating to tax years ending prior to December 31, 1995, made by amended return or other method after December 22, 1994 (which is the date of the GTE 49 decision), and to prohibit the withdrawal of money from the state treasury to pay any such refunds.

• Maryland
The Maryland Court of Special Ap-peals affirmed50 that a closing agreement between a taxpayer and the IRS, providing that a portion of income was exempt from federal tax, was binding on the comptroller for Maryland tax purposes.

• Michigan
The Michigan Court of Appeals held51 that the Department of Treasury is not limited to issuing only one assessment to a taxpayer for the same tax period when the taxpayer fails to file the requisite returns.

• North Carolina
SB 242, Laws 2007, revamped the appeals process for resolving tax disputes and made procedural changes to how taxpayers may request use of an alternative apportionment method for corporate income tax purposes.

• Oklahoma
The Oklahoma Attorney General found52 that (1) the Oklahoma Tax Commission has the authority to analyze a corporation’s structure to determine whether the taxable income reported (and thus the amount of Oklahoma corporate income tax owed) by a corporation is accurate and proper; (2) the commission has the authority to make adjustments between two or more taxpayers owned or controlled directly or indirectly by the same interests when it “reasonably determines such allocation is necessary to prevent evasion of taxes or to clearly reflect income of the organizations, trades or businesses”; and (3) what constitutes a proper adjustment by the commission is a question of fact and cannot be answered by an Attorney General Opinion.

• Pennsylvania
Beginning January 1, 2008, the corporation tax settlement process was replaced with an assessment and reassessment process. Thus, Pennsylvania corporate tax returns will now be treated like other Pennsylvania tax returns and like corporate returns in other states.53

• South Carolina
The DOR explained54 that its voluntary compliance program applies to taxpayers that have nexus but are not registered to collect or remit applicable taxes due. The program generally requires a three-year lookback and interest; however, most penalties are waived.

• Texas
The administrative law judges overseeing tax disputes were removed from the Texas Comptroller’s Office and moved into the State Office of Administrative Hearings.55

In addition to issuing rules to implement the state’s new margin tax, the comptroller provided guidance for entities that begin doing business and/or go out of business during the 2007 accounting period56 and explained that eligible taxpayers may take a temporary credit on their margin tax return for business loss carryforwards created on the 2003 and subsequent franchise tax reports that were not exhausted on a report due before 2008.57

Caution: Taxpayers must preserve their right to take this credit on or before May 15, 2008.

Tax Shelters

• New York
The New York Department of Taxation and Finance explained58 an alternative method for members of a federal consolidated return that have to file state income tax returns with federal tax shelter disclosure statements attached to fulfill their requirement and discussed59 amendments to procedural regulations relating to New York reportable transactions.

In another development, AB 4310C, Laws 2007, extended the existing tax shelter reporting, penalty, and disclosure rules for two years through June 30, 2009. The New York Department of Taxation and Finance explained this law change in TSB-M-07(7)C (6/28/07).

• Oregon
SB 39, Laws 2007, requires taxpayers to disclose their participation in reportable transactions60 and provides for a 60% listed transaction understatement penalty and an extended nine-year statute of limitations for deficiencies relating to listed transactions.

• Utah
The STC adopted rules R865-6F-37 and R865-9I-53, providing guidance on how reportable transactions should be disclosed by taxpayers and material advisers.

• Virginia
HB 2920, Laws 2007, extends the statute of limitation from three to six years if a taxpayer knowingly fails to disclose on his or her state income tax return a transaction identified by the tax commissioner as an abusive tax avoidance transaction and requires the commissioner to publish a list of such transactions.

• West Virginia
HB 2989, Laws 2007, provides that for an obligation to exist for “material advisor” disclosure or list maintenance after January 1, 2007, there no longer has to be a showing that the adviser made (or caused another to make) a false or fraudulent statement.

• Wisconsin
SB 40, Laws 2007, requires taxpayers to disclose their participation in federal reportable transactions; creates “material advisor” disclosure and list maintenance requirements and related penalties; imposes penalties on persons promoting abusive tax shelters; imposes related penalties for nondisclosure; and includes a voluntary compliance program that runs from January 1, 2008, to May 31, 2008, applicable to qualified taxpayers who participated in tax avoidance transactions.

Other Significant Developments

• Maine
Ch. 240 (LD 499), Laws 2007, subjects certain captive insurance companies to the state corporate income tax (rather than the premiums tax).

• Maryland
Ch. 3 (SB 2), Laws 2007, increased the corporate income tax rate from 7% to 8.25% for all tax years beginning after December 31, 2007.

