Current Corporate Income Tax Developments (Part II)

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


  • California modified the sales factor provisions that apply to tax years beginning after 2010, for assigning sales other than sales of tangible personal property, by reinstating the costs of performance (rather than market) sourcing rules for taxpayers that do not elect to use a single sales factor apportionment formula and requiring market sourcing for taxpayers making the election.
  • The Wisconsin Department of Revenue issued permanent rules interpreting the state’s combined reporting rules. The Massachusetts Department of Revenue issued a directive providing guidance on the application of the state’s combined reporting regulation.
  • Louisiana temporarily suspended issuing private letter rulings due to budget constraints. Washington permanently discontinued issuing letter rulings for undisclosed businesses for the same reason.
  • Legislation passed in New York defers the use of most business tax credits in excess of $2 million for tax years beginning in 2010 through 2012.

During 2010, 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were decided; regulations were proposed, issued, and modified; and bulletins and rulings were issued, released, and withdrawn.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 updates regarding nexus, tax base, allocable/apportionable income, and Sec. 338(h)(10) transactions. Part II, below, covers some of the more important developments in the areas of 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 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. 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. Some of the more significant recent apportionment developments are summarized below.


The Arizona Department of Revenue (DOR) explained that because the conditional requirements included in HB 2139, Laws 2005, were met, for tax years beginning from and after December 31, 2008, multistate corporate taxpayers (except those engaged in air commerce) must select the use of either the standard sales factor formula (property factor plus payroll factor plus two times the sales factor with a denominator of four) or the enhanced sales factor formula (property factor plus payroll factor plus eight times the sales factor with a denominator of ten). 1 In exchange for electing to use the enhanced sales factor formula, taxpayers agree to disclose their names to Arizona’s Joint Legislative Budget Committee and to participate in an economic impact study.

In another development, the DOR explained that because an Arizona affiliated group is considered to be a single taxpayer for purposes of apportionment, all the sales that flow through from a partnership to the corporate partners’ sales factor are intercompany sales that must be eliminated unless these intercompany sales are inconsequential. 2


As amended, California’s cost of performance regulation includes consideration of transactions and activities performed on behalf of a taxpayer by an agent or independent contractor in determining the state to which receipts from sales, other than sales of tangible personal property, should be assigned. 3 The amended regulation applies retroactively to tax years beginning after 2007.

In addition, the Franchise Tax Board (FTB) voted to move forward with the formal regulatory process to adopt the draft market-based sales factor regulation that for tax years beginning after 2010 will (if it is formally adopted) affect taxpayers that generate revenue from services or intangibles (including royalties) and that are (1) currently filing in California and plan to elect into the single sales factor method of apportionment, thus requiring market-based sourcing for apportionment, or (2) not currently filing in California and will thus be required to determine, by application of market-based sourcing, whether they are doing business in the state under the economic nexus rules.

In a legislative development, SB 858, Laws 2010, modifies the sales factor provisions that apply to tax years beginning after 2010, for assigning sales other than sales of tangible personal property by reinstating the costs of performance (rather than market) sourcing rules for taxpayers that do not elect to use a single sales factor apportionment formula and requiring market sourcing for taxpayers making the election.

On the judicial front, on remand from the California Court of Appeal’s 2009 ruling, a California superior court concluded that (1) General Mills’s futures trading activity was qualitatively different from its primary business, (2) there was quantitative distortion under various tests drawn from case law, and (3) the FTB’s proposed alternative apportionment formula (to include only net income from commodity futures contracts) was reasonable. 4

In addition, pending litigation in the San Francisco Superior Court under the lead case of Gillette Co. addresses a taxpayer’s ability to elect and apportion its income under the Multistate Tax Compact provisions (evenly weighted three factor) instead of California’s four-factor formula that double-weights the sales factor. 5


The Colorado DOR amended various industry apportionment rules to implement single sales factor apportionment that was effective for tax years beginning after 2008 and to make various other changes. 6 The DOR also adopted new CO Code Regs. Sections 39-22-303.7.1 and 7.2 to implement 2008 legislation that sources sales made by a mutual fund service corporation providing management, distribution, and administrative services for a regulated investment company (RIC) to the domicile of the RIC’s shareholders for tax years beginning after 2008.


The Idaho State Tax Commission (STC) amended Rule 450 7 to provide that when determining an entity’s apportionment factors, intercompany transactions should be eliminated onlyto the extent necessary” to properly compute the numerators and the denominators of the apportionment factors of a combined group. The STC also amended Rule 570 8 to provide that commissions and fees related to the sale of another taxpayer’s real property are sourced to the state where the property related to the commission and fees is located.


The Indiana DOR explained to a media corporation that it failed to show why the DOR’s equitable discretionary use of an audience factor method of apportionment did not fairly reflect its corporate income from Indiana sources. 9 The corporation had failed to give the auditor a 50-state apportionment schedule “necessary to determine the nature and types of revenue earned”; thus, the auditor used a Nielsen’s audience factor ratio to apply income attributable to Indiana. The company was also required to include in its consolidated return two subsidiary cable networks that did not have physical presence in Indiana because their income was found to be tied to service subscriptions from Indiana residents.


