Current corporate income tax developments.

This two-part article discusses a myriad of recent state tax activity in the corporate income tax area. Part I addresses nexus, tax base, business/nonbusiness income and trademark/tradename cases and determinations.

**********

During 2003, numerous state statutes were added, deleted or modified; court cases were decided; regulations were proposed, issued and modifed; and bulletins and rulings were issued, released and withdrawn. This two-part article focuses on some of the more interesting items in the following corporate income tax areas: nexus; tax base; business/nonbusiness income; trademark/tradename cases and determinations; apportionment formulas; and filing methods/unitary groups and administration; it also includes several other significant state tax developments. The first four areas are covered in Part I, below; the remaining areas will be covered in Part II of this article, in the April 2004 issue.

Nexus

* Alabama

The chief administrative law judge (ALJ) held (1) that Alabama did not have Constitutional jurisdiction over a nonresident limited partner whose only contact with the state was the ownership of a limited interest in an Alabama limited partnership. This holding was based on Alabama's adoption of the entity theory of partnerships, effective Jan. 1, 1997. Under that theory, "the presence and activities of a partnership in Alabama cannot be attributed to its nonresident partners for nexus purposes." For years after 2000, Alabama law (2) requires nonresident partners to consent to jurisdiction or be taxed through entity withholding.

* Massachusetts

In Alcoa Building Products, Inc., (3) the Massachusetts Supreme Court affirmed that Alcoa's district sales managers exceeded P.L. 86-272 nexus protections for their nonancillary in state warranty claim activities. The sales managers visited the state an average 1.5 times annually, as part of their perceived job function of initiating and investigating warranty claims to maintain customers and remain competitive in the marketplace.

In another case, (4) the Appellate Tax Board (ATB) ruled sales should not have been thrown back to Massachusetts, because certain product demonstrations, "in service" advice and troubleshooting activities in other jurisdictions were not ancillary to solicitation, and exceeded EL. 86-272's nexus protections.

* Michigan

In Acco Brands, Inc., (5) the Michigan Court of Appeals held that the tax authority's delay in changing guiding bulletins did not bar a nexus assessment through the "doctrine of laches." The court first noted that Acco clearly had Michigan nexus through the presence of two resident sales personnel that solicited sales from in state accounts. For laches to apply, Acco had to prove that the Department of Treasury (Department) lacked diligence and that the delay was prejudicial. According to the court, the Department's more-than-three year delay to audit Acco reflected the backlog of cases following the Gillette (6) nexus decision, but not a lack of diligence. The delay in issuing a new bulletin was not prejudicial to Acco, as the Gillette decision put Acco on notice that the previous bulletins were not determinative of nexus.

* New York 

The Department of Taxation and Finance ruled (7) office space rented for the personal convenience of a president, chief executive officer and chairman of the board, and a listed telephone number for the corporation at that address, qualified as "doing business" nexus for the state corporate franchise tax.

* North Carolina 

A Superior Court ruled (8) that the presence of reined educational videos in the state did not create nexus. The state Attorney General's office emphatically states that this case does not establish precedent, and has appealed.

* Ohio

Reversing the Board of Tax Appeals, file Ohio Supreme Court held (9) the business activities that occur during the tax (accounting) year, not the business activities that occurred as of January 1 of the report year, are used to determine whether activities are subject to P.L. 86-272.

* South Carolina 

The Department of Revenue (DOR) issued Rev. Rul. 03-4, (10) which lists a number of" activities and indicates whether they create nexus for corporate income tax purposes.

* Tennessee

The DOR found (11) that a mortgage banker without physical presence in the state does not have nexus, but must still file a franchise and excise tax return and pay the minimum tax, because it is registered to do business.

In another ruling, (12) the aggregate of the taxpayer's employees' infrequent presence and the parent's activities performed for the taxpayer by its instate headquarters, created sufficient franchise and excise tax nexus. A regional manager employed by, arid based in, the parent's Tennessee headquarters offices, performed a majority of his services on the subsidiary's behalf, specifically as direct supervisor for the taxpayer's business managers, with responsibility for implementing and maintaining set-standard high-quality performance and profitability. In addition, certain subsidiary officers and directors outlined and implemented strategy while in Tennessee; the subsidiary's business managers attended annual corporate three day training sessions; and the subsidiary's accounting, tax, business and insurance records, as well as payroll processing, were kept with the parent company in the state.

