Current Corporate Income Tax Developments (Part II)

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


  • California passed legislation that will allow businesses, other than financial and agricultural corporations, to elect to use a single sales factor apportionment formula beginning in 2011

  • New York and California passed legislation that accelerates the payment of estimated taxes for certain taxpayers.

  • Alabama passed legislation generally requiring passthrough entities to file composite returns and make composite payments on behalf of their nonresident owners. Utah modified its withholding requirements to provide that a passthrough entity must pay or withhold a tax on behalf of a resident or nonresident business entity or a nonresident individual.

  • Connecticut imposed a new 10% surcharge on certain corporate taxpayers for three years beginning in 2009, North Carolina imposed a 3% corporate surtax for 2009 and 2010, and New Jersey extended its 4% corporate tax surcharge until tax years ending before July 1, 2010.

During 2009, 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were decided; regulations were proposed, issued, and modified; and bulletins and rulings were issued, released, and withdrawn.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 issue, focused on nexus, tax base, allocable/apportionable income, and Sec. 338(h)(10) transactions. This part covers some of the more important developments in apportionment, unitary groups/filing methods, administration, flowthrough entities, and other significant corporate state tax issues.


A multistate corporation apportions its business income among the states using an apportionment percentage for each state having jurisdiction to tax the corporation. To determine the apportionment percentage, the corporation computes a ratio 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 with 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. States may also use changes in the apportionment formula 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.


An Arizona court of appeals held that use of costs of performance is the proper sourcing mechanism for sales of mortgage loans and servicing rights and that net gains on such sales must be included in the denominator of the sales factor.1


SB X3 15, Laws 2009, includes the following apportionment changes starting in 2011: (1) businesses (other than financial and agricultural corporations) will be allowed to elect a single sales factor apportionment formula; (2) market sourcing will be adopted for sales other than sales of tangible personal property; (3) treasury receipts and certain other receipts will be excluded from the sales factor; and (4) the Finnigan approach will be adopted so that sales of tangible personal property to California are included in the numerator of the sales factor if any member of the combined group has nexus in California (with a corresponding effect on the throwback rule).2

In a judicial development, a California Court of Appeal held that the buying and selling of futures commodities created sales income under the general Uniform Division of Income for Tax Purposes Act provisions because it was an integral part of the company’s business activity; therefore, the income constituted gross receipts for sales factor apportionment purposes.3 However, the court remanded the case back to the trial court to determine whether the California Franchise Tax Board (FTB) had met its burden of proof regarding whether it was distortive to include the hedging receipts in the sales factor at the gross amount.


For years beginning after 2008, HB 1311, Laws 2009, provides that sales made by a mutual fund service corporation providing management, distribution, and administrative services for a regulated investment company (RIC) are included in the numerator of the sales factor to the extent that the shareholders of the RIC are domiciled in Colorado. In light of this law change, the Department of Revenue (DOR) proposed new regulations Sections 39-22-303.7.1 and 7.2 to provide definitions and calculation information about the sourcing of sales of mutual fund service corporations.


The State Tax Commission (STC) adopted Rule 550, addressing the sourcing of income from intangible property and implementing the Multistate Tax Commission’s (MTC) rule requiring the inclusion of personal services performed by unrelated third parties acting on behalf of the taxpayer in computing income-producing activity and costs of performance for certain sales of other than tangible personal property.


Effective July 1, 2009, HB 2270, Laws 2009, relaxes a timing requirement for manufacturers seeking to qualify for the use of a single sales factor apportionment formula by extending the deadline for hiring 100 new employees at their new instate facilities by up to six months upon a showing of good cause and after receiving state certification of substantial compliance. The original 2007 legislation had allowed single sales factor apportionment at certain new in-state manufacturing facilities that hired at least 100 new employees by December 31, 2009.


For tax years beginning after 2008, the corporate sales apportionment factor must now exclude from both the numerator and the denominator sales of tangible personal property that are delivered to a state where the taxpayer is not taxable.4


The Michigan Tax Tribunal granted summary judgment in favor of an employment management company, holding that the company’s receipts from the sales of employment services must be sourced according to the particular leasing agreement contracts, rather than based on a particular employee’s wages, under the former single business tax (SBT).5

In another development, the Michigan Court of Appeals held that an in-state limited liability partnership that provided legal services to clients within and outside Michigan was entitled to source its income under the former SBT both inside and outside Michigan, as each 15-minute increment of legal service work provided to its clients constituted a separate unique business activity that must be apportioned to the state in which the activity was performed.6

In two separate cases addressing the former SBT, the Michigan Court of Appeals ruled in favor of the state and held that interest income from loans secured by real property located in Michigan and unsecured loans provided to Michigan customers must be sourced to Michigan even though the interest payments were not received in Michigan.7


The DOR ruled that a national marketer/processor of prepaid debit cards and related services that is subject to the corporate income tax has a choice of apportioning its revenue streams under either the single sales factor or the three-factor apportionment method.8 The DOR also set forth how the company’s sales would be sourced under both methods.

New Mexico

HB 75, Laws 2009, extends the use of the double-weighted sales factor formula for qualified manufacturers from its original expiration date after 2010 to expiration by 2020.