LD 1671, Laws 2010, adopted the Finnigan 10 approach for corporate income tax purposes. Under this approach, when calculating the numerator of the sales factor, Maine sales include sales of the taxpayer and of any member of its affiliated unitary group; for purposes of the sales factor throwout rule, the sales factor excludes from both the numerator and the denominator sales of tangible personal property delivered or shipped to a purchaser within a state in which neither the taxpayer nor any member of its affiliated unitary group is subject to tax.

Maine Revenue Services (MRS) proposed amendments to Rule 801 (apportionment of income) to expand the discussion of water’s-edge reporting, reflect recent legislative changes (including adoption of the Finnigan rule, the repeal of the throwback rule, and the adoption of the throwout rule), and provide new definitions of “taxpayer” and “unitary business.”

MRS also amended Rule 810 (unitary income and combined returns) to provide guidance on water’s-edge filing, to reflect recent legislative changes (including the Finnigan rule), and to clarify that members of a unitary group filing a combined return are jointly and severally liable for the tax.


In a case involving the former single business tax (SBT), the Michigan Court of Appeals affirmed that because a taxpayer was in the business of remanufacturing buses and not merely the sale of bus parts, revenue from the sales at issue was from “other than tangible personal property” and thus was sourced based on where the services were performed (i.e., Michigan). 11

In another decision involving the former SBT, the Michigan Tax Tribunal held that a hotel management company that performs services for hotels within and outside Michigan must source its income earned from in-state hotels to Michigan because the greater of the cost of performance to operate each hotel in Michigan occurred in Michigan. 12

New Jersey

The New Jersey Superior Court, Appellate Division, affirmed that while the sales factor throwout rule may operate unconstitutionally in some applications, the rule was facially constitutional. 13 The New Jersey Supreme Court has granted review of this decision.

New York

The Department of Taxation and Finance issued proposed amendments to update the administrative procedures for requests for discretionary adjustments to the method of allocation for state business corporation and bank franchise tax purposes to, among other changes, provide that the taxpayer’s request be made separate and apart from the filing of the return and to eliminate the requirement that taxpayers must in every instance submit the computation of tax under the proposed method. 14

In a decision regarding rights to broadcast particular programs, an administrative law judge (ALJ) ruled that broadcasting rights are intangible assets and thus must be excluded from the property factor. 15

In another apportionment development, an ALJ held that income from equipment financing agreements entered into with various government entities constituted investment income rather than business income for Article 9-A corporate franchise tax purposes pursuant to applicable administrative regulations that during the years at issue defined “other securities” to encompass debt instruments issued by government entities. 16


Rule 710:50-17-71 17 was amended to “clarify policy and comply with current statutory authority” that sales of services should be sourced on a market basis. 18


According to the Comptroller’s Office, in computing its apportionment percentage, a lending institution is allowed to use the gross proceeds from the sale of securities or loans that are categorized as “available for sale” or “trading securities” under Statement of Financial Accounting Standards (FAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, for all franchise tax reports originally due after 2007. 19


SB 165, Laws 2010, phases in single sales factor apportionment for select industry taxpayers; the sales-only formula will be fully effective for tax years beginning after 2012. For a unitary group to qualify, more than 50% of the group’s total sales must be classified in a 2002 or 2007 North American Industry Classification System (NAICS) code, though certain mining, manufacturing, transportation and warehousing, information, and finance/insurance industry classifications are specifically excluded.

In another development, the Utah Tax Commission amended the financial institution apportionment rule to update the sourcing of receipts from services to market sourcing, rather than the previous greater cost of performance basis. 20


Applicable to the Washington business and occupation (B&O) tax, for tax liabilities incurred after May 31, 2010, SB 6143, Laws 2010, adopted single sales factor, market sourcing, and throwout for certain services and royalties (with special application for financial organizations). The Washington DOR adopted emergency and subsequently finalized rules to implement these law changes. 21


A Wisconsin Court of Appeals essentially affirmed that income-producing activities associated with national directory advertising services were performed in Wisconsin because the desired audience received the directories in Wisconsin. The company unsuccessfully argued for use of a costs-of-performance method, claiming that much of the cost of performance related to the income-producing activity occurred outside Wisconsin. 22

Unitary Groups/Filing Methods


An Arizona Court of Appeals affirmed that a printing company must file a combined return with its trademark subsidiary because the trademark company’s only assets were under exclusive license to the printing company and therefore were incorporated indivisibly into the company’s core products. 23 However, the company could exclude its accounts receivable subsidiary and investment subsidiary from the combined return because they provided management services to the company that were deemed equivalent to accessory services available in the open market and were therefore ascertainable using generally accepted accounting principles.


The FTB issued proposed amended Regulations Section 25106.5-1 involving the election to report intercompany transaction income/loss on a separate entity basis, additional guidance on the deferred intercompany stock account provisions, and conformity to Regs. Sec. 1.1502-13.

District of Columbia

B18-0203 (Act 18-255) includes a mandate for the District of Columbia Council to pass legislation that would implement a combined reporting tax regime for all corporations for tax periods beginning after 2010. However, the council has not yet done so, and combined reporting is not required as this article goes to print.