* Texas

The mere holding of a lien on real property does not subject a corporation to the franchise tax; however, foreclosure on any loan related to a property lien that results in obtaining title to real property in the state creates franchise tax nexus. (13)

* Virginia

Financing subsidiaries having no office, employees or tangible assets in the state, but having their affairs conducted primarily by officers of an affiliated taxpayer's in-state headquarters, had commercial combine in Virginia and could, thus, be included in the taxpayer's combined report. (14)

Trademarks/Tradenames

* Indiana

The DOR again denied (15) a corporation's royalty expense deductions for payments to a Delaware holding company (DHC). On rehearing, the corporation argued that the previous ruling referred to a two-party transaction, but there really was a three party arrangement: the intangible was contributed to the DHC; the DHC collected royalties from related subsidiaries and provided arm's-length loans to the parent. According to the DOK, this structure still reflects no business or economic justification and, despite the arm's-length pricing, it can properly disallow the related deduction as not fairly representing the income derived from sources ill the state.

The DOR also upheld (16) an audit finding requiring a corporate group to file on a unitary basis, because the trademark/royalty relationships among the group were "entirely illusory." The DOR found the group's business purpose and economic substance arguments unsupported, concluding (1) trademarks have no value once severed from the business, (2) business operations were not affected by the creation of the transactions and (3) the holding companies did not manage or enhance the trademarks' value. The DOR, also noted that the holding companies simply "loaned" back the royalty money received or invested the money on the payer's behalf.

* Maryland

In a joint decision, (17) the Maryland Court of Appeals reversed the Maryland Tax Court to hold that income from affiliated intellectual property DHCs is subject to tax based on the parent's in-state business. The court explained that the subsidiaries did not have real economic substance as separate business entities, only a touch of "window dressing" designed to create an illusion of substance.

* Massachusetts

The ATB allowed (18) royalty payments made to a trademark/candy formula affiliate to be treated as valid business expenses. The trademarks were never owned by the entity leasing them; instead, they were separately allocated when first acquired by the parent via a business growth strategy of purchasing new brands of candy. There was also was no circular income flow, because the lessee was separate from the entity that paid for the maintenance and administration of those trademarks. This separate maintenance of the intangibles, coupled with the higher profit margin realized by using the trademarks, provided sufficient factual circumstances to justify the deduction.

* New Jersey

The state Tax Court held (19) an affiliated trademark/tradename company must have physical presence in the state to be subject to the corporate income tax. According to the court, "physical presence is a necessary element of" commerce clause nexus for taxation"; any "tax avoidance" could be addressed by measures other than asserting income tax nexus, including disallowing the affiliate royalty payment deductions, as recently enacted into statute.

* North Carolina

In A&F Trademark, Inc., (20) a Superior Court affirmed a decision holding that nine wholly owned DHCs of The Limited Stores, Inc., that relicensed to retail affiliates trademark rights obtained from The Limited, were "doing business" for corporate income/franchise tax purposes. The court found that the value of the trade mark subsidiaries' rights could not exist apart from the established storefront businesses that paid the licensee fee.

* Virginia

The lack of economic substance in a trademark subsidiary arrangement was sufficient to authorize the Department of Taxation (DOT) to require consolidated reporting to equitably adjust the tax. (21) According to the DOT, the corporate structure lacked a supportable arm's-length royalty rate, evident economic and viable substance for the subsidiary and quality-control standards for trademark maintenance.

State Tax Base

The majority of states imposing a corporate income-based tax begin the computation of state taxable income with taxable income as reflected on the Federal corporate income tax return (Form 1120, U.S. Corporate Income Tax return). These states use either taxable income before net operating loss (NOL) and special deductions (Line 28) or taxable income (Line 30); certain state-specific addition and subtraction modifications are then applied to arrive at the state tax base. Below is a summary of the recent significant changes to the states' tax bases.