New York

For purposes of the business allocation percentage under Article 9-A, fees for arranging for the provision of a medical service to be rendered by a third-party physician are sourced to New York if the medical service is performed in New York.9 In addition, monthly fees for website advertising services must be sourced to New York based on the ratio of persons who view the ads in New York to the number of persons who view the ads everywhere. If the company does not have any way of knowing where a prospective customer is when he or she views or reads an advertisement on the website, it may use some reasonable method to estimate the ratio, subject to the DOR’s approval.

New York City

A8867, Laws 2009, conforms to the state rules for customer-based sourcing for registered broker-dealers and, over a 10-year period, phases in a single sales factor apportionment formula for the general corporation and the unincorporated business taxes. As under state law, a partial single sales factor phase-in also applies under the bank tax for corporations whose income is substantially derived from providing certain services to mutual funds. In addition, the existing law permitting manufacturers to elect a double-weighted sales factor will no longer be available for tax years beginning after 2010.

North Carolina

For tax years beginning after 2009, SB 575, Laws 2009, offers current or expanding capital-intensive companies that meet certain in-state investment and quality jobs criteria the option to use single sales factor apportionment (as opposed to the standard three-factor, double-weighted sales formula).


SB 182, Laws 2009, modifies the definition of financial corporation starting with the 2009 tax year and, for the traditional listed financial institutions other than subsidiaries of such institutions, for all open tax years for appeal/audit/adjustment or refund. Financial corporations apply special industry apportionment provisions in determining their income apportionable to Oregon.


HB 1531, Laws 2009, increases the weighting of the sales factor to 83% for 2009 (previously 70%); after 2009, the sales factor weighting will be 90%.

South Carolina

The DOR issued guidance regarding statutory provisions enacted in 2006 that began to phase in single sales factor apportionment for certain in-state manufacturers for tax years beginning after 2006.10


A Tennessee court of appeals reversed a chancery court decision to hold that the DOR’s variance from the greater costs of performance sourcing method to a market-sourcing method in connection with the sale of advertising by a telephone directory publisher was appropriate.11 Under the standard costs of performance method, a significant amount of the publisher’s revenue was received from the sale of advertisements in Tennessee but was not sourced to Tennessee.


Texas Tax Code Section 171.106(f) provides that if a loan or security is treated as inventory of the seller for federal income tax purposes, the gross proceeds of the sale of that loan or security are considered gross receipts. Effective January 1, 2010, HB 4611, Laws 2009, adds Section 171.106(f)(1), which provides that if a lending institution categorizes a loan or security as securities available for sale or trading securities under Financial Accounting Standards (FAS) No. 115, Ac counting for Certain Investments in Debt and Equity Securities, the gross proceeds of the sale of that loan or security are considered gross receipts.


Phased in over a four-year period starting for tax years that begin on or after July 1, 2011, HB 2437, Laws 2009, provides a single sales factor apportionment election for defined manufacturing companies. The department of taxation (DOT) subsequently may impose additional tax and related penalties and interest on a company using the new apportionment methodology if that company fails to meet certain average annual full-time employee requirements.


The sales factor provisions related to certain intangible property were amended to include three sourcing methods based on the place in which the property is used by the purchaser or licensee, the place in which the purchaser has commercial domicile, and the place at which the purchaser or licensee is billed.12

Subsequent legislation increased the percentage of throwback sales for tangible personal property from 50% to 100% and eliminated throwback for receipts from services, the use of computer software, and the sale, use, or license of intangible property.13

Unitary Groups/Filing Methods


The Colorado Court of Appeals reversed a trial court’s decision to hold that an affiliated group did not make a timely and valid election to file its corporate income tax return under the combined-consolidated filing method, because the group had sufficient notice of Colorado’s combined-consolidated filing option requirements through existing statutes and regulations and yet made the election beyond the regularly established amended return filing deadline.14


HB 6802, Laws 2009, doubles the preference cap for filing a combined return to $500,000.

District of Columbia

Permanent legislation, which was signed by the mayor during 2009 and became effective during March 2010, includes a mandate for the District of Columbia Council to pass legislation that would implement a combined reporting tax regime for all corporations taxable in the District of Columbia for tax periods beginning after December 31, 2010.15


HB 3, Laws 2009, provides that a state water’s-edge election will be deemed to have been filed for each corporation within a state combined filing group upon the filing of a valid water’s-edge election by any qualified taxpayer of the group. During the period a water’s-edge election is in effect, if another corporation subject to Idaho corporate income tax becomes a part of the combined group, that corporation is deemed to have made a valid water’s-edge election.


The DOR held that a combined unitary group of financial institutions was required to use the state auditor’s alternative apportionment methodology for the losses attributable to the bank holding company to equitably reflect its Indiana source income for purposes of the financial institution tax (FIT).16 In lieu of allowing the bank holding company’s losses to offset the two profitable banks’ incomes in computing the nexus combined FIT for the group, the auditor required the loss to be apportioned based on the ratio of fees received from Indiana sources to total fees, and only the apportioned loss was permitted to offset the incomes of the profitable Indiana banks.


The Kentucky Supreme Court reversed a Kentucky Court of Appeals decision and held that legislation enacted in 2000, which retroactively prohibited granting refund claims based on unitary return filings for years prior to 1996, was constitutionally valid and did not violate the taxpayers’ due process rights.17


The DOR promulgated in final form 830 MA Code Regs. 63.32B.2, which provides additional detail regarding the new Massachusetts combined reporting regime.