• Michigan
SB 94, Laws 2007, replaced the Single Business Tax with the Michigan Business Tax (MBT). Details on the new tax can be found in the December 2007 issue of The Tax Adviser.61 Subsequent legislation, HB 5104, Laws 2007, amended the MBT to provide for a new deduction beginning in the 2015 tax year that is intended to offset the financial statement expense associated with establishing deferred tax liabilities resulting from the FAS 109, Accounting for Income Taxes, income tax treatment of the MBT.

• New York
For tax years beginning after 2006, AB 4310C, Laws 2007, reduced the Article 9-A and Article 32 corporate tax rates from 7.5% to 7.1% and the Article 9-A minimum tax rate from 2.5% to 1.5%. The corporate tax rate of “qualified New York manufacturers” was reduced to 6.5%.

In another development, the New York Tax Appeals Tribunal agreed62 with the taxpayer that the loss on the sale of a subsidiary was attributable to a reduction in business capital rather than subsidiary capital from an investment in a subsidiary.

• Oregon
HB 2707c, Laws 2007, suspended the corporate kicker credit for 2007.

• Texas
HB 3928, Laws 2007, reduced the ownership percentage for inclusion in the unitary return from 80% or more to greater than 50%; expanded the definition of “lending institution”; provided that for apportionment purposes, if a loan or security is treated as inventory for federal tax purposes, the gross proceeds of the sales are considered gross receipts; required the preparation of a Finnigan report; and provided that a new taxable entity ceasing to do business in Texas during the period July 1, 2007–December 31, 2007, must file a final report and pay margin tax for the portion of the 2007 calendar year that it was doing business.

• West Virginia
For tax years beginning after 2006, SB 2005, Laws 2007, reduced the corporate tax rate from 9% to 8.75%. SB 2004, Laws 2007, reduced the business franchise tax rate from 0.7% to 0.55%.

For more information about this article, contact Ms. Boucher at kboucher@deloitte.com.


Notes

Authors’ note: This article is written in general terms and is not intended to be a substitute for specific advice regarding tax, legal, accounting, investment planning, or other matters. While all reasonable care has been taken in the preparation of this outline, Deloitte Tax LLP accepts no responsibility for any errors it may contain, whether caused by negligence or otherwise, or for any losses, however caused, sustained by any person or entity that relies on it.

1 AZ DOR, Corp. Tax Rul. CTR 07-1 (4/3/07).

2 General Motors Corp. v. California Franchise Tax Bd., B165665, 2007 Cal. App. Unpub. LEXIS 669 (Cal. Ct. App. 1/29/07).

3 Microsoft Corp. v. California Franchise Tax Bd., 39 Cal4th 750 (Cal. 2006).

4 Square D Co. v. California Franchise Tax Bd.,CGC 05-442465 (Cal. Super. Ct., San Francisco Co. 4/11/07).

5 The Limited Stores, Inc. v. California Franchise Tax Bd.,152 CalApp4th 1491 (Cal. Ct. App. 6/8/07).

6 General Mills, Inc. v. California Franchise Tax Bd.,No. 439929(Cal. Super. Ct., San Francisco Co. 9/26/07).

7 California Franchise Tax Board, Tax News (December 2007).

8 General Motors Corp. v. California Franchise Tax Bd.,39 Cal4th 773 (Cal. 2006).

9 Microsoft Corp. v. California Franchise Tax Bd.,39 Cal4th 750 (Cal. 2006).

10 KS DOR Final Written Determination, WFD-P-2007-1 (1/8/07).

11 Appeal of Alaska Airlines, Inc., Cal. SBE Letter Decision No. 342596 (3/1/07).

12 Appeal of Finnigan Corp., 88-SBE-022 (8/25/88). The Finnigan rule says that in computing the numerator of the sales factor, P.L. 86-272 must be applied on a unitary-business-group basis.

13 CA FTB Chief Counsel Rul. No. 2007-2 (6/4/07).

14 ID State Tax Comm’n Rulings Nos. 18719 and 19549 (4/20/07).

15 Welch Packaging Group Inc. v. Department, Cause No. 49T10-0503-TA-21 (Ind. T.C. 11/13/07).

16 Fluor Enters., Inc. v. Department, 730 NW2d 722 (Mich. 2007).

17 In re Disney Enters., Inc., 830 NYS2d 614 (N.Y. App. Div. 2007).

18 U.S. Bancorp v. Department, 2007 Ore. Tax LEXIS 41 (Or. T.C. 3/13/07).

19 FedEx Ground Package Sys., Inc. v. Commonwealth, 922 A2d 978 (Pa. Commw. Ct. 2007).

20 Rules 34 TX Admin. Code §3.549(e)(5), (e)(38) and 34 TX Admin. Code §3.557(e)(5), (e)(33)(D).

21 Comptroller v. Home Interiors & Gifts, Inc., motion for rehearing denied, Dkt. No. 05-0939 (Tex. 6/1/07); Home Interiors & Gifts, Inc. v. Comptroller,175 SW3d 856 (Tex. Ct. App. 2005).