* Nonconformity to Bonus Depreciation

The Jobs and Growth Tax Relief Reconciliation Act of 2003 provided additional 50% bonus first-year depreciation for qualified property acquired after May 5, 2003 and before Jan. 1, 2005, and extended the placed-m-service date to Jan. 1, 2005 for the 30% bonus depreciation enacted as part of the Job Creation and Worker Assistance Act of 2002. Due to the negative revenue effect, the majority of states have decoupled from conformity to the Federal depreciation provisions.

DRD 

* California

The Court of Appeal ruled (22) the general dividends-received deduction (DRD) (Rev. & Tax Code Section 24402) violates the Constitution's commerce clause, because it limits the DRI) to the extent that the payer's income was subject to California corporate income tax. The California Supreme Court denied review; the Franchise Tax Board petitioned for certiorari from the U.S. Supreme Court.

SB 103, Laws 2003, clarified that dividends received by a California corporate shareholder from a regulated investment company (RIC) are generally not excludible from income.

* Massachusetts

S 1949/H 2022, Laws 2003, disallowed the DI<D for real estate investment trust (REIT) dividends received by corporations and financial institutions. For tax years beginning after 2003, subsequent legislation (S 2149) disallowed the DRD for dividends received directly or indirectly from a 1LIC and extended the DILD disallowance to dividends received indirectly from a REIT. (23)

* Minnesota

In Hutchinson Technology, Inc., (24) the state Tax Court affirmed a plain statutory reading preventing the taxpayer from claiming the state's DRD from its wholly owned "foreign operating company" (FOC). The court noted that the FOC's qualification as a Federal foreign sales corporation fell squarely within the statute's denial of all foreign sales corporation dividends, and found no need for exception, despite (1) the unitary relationship between the companies, (2) the fact that dividends were deemed rather than actually paid or (3) the fact that tax return instructions suggested different treatment.

* North Carolina

Under SB 236, Laws 2003, deductions are no longer allowed for dividends received from RICs and REITs.

* North Dakota

In D.D.I., Inc., (25) the state Supreme Court determined that the state's DRD scheme is unconstitutional, because it limits the DRD to the extent the payer's income was subject to the state's corporate income tax. In reaction to this decision, SB 2099, Laws 2003, retroactively repealed the DRD to tax years beginning after 1999.

* Oregon

H 2152, Laws 2003, reduced the DRD from 70% to 35% for calendar years 2003-2005. Also, the DOR amended Admin. R. 150-317.267(B) to clarify the state's DRD; the DRD is allowed for domestic and foreign dividends, including Subpart F income and Internal Revenue Code (IRC) Sec. 78 gross-up.

NOLs

* Illinois

In ABC Reinsurance Co., (26) an ALJ explained that, although Illinois allows for a life insurance company's income to be developed using, in part, the IRC's special calculations for insurance companies, such adoption does not allow use of the IRC's special life insurance company three-year loss carryover. Instead, LLC Sec. 172 governs and limits the carryback to two years.

* New Hampshire 

For tax periods ending after June 30, 2005, SB 58, Laws 2003, provides that taxpayers will no longer be required to carry back losses before carrying forward any remaining loss as a NOL deduction.

* North Dakota

For tax years beginning after 2003, HB 1471, Laws 2003, eliminated the state's NOL carryback.

Disallowance of Intercompany Expenses

* Alabama

The DOR finalized regulations (27) restricting deductibility of certain related company intangible/interest expenses and requiring specified tax return enclosures to sustain such deductions.

* Arkansas

For tax years beginning after 2003, interest and intangibles expenses paid to a related party are disallowed, (28) unless: (1) the related income is subject to net income tax by a state or foreign treaty country; (2) the income was received pursuant to an arm's-length contract or interest rate and the transaction is not intended to avoid Arkansas income tax; (3) the taxpayer and director enter into a written agreement allowing the deduction or providing an alternative apportionment method; or (4) the corresponding income recipient is in a nontax location, but operates an active trade or business with at least 50 full-time equivalent employees, $1 million of real or tangible property and revenues in excess of $1 million.