New York

A157-B, Laws 2009, generally provides that an overcapitalized captive insurance company must be included in a combined return with its controlling shareholder if that shareholder is subject to tax in New York or is part of a New York combined group. Otherwise, it must be included in a combined report with its closest controlling shareholder, which is the closest corporation in the chain of ownership that either is a New York taxpayer or is included in a New York combined group.

New York City

A8867, Laws 2009, conforms to the state provisions that require combined reporting for captive RICs and real estate investment trusts (REITs) and when there are substantial intercorporate transactions among related corporations.


For tax years beginning after 2009, certain RICs and REITs that are excluded from an affiliated group’s federal consolidated income tax return must be included in the Oregon consolidated income tax return.18

In another development, the DOR adopted amendments to OAR 150317.705(3)(a) to adopt certain provisions of an MTC uniform regulation defining the criteria for determining whether corporations constitute a unitary business for Oregon tax purposes.

South Carolina

Granting the taxpayers’ motion for summary judgment, an administrative law judge (ALJ) held that statutory authority providing for the use of any other method to effectuate an equitable allocation and apportionment of a taxpayer’s income authorizes the DOR to permit taxpayers to use a combined entity unitary apportionment method when it is reasonable and more fairly represents the extent of the taxpayer’s business activities in South Carolina.19


For tax years beginning after 2008, unitary business groups must compute their tax using combined reporting (applying the Finnigan approach).20 In light of this new law, the DOR issued Emergency Rules Tax 2.60–2.67 to implement Wisconsin’s mandatory combined reporting.

Later in the year, AB 75, Laws 2009, amended the law to: (1) allow a taxpayer to elect to include in its state combined group every corporation in its commonly controlled group, regardless of whether the corporations are engaged in the same unitary business as the taxpayer; and (2) permit corporations in a combined group to apply certain unused tax credits or carryforward credits to other entities in the group on a proportionate basis, to the extent the liability is attributable to that same unitary business, for tax years beginning after 2008.

Forced Combinations and Structures Ignored/Disregarded


The Arizona Tax Court granted summary judgment in favor of the DOR holding that the DOR could require the filing of a combined return with an affiliate trademark holding company because “the core function of a seller of goods and services is indivisible from the core function of the formal owner of the trademarks associated with those goods and services: neither core function can be achieved in the absence of the other.”21


The Minnesota Tax Court held that a bank’s structure that included a REIT owned by a foreign operating holding company had no real business purpose or economic substance and, when viewed as a whole, was created only to avoid taxes and thus should be ignored.22

New York

The New York Tax Appeals Tribunal remanded for further fact-finding a previous ALJ ruling that a company that used two wholly owned nontaxpayer subsidiaries to operate as an accounts receivable factoring company and a management company (performing payroll, accounts payable, and accounts receivable functions), respectively, was required to file a combined return with the two out-of-state subsidiaries for Article 9-A corporation franchise tax purposes.23

North Carolina

The North Carolina Court of Appeals affirmed that a large retail merchant was required to file its North Carolina corporate income tax return on a combined basis because its use of a complex strategy involving REITs served to distort its true net income earned in North Carolina.24 In a case of first impression, the court explained that the DOR has valid authority to combine the returns of a taxpayer and its related businesses if the taxpayer’s return does not disclose the “true earnings” from its North Carolina business activity.


In an effort to bridge budget gaps, a number of states enacted amnesty programs, special settlements, and/or resolution programs during 2009.25


HB 1549, Laws 2009, clarifies the time limitations and issues involved in assessments and refunds after a taxpayer receives a federal correction of income. Generally, if there is any additional state tax due resulting from an IRS adjustment, the additional state income tax resulting from the issues included in the adjustment must be assessed by the director within one year of the filing of the taxpayer’s amended Arkansas income tax return. If the IRS adjustment results in an overpayment of state income tax, the taxpayer may receive a refund of the overpaid income tax if it files an amended return within 90 days of receiving the IRS notice.


SB X1 28, Laws 2008, established a new 20% corporate penalty on an underpayment of tax in excess of $1 million, in addition to all other potentially applicable penalties. The penalty applies to open tax years beginning after 2002, and taxpayers were allowed to eliminate or reduce the penalty for any tax year beginning before 2008 by filing an amended return and paying the applicable tax on or before May 31, 2009. During 2009, the FTB provided guidance on this new penalty in the form of frequently asked questions. In a taxpayer legal challenge to the new penalty, the Superior Court for Sacramento County held that the 20% penalty is constitutional and enforceable on its face.26

Legislation enacted during 2009 requires accelerated payments of estimated tax as follows: (1) a first installment equal to 30% of estimated tax liability; (2) a second installment equal to 40% of estimated tax liability; (3) no third installment payment required; and (4) a fourth installment equal to 30% of estimated tax liability.27

In an administrative judicial development, the California State Board of Equalization (SBE) held that a taxpayer was not entitled to a $490 million increase in adjusted tax basis because a series of intercompany business transactions that occurred from the time between its initial negotiations and final sale of one of its subsidiaries to a third party violated California’s anti-abuse statute and also had to be ignored for tax purposes in accordance with the step-transaction, economic substance, and substance over form doctrines.28


HB 1093, Laws 2009, requires taxpayers to disclose their participation in certain federal and state-specific reportable and listed transactions and requires material advisers to disclose and maintain a list of reportable and listed transactions. Certain transactions involving captive REITs and RICs are considered listed transactions for Colorado purposes. Disclosure of all reportable and listed transactions is required for each period in which the taxpayer participates in such transactions and for all prior periods that were still open for assessment as of April 2, 2009. Significant penalties may apply for failing to disclose these reportable and listed transactions or maintain lists. The DOR subsequently proposed regulations Sections 39-22-652, -653, and -656 to implement this new law.