22 RR Donnelley and Sons Co. v. Department, No. TX 2005-050288 (Ariz. T.C. 6/29/07).

23 IN DOR, Ltr. of Finding No. 05-0500 (11/29/06).

24 IN DOR, Ltr. of Finding No. 05-0519 (11/16/06).

25 In re The Talbots, Inc., DTA No. 820168 (N.Y. Div. of Tax App., Admin. Law Div. 3/22/07).

26 In re Hallmark Mktg. Corp.,DTA No. 819956(N.Y. Tax App. Trib. 7/19/07).

27 In re Premier Nat’l Bancorp, Inc., DTA No. 819746 (N.Y. Tax App. Trib. 8/2/07).

28 Wal-Mart East Stores, Inc. v. Hinton,06-CVS-3928 (N.C. Super. Ct., 12/31/07).

29 VA Pub. Doc. No. 07-174 (11/14/07).

30 AL DOR, Rev. Rul. No. 07-001 (10/15/07).

31 CA FTB Publication 3556, Tax Information for LLCs (rev. March 2007).

32 CA FTB Publication 689, Don’t Gamble with Your Taxes: Incorporating in Nevada (rev. February 2007).

33 Appeal of Eli Lilly & Co., CA SBE Summary Decision No. 330522 (2/1/07).

34 Bender v. District of Columbia, 906 A2d 277 (D.C. 2006), cert. denied, S. Ct. Dkt. 06-719 (U.S. 2/20/07).

35 IN DOR, Supplemental Ltr. of Finding No. 02-0518 (11/1/06).

36 IL DOR, Publication 129, Pass-Through Entity Income (January 2007).

37 Sasol N. Am. v. Commissioner,Dkt. No. C273084 (Mass. App. Tax Bd. 9/5/07).

38 MO DOR, Ltr. Ruling No. LR 4110 (10/1/07).

39 NJ Admin. Code §§18:7–20.1 and 20.2 (2007).

40 NYS Dep’t of Tax’n and Fin., TSB-M-07(2)C, (1)I [Amendments to the Business Corporation Franchise Tax Regulations Relating to the Taxation of Corporate Partners] (1/17/07).

41 NYS Dep’t of Tax’n and Fin., Important Notice N-07-23 (November 2007).

42 In re National Bulk Carriers, Inc.,TAT (E) 04-33 (GC) (N.Y.C. Tax App. Trib. 11/30/07).

43 Hilloak Realty Co. v. Commissioner, No. E2006-00213-COA-R3-CV (Tenn. Ct. App. 3/29/07).

44 TX Comptroller, Tax Policy News (December 2007).

45 VA Pub. Doc. No. 07-150 (9/21/07).

46 WI DOR, News: New Requirements for Composite Returns (2/20/07).

47 Ryan & Co. AR, Inc. v. Weiss,No. 06-1266 (Ark. 9/27/07).

48 CA FTB Public Service Bulletin, Protective Claims—Amnesty Penalty (5/22/07).

49 GTE v. Revenue Cabinet,889 SW2d 788 (Ky. 1994).

50 Comptroller v. Colonial Farm Credit, ACA,918 A2d 514 (Md. Ct. Spec. App. 2007).

51 Tyson Foods, Inc. v. Department, No. 272929 (Mich. Ct. App. 9/20/07).

52 OK Office of the Attorney General, Opinion No. 07-25 (8/28/07).

53 2006 Act 119 (SB 993).

54 SC DOR, Rev. Proc. No. 07-1 (12/14/07).

55 www.window.state.tx.us/taxinfo/taxprocess/.

56 TX Comptroller, Tax Policy News (August 2007).

57 TX Comptroller, Tax Policy News (September 2007).

58 NYS Dep’t of Tax’n and Fin., TSB-M-07(1)C [Additional Supplement to the Disclosure of Certain Transactions and Related Information Regarding Tax Shelters] (1/11/07).

59 NYS Dep’t of Tax’n and Fin., TSB-M-07(4)C and (4)I [Amendments to the Procedural Regulations Relating to New York Reportable Transactions] (3/8/07).

60 Such disclosure was contingent on the DOR adopting enabling rules, which it adopted under OAR 150-314.308.

61 Wright, “Michigan Business Tax: Overview and Issues to Consider,” 38 The Tax Adviser (December 2007): 750.

62 In re Bausch & Lomb, Inc., DTA No. 819883 (N.Y. Tax App. Trib. 12/20/07).

 

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