* Connecticut

For tax years beginning after 2002, corporate taxpayers are required to add back interest paid to related members. (29) For a recipient company taxable in the state and receiving or accruing the interest income required under the new law to be added back by its related member, the company may exclude the amount received or accrued from its gross income and its receipt factor for apportionment purposes. Limited exceptions to the related member addback are provided.

* Maryland

HB 753, which passed but was vetoed by the governor, would have disallowed deductions for interest and intangible expenses/costs paid to related members, unless certain exceptions were met.

* Massachusetts

For tax years beginning after 2001, corporations generally must add back interest and intangible expenses/costs directly or indirectly paid to related members. (30) However, intangibles expenses are not required to be added back if: (1) the corporation proves by a preponderance of the evidence that, during the same tax year, the related member paid or accrued the expenses to an unrelated member and the transaction giving rise to the expense did not have as a principal purpose the avoidance of Massachusetts tax; (2) the corporation establishes by clear and convincing evidence that the adjustment is unreasonable; or (3) the taxpayer and commissioner agree in writing to the use of an alternative apportionment method.

Interest expenses are not required to be added back if: (1) the corporation establishes by dear and convincing evidence that the deduction disallowance is unreasonable; (2) the taxpayer and commissioner agree in writing to the application of an alternative apportionment method; or (3) a principal purpose of the transaction giving rise to the expense was not to avoid Massachusetts taxes, the interest is paid pursuant to an arm's length contract and the related member was subject to state or foreign net income tax on the income at a rate no less than the statutory rate applied to the taxpayer, minus three percentage points. Also, interest deductions related to dividend notes and deductions for third-party debt incurred in certain reorganizations are disallowed. The DOR's explanation and guidance for the 2003 law changes (including the related intercompany addback provisions) is included in Technical Information Release 03 19. (31)

HB 3727, Laws 2003, allowed inter-company deductions when: (1) the related party is resident in a foreign country covered by a U.S. tax treaty; (2) the related party is not a controlled foreign corporation; and (3) the amounts are also deductive for Federal income tax purposes and arranged through arms-length pricing.

* Mississippi

SB 2354, Laws 2003, removed the July 1, 2003 expiration date of: (1) the factors to be considered in determining whether a corporate transaction is at arm's length for income tax purposes under MS Code Section 27-99; and (2) the addback of related-party intangible and interest expenses under MS Code Section 27-7-17.

* New York

Prior to the enactment of the technical corrections bill (S 5725, Laws 2003), with limited exceptions, taxpayers would have been required to add back interest and royalty expenses paid to related members for tax years after 2002; see AB 2106, Laws 2003. However, S 5725 repealed the interest addback provision, other than for certain debt incurred in connection with intangible assets subject to the royalty addback provision. S 5725 also amends and broadens the exceptions applicable to the royalty addback rule. Interaffiliate royalty expenses do not have to be added back if the transaction was primarily for a valid business purpose other than the avoidance of New York tax, and (1) the related member paid or accrued the amount to an unrelated party, (2) the transaction giving rise to the expense was made pursuant to an arm's-length contract or (3) the income receipt is paid to an affiliate organized under the laws of a country that has a comprehensive tax treaty with the U.S., provided the royalty income is taxed by that country at a tax rate at least equal to New York's rate.

* Oregon

Under proposed OAR 150-314.295, intercompany deductions for intangible assets are disallowed if(1) the owner and the user are not included in the same Oregon tax return and (2) the separation of ownership of the intangible asset from the user of the intangible asset results in either tax evasion or a computation of Oregon taxable income not clearly reflective of the business activity conducted in the state in comparison to business activity as a whole.

Other Modifications

* Indiana

The DOR ruled (32) that Washington business and occupation (B&O) taxes must be added back for purposes of determining state adjusted gross income, because it is reasonably measured by income produced.

* Massachusetts

The ATB ruled (33) that combined fliers must apply the charitable contribution deduction limit on a separate entity basis.