HB 1739, Laws 2009, establishes penalties for promoting abusive tax shelters; understating a taxpayer’s liability by tax return preparers; filing erroneous claims for refunds or credits; substantial understatements of tax; and the willful failure to collect, account for, and pay taxes. The new law also establishes stat-ute of limitation provisions and extension provisions for substantial omissions of tax amount information. The DOT has since issued emergency temporary rules providing guidance on the new law29 and has also issued Announcement 2009-25 (9/9/09) concerning its adoption of these new rules.


Responding to an ongoing controversy that began in 2008 with an Idaho auditor’s allegations that the STC illegally allowed large multistate corporations to pay less income tax than required by state law through misuse of compromise/closing agreements, the STC issued Temporary Rule during 2008, which defines the grounds upon which it may settle tax liabilities. Under this rule, the STC may settle the tax liability/penalties of a case if there is a disputed liability, doubt as to collectability, economic hardship of the taxpayer, and/or promotion of effective tax administration. The legislature also responded to the allegations by enacting S 1128, Laws 2009, which in cases involving $50,000 or more of tax liability requires that the final hearing be attended by at least two tax commissioners, a representative from the attorney general’s office, and certain tax commission staff members. In addition, the STC must submit an annual report to the governor and legislature summarizing all such settlements. Subsequently, the STC adopted Temporary Rule 35-0201-0902-501 implementing this new law.


In lieu of an amnesty program, HB 2365, Laws 2009, grants the Secretary of Revenue additional authority to equitably resolve certain audit-related assessments that are pending in the administrative appeals process, the Kansas Court of Tax Appeals, or the judicial review process before any state or federal district or appellate court.


The DOR explained that beginning with corporation income and franchise tax returns due after 2009, corporations needing additional time to file their Louisiana income and franchise tax returns will need to request a specific state filing extension, submit a paper copy of Form 4868, Federal Application for Automatic Extension of Time to File U.S. Income Tax Return, or request an extension via an electronic application.30

SB 268, Laws 2009, authorizes the secretary to pay private counsel reasonable attorneys’ fees and reasonable expenses, not to exceed 10% of the taxes, penalties, and interest at issue, out of current collections of the particular tax at issue in a controversy. Before this law change, taxpayers were required to pay the state’s private counsel’s attorneys’ fees (up to 10% of taxes, penalties, and interest) if the taxpayer was ultimately determined to owe a contested assessment. Additional amounts can still be imposed on taxpayers in collection actions where an assessment is final and unpaid.


The Massachusetts Supreme Judicial Court affirmed that the Massachusetts work-product doctrine protects from disclosure communications between a company’s in-house corporate counsel and outside tax accountants regarding the structuring of a stock sale mandated by an antitrust consent judgment.31

In an administrative development, the DOR explained that for financial organizations and corporations owning and using intangible property that are presumed to have nexus with the state, if a nonfiler files under Massachusetts’s voluntary disclosure program, the DOR will apply a lookback period to 2001. For such entities that do not file under the state’s voluntary disclosure program, the DOR will apply a lookback period “that is appropriate to the circumstances and will not be bound by this or any other lookback period that has been announced in any prior public written statement or form issued by the Commissioner.”32


Retroactive to tax years beginning after 2007, HB 4709, Laws 2009, clarifies that if the term “tax year” is used in reference to one or more previous or preceding tax years and the tax years referred to are before 2008, those tax years are deemed to be the same tax years during which the former SBT was in effect. Another bill passed during 2009 (SB 91, Laws 2009) revised one of the two methods that a taxpayer may use to compute its Michigan Business Tax (MBT) for the 2008 tax year or for its first tax year that is less than 12 months. The law clarifies that under the first method, the MBT may be computed as if it applied on the first day of the taxpayer’s annual accounting period, with this amount multiplied by a fraction, the numerator of which is the number of months in the taxpayer’s first tax year and the denominator of which is the number of months in the taxpayer’s annual accounting period.


SB 2712, Laws 2009, increases from 30 to 60 days the amount of time a taxpayer has to pay an assessment of additional income tax or appeal the assessment. The new law also reorganizes the State Tax Commission into a Department of Revenue, which will be responsible for administration, and an independent Board of Tax Appeals to hear administrative appeals. The DOR will have the authority to appeal decisions of the Board of Tax Appeals to the courts.


The Administrative Hearing Commission denied a tax credit refund request as untimely because even though the claim was filed within one year after the IRS finalized certain changes to the taxpayer’s federal income tax return for the previous year, the IRS changes did not change the taxpayer’s previously reported zero federal taxable income amount for the year at issue.33 Because the taxpayer had consistently stated that its federal taxable income was zero for the year at issue, there was no change or correction in reported federal taxable income that would trigger Missouri’s extended statute of limitation for refund claims filed within one year after IRS changes are finalized.