The Idaho STC amended Rule 640 to conform to 2009 legislation clarifying that one qualified corporation within the water’s-edge group that makes the election binds the other corporations to that election, including corporations added to the combined group in years after the initial election. The amended rule also clarifies the filing requirements of the election form and that a corporation that is not part of a unitary group cannot make the water’s-edge election. 24

The STC also amended Rule 641 to provide that the filing of a protective Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, by itself will not constitute the filing of a federal return for purposes of the water’s-edge combined report. 25


The Indiana DOR held that a company must exclude from its combined Indiana financial institutions tax (FIT) return a loss affiliate that served as treasury for the taxpayer and its other affiliates, because the affiliates, while taxable in Indiana, were not commercially domiciled in the state. Thus, the DOR ruled that the treasury affiliate did not have Indiana customers and thus could not be included in the combined return. 26 In a supplemental ruling for the same taxpayer, the DOR held that the treasury affiliate’s sale to Indiana residents of retail Internotes via brokerage firms did not qualify as “transacting the business of a financial institution” under state FIT statutes and regulations; thus, the loss affiliate could not be included in the combined return. 27

In another ruling, the DOR held that a company operating various establishments and retail stores in Indiana must file a combined income tax return to include certain out-of-state affiliates with which it engaged in substantial intercompany transactions, including royalty payments for the use of intangibles/intellectual property, management fees, interest on intercompany loans, and dividends received from an affiliate REIT in order to more fairly reflect its Indiana source income. 28

Similarly, in another ruling the DOR held that a retail company must file a combined Indiana income tax return with several of its affiliates (including a service company, management company, royalty company, and finance company) because the company’s factual circumstances and reporting for the years at issue did not fairly represent its business activities within Indiana. 29


S 2582, Laws 2010, provides that for a combined group filing on water’s-edge basis, the income of a corporation organized outside the United States is excluded from the group’s tax base to the extent that the income item is exempt from federal tax under a federal tax treaty.

In another development, in Directive 10-5 (9/9/10), the Massachusetts DOR provides further guidance regarding application of the state combined reporting regulation, 830 MA Code Regs. 63.32B.2. In particular, the directive illustrates application of the provisions involving (1) a combined group’s reporting of REIT dividends, (2) a combined group member’s calculation of its capital gains/losses and Sec. 1231 gains/losses, (3) calculation of the limitation that applies for the use by a taxable combined group member of a Massachusetts NOL carryforward that it derived in a tax year prior to becoming a member of the combined group, and (4) the relationship between allocable and apportionable losses and loss carryforwards.


The Michigan Department of Treasury issued Revenue Administrative Bulletin (RAB) 2010-1 (2/5/10) regarding the unitary business group control test and RAB 2010-2 (2/24/10) regarding the unitary business relationship tests. Generally, to meet the relationship test, the group must have business activities or operations that either result in a flow of value between or among the persons in the group or are integrated with, dependent upon, or contribute to each other.

In another development, the Michigan Court of Appeals held that under the former SBT an LLC taxed as a corporation under federal tax law was considered to be a corporation for purposes of the SBT’s “affiliated group” definition and thus was properly includible in an SBT consolidated return. 30

In another decision, the Michigan Court of Appeals affirmed that a taxpayer had met the relevant statutory requirements for filing consolidated SBT returns, even though it had not filed certain forms prescribed by the Michigan Department of Treasury (DOT) under a RAB. The court held that because the DOT had accepted the procedurally deficient returns from the taxpayer without complaint, it could not retroactively require the taxpayer to comply with its procedures. 31


Amended rule 12 Code State Regs. 10-2.045 clarifies the director’s statutory authority to approve methods (other than the uniform method for division of income provided for in the Multistate Tax Compact and the corresponding Missouri regulations) after a finding of special circumstances for filing Missouri consolidated income tax returns by affiliated groups or corporations and computing the underlying portion of consolidated taxable income that is derived from Missouri sources.

New York

On remand from the New York Tax Appeals Tribunal, an ALJ held that a shared service affiliate had a valid business purpose and sufficient economic substance to justify separate reporting. 32

In another decision, the New York City Tax Appeals Tribunal ruled that a post-merger group of holding companies could file on a combined basis for corporate income tax purposes with related operating companies because functional integration existed between them, and the merger of some of the companies was essential to the continued economic viability of the operating companies. 33

South Carolina

The South Carolina Supreme Court affirmed that the state’s statutory authority providing for the use of “any other method” to effectuate an equitable result authorizes the DOR to permit taxpayers to use the combined unitary reporting apportionment method when it is reasonable and more fairly represents the extent of the taxpayer’s business activities in the state. 34


Effective for tax years ending after June 30, 2010, SB 3901, Laws 2010, requires certain captive REIT affiliated groups to file their Tennessee franchise/excise tax returns on a combined basis.


For tax years beginning after 2010, SB 23, Laws 2010, modified the definition of a foreign operating company (FOC). Under the new law, an FOC (1) is incorporated in the United States, (2) has at least 80% of its business activity conducted outside the United States, (3) has at least $1 million of payroll located outside the United States, and (4) has at least $2 million of property located outside the United States. The new law also revises the previously allowed subtraction from unadjusted income of 50% of the adjusted income of an FOC to prohibit a deduction from unadjusted income for income generated from intangible property or a capital gain, dividend, interest, rent, royalty, or other similar item that is generated from an asset held for investment and not from a regular business trading activity. Taxpayers filing worldwide combined reports continue to be prohibited from taking this deduction.