* Michigan

For entities other than financial organizations, the single business tax (SBT) base excludes interest income and interest expense; however, the SBT law does not define "interest" The Department provided guidance of the definition of that term. (34) In addition to a broader, dictionary-style definition, the Department specifically requires a bona fide debtor-creditor relationship, with the charge based on a percentage of an account balance (not a flat fee), fixed by contract or law and reflecting the time value of money.

* New York City 

The Department of Finance (35) clarified that employers who have taken the Federal work opportunity credit for New York Liberty Zone employees and haw been denied a Federal wage expense deduction under IRC Sec. 280C, are permitted to deduct such expenses for New York City purposes.

* South Carolina

Rev. Rul. 03-6 (36) provides guidance on state taxes not allowed as a deduction from South Carolina taxable income. The ruling lists as deductible the Indiana gross receipts tax, Kentucky license tax, Michigan SBT, Washington and West Virginia B&O taxes, and other state net worth-based taxes, including the net worth portion of the Texas and Ohio franchise taxes.

Business/Nonbusiness Income

Under the Uniform Division of Income for Tax Purposes Act (UDITPA), a multistate corporate taxpayer's income is divided into two classes--business income and nonbusiness income. Business income is divided among the states in which the corporation has nexus by use of a statutory apportionment formula, while nonbusiness income generally is assigned to the state in which the corporation is domiciled or the property was disposed of is located.

The courts are split as to whether the UDITPA business-income definition requires that both: (1) the transaction giving rise to the income is in the regular course of the corporation's income (transactional test); and (2) the acquisition, management, use and disposition of the property are integral parts of the corporation's regular business operations (functional test). In addition to UDITPA's business/nonbusiness distinction, a state is prohibited, under Allied Signal, Inc., (37) from taxing income not generated in the course of the corporation's unitary business. Such income would not be includible in the corporation's apportionable income.

* Alabama

An ALJ ruled that gains from separate sales of a paper mill and a subsidiary's sale of timberland met the definition of business income and, thus, the receipts should be included in the sales factor. (38) The ALJ held that the parent's gain from the mill sale constituted business income, because of the company's frequent purchases and sales of major businesses and business components under its long-term corporate strategy. The subsidiary received business income because it was created and operated to acquire, manage and sell timberland. The ALJ held that the related receipts should be included in the sales factor to fairly reflect the companies' Alabama business activities, explaining that the rule that would have allowed sales factor exclusion for incidental and occasional sales was voided when the Alabama Supreme Court rejected the functional test (on which the rule was predicated).

* California

In Appeal of American General Realty Investment Corp., Inc.,39 the State Board of Equalization (SBE) generally upheld a decision that the taxpayer could not deduct interest expenses on its California combined return related to dividend income from its insurance line of business. The SBE held that, regardless of the taxpayer's nonbusiness-income treatment of the dividends, both the express language of CA Rev. & Tax Code Section 24425 and precedents mandated the disallowance of expenses allocable to nontaxable dividends before income allocation or apportionment.

The SBE also held (40) California does not recognize a cessation of business or liquidation exception to the functional-test classification of the gain as business income.

* Connecticut

The DOR held (41) that IRC Sec. 338(h)(10) gain is business income and related deemed gain should be reflected in the target company's receipts factor, consistent with the election. According to the DOR, asset-sale treatment for factor purposes reflects the economic reality of the gain and is consistent with its long-standing position of" following the Federal income tax law effects of an IRC Sec. 338(h)(10) election.

* Illinois

The DOR adopted IL Admin. Code 100.3500, to provide that whether an item of income is business or nonbusiness income is based on the facts and circumstances of the partnership itself, the trade or business activities of a partner or of any related party are irrelevant.

In Mead COrp., (42) the trial court held that the gain from the sale of Lexis/Nexis is business income under the functional test. Although the court found no unitary relationship, it did find that the investment in Lexis/Nexis was of an operational nature, rather than an investment nature, and the disposition was part of Mead's strategic business plan (to protect itself from takeover by restructuring debt and repurchasing capital with the sale proceeds).

An Illinois Circuit Court ruled (43) an IRC Sec. 338(h)(10) gain should be considered nonbusiness income, finding that a modified functional test can be applied when, through an IP, C 8ec. 338(h)(10) election in a consolidated group setting, the disposition of assets is made pursuant to a corporation liquidation in cessation of business, with proceeds distributed to its shareholders.