New Jersey

The Division of Taxation announced that for voluntary disclosure agreements executed after June 15, 2009 (i.e., the end date of New Jersey’s 2009 amnesty program), the general lookback period will be seven years.34

New Mexico

SB 80, Laws 2009, requires that four quarterly corporate estimated tax payments be made starting with the 2009 tax year.

New York

Effective January 1, 2010, corporations must file an amended state corporation tax return to notify the department of a change to their federal taxable income or federal alternative minimum taxable income.35 In another development, for tax years beginning after 2009, A157-B, Laws 2009, increased the mandatory first estimated tax installment from 30% to 40% for corporations whose preceding year’s tax exceeded $100,000. This legislation also made changes to the state’s voluntary disclosure and compliance (VDC) program, now permitting the department to disclose any return or report filed by a taxpayer under the VDC program to the secretary of the U.S. Treasury, his or her delegates (including the IRS), or the proper tax officer of any state or city, as otherwise permitted under state tax law.36 Prior to the amendment, the law allowed for the disclosure of returns and reports filed under the VDC program to another agency only if the taxpayer failed to comply with the terms of its VDC agreement.

New York City

A8867, Laws 2009, conforms to various changes made to the state’s provisions governing criminal tax laws and mandates that corporations receive New York City tax clearance, similar to state tax clearance, prior to their receiving a certificate of dissolution.


SB 2318, Laws 2009, authorizes the DOR to participate in the MTC joint audit program.


The DOR now has the statutory authority to redetermine a taxpayer’s taxable income if a transaction is deemed to lack economic substance. The new law also provides that transactions between members of a controlled group are presumed to lack economic substance.37 A transaction with economic substance will show that: (1) the transaction changed the taxpayer’s economic position in a meaningful way apart from the tax effect, and (2) a substantial nontax purpose exists for entering into the transaction, it is a reasonable means for accomplishing the nontax purpose, and it has substantial potential for profit aside from the tax effects.

Flowthrough Entities


For tax years beginning after 2008, HB 69, Laws 2009, requires passthrough entities (other than qualified investment partnerships) to file composite returns and make composite payments on behalf of their nonresident owners (including corporate owners).

In another development, an ALJ ruled that a taxpayer that had converted from a C corporation to an S corporation and was required to recapture LIFO deductions on its final federal C corporation return could claim an Alabama income tax deduction for the federal income tax accrued in that final year, rather than just the amount it had paid in that year.38


The FTB issued Notice 2009-04,39 announcing that it would begin processing claims for refunds of annual unapportioned limited liability company (LLC) fees for LLCs with substantially the same factual situation as that addressed in Ventas Fi nance I, LLC 40 (i.e., where the LLC earned income attributable to activities within and outside California) and providing procedures for filing such refund claims.


The Delaware Tax Appeal Board ruled that an S corporation owed personal income tax, plus related interest and underpayment penalties, for failing to report and pay the tax on behalf of its nonresident individual shareholder.41


The DOR denied S corporations’ requests to waive the 20% nonresident withholding tax penalty because the corporations failed to comply with the state’s withholding tax filing and payment requirements, even though the nonresident shareholders paid the appropriate taxes on their respective individual income tax returns.42


The DOR explained changes in the method of reporting withholding by passthrough entities. Regulation 830 MA Code Regs. 62B.2.2., which establishes withholding obligations on passthrough entities, requires passthrough entities that are not exempt to file an annual schedule characterizing their members as individuals or entities and documenting how each member is meeting its Massachusetts tax obligation (including how much tax has been withheld on behalf of each member).43 Each passthrough entity must now report the required information as part of its Schedule 2K-1, 3K-1, or SK-1 rather than on an annual schedule.


During 2009, the Michigan Court of Appeals issued four decisions involving flowthrough entities and the former SBT. In the first decision, the court affirmed that a single-member LLC’s (SMLLC) entity classification for federal income tax purposes was not determinative of whether it satisfied the definition of “person” for purposes of the SBT.44 Thus, the SMLLC could file a separate Michigan SBT return and was not required to file as a division of its owner, even though it had elected to be a disregarded entity for federal income tax purposes.

In another decision, the court similarly held that an SMLLC electing corporate classification for federal tax purposes could not be treated as a corporation when calculating a former SBT small business tax credit available only to corporations because, under state law, LLCs were not corporations.45

In a case involving the liquidation of a partnership, the court held that, for SBT purposes, a 99% corporate limited partner was entitled to its partnership’s carryover business loss deduction in a situation involving the transfer of Michigan assets from the partnership to the corporate partner for losses incurred by the partnership before it discontinued operations in Michigan.46

In a fourth decision, the court reversed a previous trial court decision to hold that an S corporation was considered a corporation for purposes of defining business income as federal taxable income under the former SBT statutes and accordingly had to include its realized gain on sold manufacturing assets in its SBT tax base.47

New Hampshire

Effective for tax years ending on or after December 31, 2009, distributions from LLCs, partnerships, and associations are subject to the interest and dividends tax to the same extent that distributions to corporate shareholders are taxable as dividends. LLCs, partnerships, and associations that under prior law were required to file and pay the interest and dividends tax will no longer be required to file returns or pay the tax.48 Subsequently, the DOR provided guidance on this new law.49

New Jersey

The Division of Taxation issued guidance addressing the computation of the per-partner fee that partnerships must pay.50 The fee generally is $150 per partner up to a maximum of $250,000. Partnerships must also pay a tax on behalf of nonresident corporate, individual, trust, and estate partners that have New Jersey allocated income.