West Virginia

The West Virginia State Tax Department finalized Rules 110-24-1 through 110-24-13, replacing previous corporate income tax rules with a version that blends the requirements of West Virginia’s corporate net income tax with the combined reporting requirements. The new rules address various combined reporting issues, such as how to reconcile reporting periods for combined group members with different tax reporting years; how to treat intercompany transactions so they are not subject to manipulation to decrease net taxable income; how to compute apportionment factors based on the combined group; and how to determine a combined group for a particular tax year when there have been corporate mergers, acquisitions, split-ups, and divestitures during the reporting period.


During 2009, the Wisconsin DOR issued emergency combined reporting rules interpreting the combined reporting statute and, based on public comment, issued revised emergency rules on January 15, 2010. Permanent combined reporting rules Tax 2.60–2.67 went into effect on May 1, 2010.


In the past year, there was activity in several states regarding penalties, voluntary disclosure agreements, and other aspects of tax administration.



A California court of appeal affirmed that the 20% large corporate understatement penalty law’s overall provisions do not violate state or federal constitutional provisions. The California Taxpayers’ Association unsuccessfully argued that this strict liability law violated the state constitution because it was a tax increase and required a two-thirds vote of the state legislature, but it received only a majority vote. 35

In a legislative development related to the same penalty, for tax years beginning after 2009, SB 858, Laws 2010, modified the 20% strict liability penalty imposed on large corporate understatements to apply only to understatements that exceed the greater of $1 million or 20% of the combined reporting group’s total understated tax liability (previously the penalty applied to understatements that exceed $1 million on a combined reporting group aggregate basis).


The Connecticut Department of Revenue Services (DRS) explains the penalty waiver process and the standard applied by the DRS in determining whether to waive a penalty ($500 or less) or to recommend a waiver of a penalty (over $500) to the Penalty Review Committee. 36

New Jersey

On remand from the New Jersey Supreme Court’s economic nexus ruling for consideration of the taxpayer’s challenges to the imposition of penalties, the New Jersey Superior Court, Appellate Division, affirmed that the taxpayer had no reasonable cause to not file tax returns for the years in question and therefore was liable for both the imposed late filing and post-amnesty penalties. 37 The taxpayer unsuccessfully argued that the Tax Court’s 2003 Lanco 38 decision favoring the taxpayer (notwithstanding its ultimate reversal) coupled with a “respectable at-large understanding at the time that physical presence in the taxing jurisdiction was a necessary prerequisite for nexus” created an adequate basis for the nontax liability position it had taken, requiring its good faith to be recognized by the director’s discretionary abatement of the penalties assessed. The court agreed that although the taxpayer may have had some basis in an arguably unsettled state of the law for its position that it was not subject to the corporation business tax, “it was obliged to accord greater respect than it did to the position of the division.”

North Carolina

S 897, Laws 2010, includes Fair Tax Penalty provisions that prohibit the North Carolina DOR from automatically imposing the 10% failure-to-pay penalty and the 25% negligence penalty when the DOR requires the taxpayer to file a consolidated or combined return. The new law also authorizes the DOR to adopt rules that describe facts and circumstances under which it will require a corporation to file a state consolidated or combined income tax return.


SB 6143, Laws 2010, requires the Washington DOR to disregard specified tax avoidance transactions or arrangements and imposes a new 35% penalty on any tax deficiency resulting from engaging in a disregarded transaction.


2009 Wisconsin Act 28 established penalties for the failure to produce tax records or documents that support information shown on tax returns and specified that the Wisconsin DOR must promulgate administrative rules specifying a standard response time, a standard for noncompliance, and penalty waiver provisions. Initially, the DOR adopted an emergency rule and, after a public hearing, made proposed changes to the emergency rule and subsequently adopted permanent rules (2.85 and 11.90) administering these penalties.

Voluntary Disclosure Agreements


SB 1492, Laws 2010, (1) requires voluntary disclosure agreements (VDAs) to specify that the FTB may extend the time for filing returns and paying amounts due to the later of the extended due date of the latest year tax return for which relief is granted, or the end of the program’s generally permitted 120-day period; (2) eliminates imposition of the underpayment of estimated tax penalty in certain situations; and (3) allows participants applying for an installment payment arrangement to have additional time to pay in full any tax, fee, penalty, or interest due should they ultimately fail to qualify for an installment payment arrangement.


The Connecticut DRS explains its updated voluntary disclosure program under which participating taxpayers benefit by not having a penalty imposed, receiving a limited lookback period, and not having to worry about discovery through the state’s normal investigative or audit procedures. 39


The Hawaii Department of Taxation (DOT) explains that if a taxpayer makes a voluntary disclosure and fully satisfies the DOT’s requirements, it is the DOT’s informal practice to assert tax, penalties, and interest for a 10-year lookback period. However, it will consider all relevant facts and circumstances surrounding a taxpayer’s particular situation. 40 The question of whether a taxpayer has nexus would provide a basis for departure from the general 10-year lookback period.

