COURT STRIKES DOWN FTB PROVISION.

The U.S. Supreme Court recently decided in Hunt-Wesson, Inc. v. Franchise Tax Board of California that California's limitations on interest expense deductions violate the U.S. Constitution's Due Process and Commerce Clauses.

California's rule for calculating "unitary" income permits the interest expense deduction to nondomiciliary corporations only to the extent that it exceeds out-of-state income, thus allowing tax on income which the state could not otherwise tax.

The court held that by offsetting or disallowing legitimate deductions where there is no relationship between the disallowed expense and exempt income, California, in effect, indirectly taxed income it could not tax directly.