New York

A157-B, Laws 2009, extended the partnership/LLC filing fee to all partnerships with New York source gross income of $1 million or more.

New York City

The New York Supreme Court, Appellate Division, affirmed that for purposes of the New York City general corporation tax, a corporation owning a partnership interest must look through the partnership to value its share of the partnership’s assets (aggregate approach) rather than to its investment in the partnership interest (entity approach) for purposes of computing the tax on capital.51


Effective for tax years beginning after 2008, SB 23, Laws 2009, addresses the characterization and taxation of passthrough income, gain, loss, deduction, or credit received by a taxpayer from a passthrough entity; expands the withholding requirements to provide that a passthrough entity must pay or withhold a tax on behalf of a resident or nonresident business entity or a nonresident individual; and repeals the corporate franchise and income taxes imposed on an S corporation for tax years beginning after 2012.


Passthrough entities with nonresident owners now must make quarterly estimated payments of withholding tax.52

Tax Rates


For companies with more than $100 million of gross revenues and a tax liability in excess of the $250 minimum tax, HB 6802, Laws 2009, imposes a 10% corporate surcharge for three years beginning with the 2009 tax year.

New Jersey

AB 4105, Laws 2009, extends through tax years ending before July 1, 2010, the 4% surcharge on corporation business tax liability that was originally set to expire on July 1, 2009.

New York City

A8867, Laws 2009, increased the cap on the general corporation alternative tax on business and investment capital from $350,000 to $1 million and conforms to the state provisions for the fixed dollar minimum tax.

North Carolina

SB 202, Laws 2009, imposes a surtax equal to 3% of the corporation’s income tax for tax years beginning after 2008 and before 2011.

North Dakota

SB 2199, Laws 2009, reduces the top corporate income tax rate from 6.5% to 6.4% for tax years beginning after 2008.


Effective for tax years beginning after 2008, HB 3405, Laws 2009, increases the top corporate income tax rate from 6.6% to 7.9% (on income over $250,000) and increases the minimum tax from $10 to a range of $150–$100,000 (for corporations that generate $100 million or more of Oregon sales). The top income tax rate is scheduled to be reduced to 7.6% for tax years 2011 and 2012, and for tax years after 2012 the top tax rate of 7.6% applies to net income greater than $10 million. The minimum tax is not apportionable (except for change of accounting periods) and is payable in full for any part of the year during which a corporation is subject to tax.53



The FTB reminded corporate taxpayers of their annual disclosure requirement regarding deferred intercompany stock account (DISA) transactions, explaining that completing FTB Form 3726, DISA and Capital Gain Information, satisfies this disclosure requirement.54 Such disclosure is triggered by certain distributions between members of the same unitary combined reporting group. Failure to disclose these transactions could result in additional tax liability and penalties.

In another development, the SBE concluded in a letter decision that the taxpayer was entitled to apply its enterprise zone tax credits and manufacturer’s investment credits against its corporate alternative minimum tax liability for the tax years at issue.55

In addition, during 2009 the FTB issued updated frequently asked questions on the implementation and administration of CA Rev. & Tax. Code Section 23663, pertaining to the assignment of certain credits among members of the unitary group.


For the tax year beginning January 1, 2009, the maximum corporate franchise tax is increased from $165,000 to $180,000, and the corporate franchise tax multiplier is increased from $250 to $350 for each $1 million in par value capital for taxpayers using the assumed par value method to compute their state franchise tax liability.56 Effective for the tax year beginning January 1, 2010, the minimum state franchise tax computed under the assumed par value method will be increased from $75 to $350.


The Illinois Supreme Court ruled that electricity is tangible personal property; accordingly, an electric utility company was entitled to claim the investment tax credit against its personal property replacement income tax liability for the years at issue.57 Subsequently, SB 256, Laws 2009, amended the law to specifically nullify the effect of this decision.


The Massachusetts Supreme Judicial Court affirmed that the tax-free liquidation of a subsidiary corporation by its parent manufacturer under Sec. 332 did not constitute a disposition of assets for purposes of the recapture provisions under the state’s investment tax credit.58

New Jersey

The New Jersey Tax Court held that under a 2007 regulatory amendment, the alternative minimum assessment credit under the state corporation business tax should be aggregated with other statutory credits against the corporation business tax so that the total of the credits does not exceed 50% of the corporation business tax liability.59

New York

Effective March 1, 2009, S5451/ A8180, Laws 2009, imposes a 0.34% payroll tax on certain employers and self-employed individuals engaging in business within the New York City metropolitan area. This tax must be added back in determining entire net income under the corporate franchise tax. In Technical Service Bulletins TSB-M-09(1)MCTMT (6/1/09) and TSB-M-09(1.1)MCTMT (10/6/09), the New York Department of Taxation and Finance provides guidance on this new tax.


HB 1531, Laws 2009, extends the capital stock/franchise tax phaseout date from 2011 to 2014 (the 2008 rate will apply for 2009–2011) and, for tax years beginning after 2009, increases the fixed formula deduction from the value of capital stock for state franchise tax purposes from $150,000 to $160,000.