New Jersey

The New Jersey Division of Taxation explains that benefits of participating in its voluntary disclosure program include anonymity pending an agreement, relief from late-filing and late-payment penalties, and an average lookback period of four years (three prior years and the current year) in certain instances. 41


The DOR explains that Pennsylvania’s voluntary disclosure program, which was suspended during its 2010 tax amnesty program, was reinstituted as of August 1, 2010. 42 The program guidelines essentially remain as they were; however, the 5% post-amnesty nonparticipation penalty cannot be waived.



HB 504, Laws 2010, conforms Alabama estimated corporate income tax payments to the federal law.


The FTB explains it is well settled that where federal law and California law are the same, federal rulings dealing with the Internal Revenue Code are persuasive authority in interpreting the state laws. 43 Thus, in those situations, federal administrative guidance applicable to the Code shall, insofar as possible, govern the interpretation of conforming state statutes with due account for state terminology, state effective dates, and other obvious differences between state and federal law. Federal administrative guidance may include federal revenue rulings, notices, revenue procedures, announcements, and other published administrative guidance promulgated by Treasury or the IRS.

In a development that will affect most large taxpayers, the FTB explains that if a taxpayer is filing the federal Schedule UTP, Uncertain Tax Position Statement, it must attach the form to its California franchise or income tax return. 44 In addition, the corporation must complete question AA on California Form 100/100W, Corporation Franchise or Income Tax Return, reporting whether it filed a Schedule UTP. According to the FTB, “at this time, no decision has been made on whether the state should set up its own similar disclosure program.”


New Regs. Sections 39-22-652, 39-22-653, and 39-22-656 provide guidance on legislation enacted during 2009 (HB 09-1093) that requires taxpayers to disclose participation in reportable and listed transactions, and material advisers to disclose reportable and listed transactions and maintain a list of persons advised with respect to such transactions. 45


The Georgia DOR proposed and subsequently withdrew amended Rule 560-7-8-.07 to help “clarify” Georgia’s shifting of income provisions when the DOR has reason to believe that a taxpayer conducts its trade or business “so as to evade taxes, distort directly or indirectly his or her true net income, or distort directly or indirectly the net income properly attributable” to Georgia. The proposed amended rule addressed when the DOR may determine the amount of taxable income of one or more corporations when certain circumstances exist and provided that the department may combine the income of any affiliates in order to compute the net income properly attributable to Georgia.


AB 2594, Laws 2010, adopts certain information reporting requirements for Hawaii tax purposes that are part of the Code, such as (1) Sec. 6041(h) (information at source), which for payments made after 2011 will require businesses to issue Forms 1099 for payments of $600 or more to nonexempt corporations, (2) Sec. 6045B (returns relating to actions affecting basis of specified securities), which effective January 1, 2011, will require the issuers of certain securities to report certain information that affects the basis of the securities, and (3) Sec. 6050W (returns relating to payments made in settlement of payment card and third-party network transactions), which for calendar years beginning after 2010 will require information reporting regarding credit card transactions. The Hawaii DOT summarized these tax provisions in Announcement No. 2010-10 (6/7/10).


SB 158, Laws 2010, allows the Kentucky DOR to include examples as part of an administrative regulation and allows those examples to include demonstrative, nonexclusive lists.

In a judicial development, the U.S. Supreme Court declined Johnson Controls’ request to review the Kentucky Supreme Court’s 2009 holding 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. 46


A Louisiana court of appeal affirmed that an employee may not bind a corporation to an agreement to suspend the statute of limitation unless the corporation granted the employee express authority. 47 In this case, the taxpayer’s director of tax audits did not have express corporate authority to bind the corporation to agreements of suspension of the prescription period, despite his authority to represent the taxpayer in other matters before the state.

The Louisiana DOR explains that effective July 1, 2010, the Audit Protest Bureau (APB) is responsible for the audit protest process after a proposed assessment of tax is issued but before the taxpayer or the DOR issue a formal assessment or a suit. 48 The APB is an independent unit within the DOR reporting directly to the secretary of the DOR and is separate from and independent of the divisions that select the audits, determine the facts, and identify the issues.

In another bulletin, the DOR explained that due to budget constraints, it will temporarily suspend issuing private letter rulings that are requested after December 31, 2010. 49


The Massachusetts DOR explained that taxpayers filing a combined return for 2009 were allowed a seven-month extension of time to file (instead of the standard six-month extension). 50

In a legislative development, chapter 131 of the 2010 Acts requires administering agency heads of refundable and transferable tax credit programs to submit an annual report to the DOR for credits awarded or claimed for the previous calendar year. 51 This report, which will be available to the public, will include the identity of the awarded taxpayer and the amount of the credit awarded. The DOR issued Technical Information Release (TIR) 10-11 (8/6/10) explaining the tax changes included in this legislation.

New Jersey

The New Jersey Tax Court held that a taxpayer failed to satisfy all the required statutory elements to offset its state corporation business tax deficiency assessment. 52 The court explained that the division’s authority to make a deficiency assessment under the extended four-year statute of limitation in this case applied only to increases or decreases in taxable income attributable to changes or corrections made by the federal audit. Thus, the taxpayer was not allowed to reduce the deficiency by an underreported dividend deduction error that the taxpayer discovered.