The comptroller reminded taxpayers that beginning in January 2010, and for each even-numbered year thereafter, Texas law requires certain adjustments to the per-person compensation deduction limit under the margin tax.60 This adjustment raises the limit on the compensation deduction to $320,000 per person for reports originally due January 1, 2010, through December 31, 2011.

HB 4765, Laws 2009, increased the minimum revenue threshold for taxable entities that are required to pay state franchise tax from businesses earning more than $300,000 in total revenue to businesses earning more than $1 million in total revenue per 12-month period on which margin is based. Effective January 1, 2012, this minimum revenue threshold will then decrease, requiring payment of state franchise tax from businesses earning more than $600,000 in total revenue per 12-month period on which margin is based.


A Wisconsin county circuit court held that member deposits made to a country club corporation were not contributions to capital and were therefore taxable as gross income earned by the corporation.61

This article contains general information only and Deloitte is not, by means of this article, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This ar ticle is not a substitute for such profes sional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional adviser. Deloitte shall not be responsible for any loss sustained by any person who relies on this article.


Karen Boucher is a director with Deloitte Tax LLP in Milwaukee, WI. Shona Ponda is a senior manager with Deloitte Tax LLP in Atlanta, GA. For more information about this article, contact Ms. Boucher at


1 MDC Holdings Inc. v. Department of Rev., 216 P.3d 1208 (Ariz. Ct. App. 2009).

2 Under the Finnigan approach, 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. Appeal of Finnigan Corp., 88SBE-022 (Cal. State Bd. of Eq. 8/25/88).

3 General Mills, Inc. v. California Franchise Tax Bd., 172 Cal. App. 4th 1535 (Cal. App. 1st Dist. 2009), review denied (Cal. 7/29/09).

4 36 ME Rev. Stats. §5211, LD 353, PL 2009, c. 213, Part NN.

5 Heartland Employment Servs. LLC v. Department of Treasury, Nos. 341804 and 359201 (Mich. Tax Trib. 3/18/09).

6 Honigman Miller Schwartz and Cohn LLP v. Department of Treasury, No. 282768 (Mich. Ct. App. 7/30/09).

7 PNC Bank Nat’l Ass’n v. Department of Treasury, No. 283560 (Mich. Ct. App. 7/23/09), and Ohio Savings Bank v. Department of Treasury, No. 284656 (Mich. Ct. App. 10/13/09).

8 MO DOR Letter Ruling LR 5453 (2/13/09).

9 NY Dep’t of Tax’n & Fin. TSB-A-09(8)C (SmarTax LLC) (6/16/09).

10 SC DOR Rev. Rul. 09-15 (11/17/09).

11 BellSouth Advertising & Pub. Corp. v. Commissioner, No. M2008-01929COA-R3-CV (Tenn. Ct. App. 8/26/09). For more on this case, see p. 245.

12 2009 Wisconsin Act 2.

13 AB 75, Laws 2009.

14 Cendant Corp. v. Department of Rev., No. 08CA0103 (Colo. Ct. App. 2/5/09).

15 DC B18-0203 (Act 18-255). This bill was transmitted to the U.S. Congress for its 30-day review period on January 5, 2010, and became law on March 2, 2010. Note that this 2009 permanent legislation follows two rounds of 2009 temporary “emergency legislation” (DC B18-443 (Act 18-207) and DC B18-409 (Act 18-187)) that unsuccessfully attempted to require unitary business groups to compute their tax using combined reporting effective for tax years beginning after 2010.

16 IN DOR Letter of Finding No. 09-0158 (10/1/09).

17 Department of Rev. v. Johnson Controls, Inc., 296 S.W.3d 392 (Ky. 2009), opinion reissued on 11/25/09.

18 SB 180, Laws 2009.

19 Media General Communications, Inc. v. Department of Rev., No. 07-ALJ17-0089-CC (S.C. DOR Admin. Law Ct. 5/4/09).

20 2009 Wisconsin Act 2.

21 Home Depot USA Inc. v. Department of Rev., TX 2006-000240 (Ariz. Tax Ct. 6/25/09).

22 HMN Financial Inc. v. Commissioner of Rev., No. 7911-R (Minn. Tax Ct. 5/27/09), decision by Minnesota Supreme Court pending.

23 In re Kellwood Co., DTA No. 820915 (N.Y. Tax App. Trib. 9/24/09).

24 Wal-Mart Stores East, Inc. v. Secretary of Rev., 676 S.E.2d 634 (N.C. Ct. App. 2009).

25 A listing of the amnesty, settlement, and resolution programs enacted or held during 2009 is beyond the scope of this article. However, note that a number of states establishing these programs also enacted additional penalties for eligible taxpayers who did not participate in the program and/ or participating taxpayers who filed returns under the program with an understatement of tax (e.g., New Jersey (AB 3819, Laws 2009), Oregon (SB 880, Laws 2009), Pennsylvania (HB 1531, Laws 2009), and Virginia (SB 1120, Laws 2009)).

26 California Taxpayers’ Ass’n v. California Franchise Tax Bd., No. 34-200980000168 (Cal. Super. Ct., Sacramento County 5/20/09). The case was appealed on August 12, 2009, to the Court of Appeal, 3d Appellate District, Case No. C062791.

27 AB X4 17 and X4 18, Laws 2009.

28 Matter of Novartis Vaccines and Diagnostics, Inc., No. 397618 (Cal. State Bd. of Eq. 7/21/09).

29 Temporary Admin. Rules 18-231-10.6-01T, 18-231-36.5-01-6694T, 18 231-36.6-01-6662T, 18-231-36.7-01-6700T, and 18-231-36.8-01-6676T.

30 LA DOR Revenue Information Bulletin No. 09-055 (12/15/09).

31 Commissioner of Rev. v. Comcast Corp., 901 N.E.2d 1185 (Mass. 3/3/09).

32 MA DOR Technical Information Release 09-7 (4/24/09).

33 Aquila, Inc. v. Director of Rev., No. 08-0637 RI (Mo. Admin. Hrg. Comm. 7/29/09).

34 NJ Div. of Tax’n Press Release, Voluntary Disclosure Program Post 2009 Tax Amnesty Program Effective June 16, 2009 (6/5/09).

35 NY Dep’t of Tax’n & Fin. Important Notice N-09-18 (October 2009).

36 NY Dep’t of Tax’n & Fin. TSB-M-09(6)I, TSB-M-09(6)C, TSB-M-9(5) M, TSB-M-09(1)R, and TSB-M-09(5)S (Voluntary Disclosure and Compliance Program Legislative Change Regarding the Disclosure of Information) (5/13/09).

37 2009 Wisconsin Act 2.

38 CC Dickson Co. v. Department of Rev., No. BIT 09-238 (AL DOR, Admin. Law Div. 6/9/09).

39 CA FTB Notice 2009-04 (5/22/09).

40 Ventas Finance I, LLC v. California Franchise Tax Bd., 165 Cal. App. 4th 1207 (Cal. Ct. App. 2008), review denied, No. S166870 (Cal. 11/12/08); cert. denied, S. Ct. Dkt. 08-1022 (U.S. 4/6/09). Note that in Ventas Finance I, the California Court of Appeal held that the LLC fee imposed pursuant to former CA Rev. & Tax. Code Section 17942 was unconstitutional in violation of the U.S. Commerce Clause because the statute did not use a method of fair apportionment to calculate the total income upon which the fee was based.

41 Visions Unlimited, Inc. v. Department of Rev., Nos. 1444, 1450, and 1456 (Del. Tax App. Bd. 4/8/09).

42 IN DOR Letter of Finding Nos. 08-0431P (2/1/09) and 09-0044P (4/1/09).

43 MA DOR Legal Notice, Change in Information Reporting by Pass-Through Entities (11/24/09).

44 Kmart Michigan Property Servs., LLC v. Department of Treasury, 770 N.W.2d 915 (Mich. Ct. App. 2009), review denied, No. 139110 (Mich. 9/28/09).

45 Alliance Obstetrics & Gynecology, PLC v. Department of Treasury, No. 280125 (Mich. Ct. App. 8/4/09), review denied, No. 139923 (Mich. 1/29/10).

46 First Industrial, LP v. Department of Treasury, No. 282742 (Mich. Ct. App. 8/18/09), review granted, No. 139748 (Mich. 2/11/10).

47 TMW Enters. Inc. v. Department of Treasury, 775 N.W.2d 342 (Mich. Ct. App. 2009).

48 HB 2, Laws 2009.

49 NH DOR Technical Information Release No. 2009-008 (7/16/09) and proposed amendments to Rules 901.01–901.03.

50 NJ Div. of Tax’n Technical Bulletin TB-55(R) (4/3/09).

51 In re National Bulk Carriers, Inc. v. New York City Tax Appeals Trib., 877 N.Y.S.2d 279 (N.Y. App. Div. 4/16/09), review denied, 912 N.E.2d 1072 (N.Y. 2009).

52 AB 75, Laws 2009.

53 Pursuant to referendum authority under the Oregon Constitution, a petition was filed during 2009 to submit the corporate income/excise tax provisions contained within H.B. 3405 to voters under Measure 67. Because of this voter referendum, H.B. 3405 did not take effect during 2009 even though it had been signed by Governor Ted Kulongoski on July 20, 2009. Subsequently, on January 26, 2010, Oregon voters approved Measure 67. Accordingly, these tax law changes became effective 30 days later on February 25, 2010; however, the provisions still generally apply to tax years beginning on or after January 1, 2009.

54 CA FTB Notices 2009-01 (2/20/09) and 2009-05 (7/17/09).

55 In re Nassco Holdings, Inc., No. 317434 (Cal. State Bd. of Eq. 2/25/09).

56 House Subst. No. 1 for HB 267, Laws 2009.

57 Exelon Corp. v. Department of Rev., 917 N.E.2d 899 (Ill. 2009), slip op.; opinion modified upon denial of reh’g (Ill. 7/15/09); reh’g denied (Ill. 9/28/09).

58 Commissioner v. Gillette Co., 907 N.E.2d 629 (Mass. 2009).

59 Equipment Leasing & Fin. Ass’n v. Director, Div. of Tax’n, 24 N.J. Tax 527 (N.J. Tax Ct. 3/6/09).

60 TX Comptroller, Tax Policy News (November 2009).

61 Minocqua Country Club, Inc. v. Department of Rev., No. 07 CV 520 (Wis. Cir. Ct. 4/1/09).

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