The New Jersey Tax Division implemented a new procedure for obtaining a letter ruling. 53


The comptroller denied a taxpayer’s refund request made on its amended 2008 franchise tax report in which it recalculated its taxable margin using the cost of goods sold (COGS) deduction rather than the 70% of revenue limitation, because taxpayers may not use an amended report to change their election to COGS or compensation after the due date of the annual report. 54


The Washington DOR announced that due to budget reductions, effective October 1, 2010, it will no longer issue letter rulings for undisclosed businesses. Requests for tax rulings for disclosed businesses have not changed. 55

Flowthrough Entities


New Rules 810-3-24.1-.01, 810-3-24.2-.02, and 810-3-24.2-.03 address composite returns/payment requirements for passthrough entities effective for tax years beginning after 2008 and gross income and asset requirements for classification as a qualified investment partnership. Passthrough entities are required to file a composite return and make composite payments on behalf of all nonresident owners/members.


The Indiana DOR held that the taxpayer’s combined Indiana financial institutions tax (FIT) return must include the adjusted gross income of a Delaware LLC taxed as a partnership because the FIT combined reporting regime includes any entity, regardless of form, that conducts activities that would constitute the business of a financial institution. 56 The taxpayer unsuccessfully argued for use of a post-apportionment methodology under which the LLC’s income would first be apportioned at the entity level and then added to the bank group’s Indiana apportioned income.


HB 2, Laws 2010, mandates estimated tax payments for certain passthrough entities that are required to withhold Kentucky income tax on nonresident individuals and/or corporate members, applicable to tax years beginning after 2011.


HB 4800, Laws 2010, provides that a partner’s distributive share is determined in accordance with the partner’s interest in the partnership, taking into account all facts and circumstances, when (1) the allocation to a partner under the partnership agreement of income, gain, loss, deduction or credit, or any item thereof has no substantial economic effect or (2) the partnership agreement does not provide for the partner’s distributive share of income, gain, loss, deduction or credit, or item thereof.


HB 5937, Laws 2010, prohibits (1) the Department of Treasury from assessing additional tax or reducing a tax overpayment attributable to inclusion of a federally disregarded entity in a taxpayer’s previously filed SBT return; (2) the Department of Treasury from requiring a federally disregarded entity (previously included in a taxpayer’s SBT return) to file a separate SBT return; and (3) taxpayers that previously included a federally disregarded entity in an SBT return from claiming a refund based on the disregarded entity filing a separate SBT return. In light of this new law, the Department of Treasury announced that it has rescinded its notice to taxpayers regarding Kmart Michigan Property Services LLC. 57

With respect to the Michigan Business Tax (MBT), the Department of Treasury posted to its website a notice announcing that a disregarded entity for federal tax purposes is required to file a separate MBT return or file as a member of a unitary business group if the tests for unity are met. 58

New Hampshire

Applicable to taxable periods ending on or after December 31, 2010, SSHB 1, Laws 2010, repeals controversial legislation enacted during 2009 by making distributions from LLCs, partnerships, and associations subject to New Hampshire’s interest and dividends tax only if they have transferable shares.

New Mexico

Applicable to tax years beginning after 2010, HB 120, Laws 2010, requires passthrough entities to make quarterly withholding tax payments on net income distributed to their nonresident owners, permits owners to agree to make the quarterly payments on their own behalf rather than by the passthrough entity, makes trusts and estates that distribute income to beneficiaries’ passthrough entities for withholding purposes, and removes the withholding obligation for single-member LLCs that are disregarded for federal income tax purposes.

Other Significant Developments


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 a unitary group.

In another development, the State Board of Equalization concluded that a taxpayer can use Enterprise Zone hiring tax credits and the manufacturers’ investment credit to reduce its California corporate alternative minimum tax liability. 59


The Illinois DOR ruled that a corporation electing to be a bank holding company under the federal Troubled Assets Relief Program (TARP) during its tax year is treated as a financial organization for the entire tax year, and all its subsidiaries are similarly treated as financial organizations for the entire tax year. 60


In TIR 10-22 (11/29/10), the Massachusetts DOR explains that as a result of the Gillette decision, 61 the DOR will not consider the tax-free liquidation and merger of a wholly owned subsidiary into its parent under Sec. 332 to be a disposition of assets within the meaning of the investment tax credit rule.

New York

A 9710-D, Laws 2010, defers the use of most business tax credits in excess of $2 million for tax years beginning in 2010 through 2012. The New York Department of Taxation and Finance explains this new law in TSB-M-10(5)C (9/13/10).

In another development, A 10238, Laws 2010, extends the bank tax under Article 32 (for state and city) until tax years beginning before 2011.


SB 1267, Laws 2010, imposes a moratorium for two years on numerous tax credits. While businesses can still carry unclaimed investment or new jobs credits forward indefinitely, unclaimed credits generated during the period from July 1, 2010, to July 1, 2012, are limited to 50% per year of the total credit accrued in each of the following two tax years.

In another development, SJR 61, Laws 2010, imposes and sunsets a new business activity tax (BAT) in lieu of all ad valorem taxes on the intangible personal property of persons doing business in Oklahoma for tax years 2010–2012. The BAT applies to all entities regardless of form (e.g., sole proprietorships, partnerships, LLCs, trusts, and all types of corporations) doing business in Oklahoma and is imposed at a per annum rate of $25 plus 1% of net revenue.

However, for tax years 2010–2012, the 1% rate will not apply; instead, corporations doing business in Oklahoma are required to pay the BAT in an amount equal to their franchise tax paid for tax year 2010 or $25, whichever is greater; all others doing business in Oklahoma must pay $25. The Oklahoma Tax Commission has the power to suspend a taxpayer’s charter or other instrument of organization if it fails to file the required informational report. The commission subsequently issued guidance on this new tax. 62


On January 26, 2010, Oregon voters approved Measures 66 and 67, addressing personal income taxes and corporate income/excise taxes, respectively. The two measures impose tax increases that were originally contained in HB 2649 and HB 3405, Laws 2009.

The corporate tax changes included (1) increasing the previous $10 corporate minimum tax to amounts that range from $150 to $100,000 for tax years beginning after 2008, (2) increasing the corporate income tax rate beginning in 2009, and (3) subjecting partnerships and S corporations to the $150 minimum tax amount.


During 2010, the DOT issued three rulings on whether a bank or bank affiliate was subject to the bank franchise tax or the corporate income tax. In the first of these rulings, the department ruled that a trust company owned by a national bank was subject to the corporate income tax because it did not accept deposits, and Virginia was not listed in its charter as being the principal place of business and thus was not subject to the bank franchise tax. 63

Similarly, in the second ruling, the department concluded that a nationally chartered bank headquartered in another state that maintains a mortgage loan office in Virginia was subject to the corporate income tax because it neither had a charter designating a place within Virginia as its principal place of business nor accepted deposits from customers at an office located in Virginia. 64

In the third ruling, the department held that a taxpayer classified as a federal savings association is subject to the corporate income tax because the bank franchise tax definition of a bank includes banking associations but not savings associations. 65


SB 6130, Laws 2010, temporarily suspended the two-thirds voting requirement for revenue increase bills until July 1, 2011.

In subsequent legislation, SB 6143, Laws 2010, increased the B&O tax rate on services from 1.5% to 1.8% until June 30, 2013.

This article does not constitute tax, legal, or other advice from Deloitte Tax LLP, which assumes no responsibility with respect to assessing or advising the reader as to tax, legal, or other consequences rising from the reader’s particular situation.


1 AZ DOR, 2009 Corporate Income Tax Highlights (1/25/10).

2 AZ DOR, Taxpayer Information Ruling LR10-008 (3/24/10).

3 CA Code Regs., tit. 18, §25136.

4 General Mills v. California Franchise Tax Bd., No. CGC-05-439929 (Cal. Super. Ct., San Francisco County 11/01/10), on remand from 172 Cal. App. 4th 1535 (2009).

5 Gillette Co. v. California Franchise Tax Bd., No. CGC-IO-495911 (Cal. Super. Ct., San Francisco County).

6 The amended industry regulations include CO Special Regulations 1A–Airlines; 2A–Contractors; 3A–Publishing; 4A–Railroads; 5A–Television and Radio Broadcasting; 6A–Trucking; 7A–Financial Institutions; and 8A–Telecommunications and Ancillary Service Providers.

7 ID Income Tax Administrative Rules IDAPA

8 ID Income Tax Admin. Rules IDAPA

9 IN DOR Ltr. of Findings No. 09-0826 (12/22/10).

10 Appeal of Finnigan Corp., 88-SBE-022 (Cal. State Bd. of Eq. 8/25/88).

11 Midwest Bus Corp. v. Department of Treas., 288 Mich. App. 334 (2010).

12 Meristar Management Co. LLC v. Department of Treas., No. 320548 (Mich. Tax Trib. 8/31/10).

13 Whirlpool Props., Inc. v. Director, Div. of Tax’n, 25 N.J. Tax 519 (N.J. Super. Ct. App. Div. 2010); leave to appeal granted, Pfizer, Inc. v. Director, Div. of Tax’n, 6 A.3d 439 (N.J. 2010). Note that the throwout rule provision referred to in this case was legislatively repealed effective for tax years beginning after June 30, 2010.

14 Proposed Amended 20 NYCRR §§4-6.1 and 19-8.4 (11/18/10).

15 In re Meredith Corp., No. 822396 (N.Y. Div. of Tax App., ALJ 1/14/10).

16 In re Xerox Corp., No. 822620 (N.Y. Div. of Tax App. 10/7/10).

17 OK Admin. Code §710:50-17-71.

18 OK Admin. Rules Dkt. No. 10-40, 27 The Oklahoma Register No. 10 (2/1/10)

19 TX Policy Letter Ruling No. 201005671L (5/28/10).

20 UT State Tax Comm’n Rule R865-6F-32.

21 Emergency and finalized Rule WAC 458-20-19402 describes the general application of single-factor receipts apportionment that is effective June 1, 2010; emergency and finalized Rule WAC 458-20-19404 describes the application of single-factor receipts apportionment to certain income of financial institutions and applies only to tax liability incurred after May 31, 2010; and emergency and finalized Rule WAC 458-20-19403 describes the application of single-factor receipts apportionment to gross income from royalties and applies only to tax liability incurred after May 31, 2010.

22 Ameritech Publishing, Inc. v. Department of Rev., 788 N.W. 2d 383 (Wis. Ct. App. 2010).

23 R.R. Donnelley & Sons Co. v. Arizona Dep’t of Rev., 224 Ariz. 254 (Ariz. Ct. App. 2010), rev. denied, No. CV-10-0223-PR (Ariz. 11/30/10).

24 ID Income Tax Admin. Rules IDAPA

25 ID Income Tax Admin. Rules IDAPA

26 IN DOR Ltr. of Findings No. 09-0737 (9/1/10).

27 IN DOR Supplemental Ltr. of Findings No. 09-0737 (12/22/10).

28 IN DOR Ltr. of Findings No. 09-0918 (7/28/10).

29 IN DOR Ltr. of Findings No. 09-0399 (12/22/10).

30 Handleman Co. v. Department of Treas., No. 291178 (Mich. Ct. App. 9/21/10).

31 American Home Products Corp. v. Department of Treas., No. 292344 (Mich. Ct. App. 9/28/10).

32 In re Kellwood Co., No. 820915 (N.Y. Div. of Tax App., ALJ 3/18/10).

33 In re American Banknote Corp., TAT (E) 03-31 (GC), TAT (E) 03-32 (GC), and TAT (E) 03-33 (GC) (N.Y.C. Tax App. Trib. 11/14/08). Responding to the parties’ post-decision motions, on December 3, 2010, the tribunal issued an order clarifying that the underlying notices of determination are cancelled in full.

34 Media General Communications, Inc. v. Department of Rev., No. 26828 (S.C. 6/4/10).

35 California Taxpayers’ Ass’n v. California Franchise Tax Bd., No. C062791 (Cal. Ct. App. 12/13/10).

36 CT Dep’t of Rev. Serv. Policy Statement (PS) 2010(1) (6/7/10).

37 Praxair Technology Inc. v. Director, Div. of Tax’n, No. A-6262-06T3 (N.J. App. Div. 9/1/10).

38 Lanco, Inc. v. Director, Div. of Tax’n, 21 N.J. Tax 200 (N.J. Tax Ct. 2003), rev’d, 908 A.2d 176 (N.J. 2006), cert. denied, 551 U.S. 1131 (2007).

39 CT Dep’t of Rev. Serv., Informational Publication 2010(18) (9/28/10).

40 HI Dep’t of Tax, Tax Information Release (TIR) No. 2010-07 (8/17/10).

41 NJ Div. of Tax’n, Voluntary Disclosure Program (8/20/10).

42 PA DOR, Tax Update No. 150 (June–July 2010).

43 CA FTB Information Letter 2010-5 (8/17/10).

44 CA FTB, Tax News (December 2010).

45 CO Code Regs. §§39-22-652, 39-22-653, and 39-22-656.

46 Kentucky Dep’t of Rev. v. Johnson Controls, Inc., 296 S.W.3d 392 (Ky. 2009), opinion reissued on 11/25/09; cert. denied, S. Ct. Dkt. 09-981 (U.S. 5/24/10).

47 Bridges v. Hertz Equipment Rental Corp., 47 So.3d 519 (La. Ct. App. 8/11/10).

48 LA DOR Revenue Information Bulletin No. 10-013 (6/29/10).

49 LA DOR Revenue Information Bulletin No. 10-024 (10/1/10).

50 MA DOR Directive 10-1 (2/25/10).

51 MA Gen. Laws ch. 62C, §89.

52 General Motors Acceptance Corp. v. Director, Div. of Tax’n, No. 010743-2007 (Tax Ct. 2/18/10).

53 The new procedure can be found on the Division of Taxation website

54 TX Decision, Hearing No. 103,083 (7/28/10).

55 WA DOR Notice (10/1/10).

56 IN DOR Ltr. of Findings No. 09-1022 (9/1/10).

57 MI Dep’t of Treas., Rescinded: Notice to Taxpayers Regarding Kmart Michigan Property Services LLC v. Dep’t of Treasury, the Single Business Tax, RAB 1999-9, and RAB 2000-5 (4/12/10).

58 MI Dep’t of Treas., Notice to Taxpayers Regarding Federally Disregarded Entities and the Michigan Business Tax (11/29/10).

59 Appeal of NASSCO Holdings, Inc., 2010-SBE-001 (Cal. St. Bd. of Eq. 11/17/10). In response to the FTB’s subsequent petition for rehearing, the SBE held on January 24, 2011, that a new hearing was not warranted. However, responding to both parties’ requested publication of this opinion due to its “potential impact on a large number of taxpayers,” the SBE issued a discussion of the grounds for its decision.

60 IL DOR Private Letter Ruling No. IT 10-0002-PLR (4/22/10).

61 Commissioner of Rev. v. Gillette Co., 454 Mass. 72 (2009).

62 OK Tax Comm’n, FAQ: BAT—Business Activity Tax (12/20/10).

63 VA Pub. Doc. No. 10-16 (3/1/10).

64 VA Pub. Doc. No. 10-17 (3/1/10).

65 VA Pub. Doc. No. 10-56 (5/7/10).


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

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