* Indiana

The DOR explained (44) that distributions to a nonunitary out of-state corporate partner should be treated as allocated income for state adjusted gross income tax purposes and not apportioned to the partner based on its ownership percentage.

The DOr also affirmed (45) an audit decision that a liquidating distribution received by a California entity from two nonunitary partnerships owning an Indiana hotel is classified as nonbusiness income sourced to Indiana. Also, due to no unitary ties with the partnerships, the California company could not use an NOL generated by the partnerships against nonpartnership income.

In addition, the DOR determined (46) IILC Sec. 338(h)(10) deemed-asset-sale gain constitutes business income under the functional test.

Royalties received from a manufacturer's foreign subsidiaries for use of its paint formulas constituted business income, regardless of any unitary relationship between the companies, because the royalties arose from its regular course of business. (47) However, gain from the sale of certain lower-tiered subsidiaries was nonbusiness income, because the subsidiaries were purchased as a nontargeted part of an earlier, larger transaction.

Income received from a chemical company's sale of its controlling interest in a pharmaceutical company was business income, whether analyzed from a unitary, functional or transactional approach. (48)

* Massachusetts

In W.R. Grace, Inc., (49) the Appeals Court held that W.R. Grace could exclude gains from the sale of its Herman's and El Torito retail and restaurant subsidiaries from apportionable income, due to lack of a unitary business enterprise. The court noted the subsidiaries were run by their own management teams, with W.R. Grace merely applying occasional oversight typical to an investment, and there were no joint or shared purchasing, research, advertising, planning, engineering, marketing, training programs, trademarks or facilities. Cash management and other intercompany services provided at arm's length did not constitute a unitary flow of value.

In General Mill Inc., (50) the Supreme Judicial Court affirmed that: (1) gain from the sale of a subsidiary (Eddie Bauer) was nonapportionable, because the corporations were not unitary; (2) an IRC Sec. 338(h)(10) election pertaining to the sale of its Talbots subsidiary should be respected and the deemed gain was properly reflected in Talbots' income as part of the combined return; (3) gain realized by a Talbots subsidiary from a sale of intangibles immediately prior to the Talbots' sale reverted to Talbots under the step-transaction doctrine, because both the original transfer to the subsidiary and the subsequent sale lacked economic substance beyond the creation of tax benefits; and (4) the gain should be included in Talbots' sales-factor numerator, to reflect the efforts of the employees involved in the catalog development process, who contributed most to the intangibles' value.

* Ohio

HB 95, Laws 2003, made significant modifications to Ohio's allocation statutes and adopted the business/ nonbusiness provisions included in UDITPA.

* Oregon

In Nabisco Brands, Inc., (51) the state Supreme Court ruled that Nabisco received nonbusiness income from its sale of certain wholly or majorityowned subsidiaries, because Nabisco had acquired the subsidiaries as existing entities, preserved their independent character during ownership and successfully refuted the inferences and conclusions drawn by the DOR's reference to annual reports, corporate minutes, various contracts and other written materials.

The DOR has proposed amending OAR 150 314.610(1)-(A) to adopt the recently revised Multistate Tax Commission's business/non-business income model regulations.

* Pennsylvania

In Canteen Corp., (52) a full panel of the Commonwealth Court reversed its Feb. 8, 2002 partial panel decision, to hold that an IILC Sec. 338(h)(10) liquidation gain qualifies as nonbusiness (allocable) income. The court reached the same conclusion in Osram Sylvaia, Inc. (53) The commonwealth has appealed these decisions to the Pennsylvania Supreme Court.

(1) Joe E, Lanzi, III v. Al. Dep't of Rev., Admin. L. Div., Dkt. No. Inc. 02-721 (9/26/03).

(2) See AL Code [section] 40-18-24.1.

(3) Alcoa Building Products, Inc. v. Comm'r of Rev., 440 Mass. 224 (2003).

(4) Colgate Palmolive Co. v. Comm'r of Rev., MA ATB, Dkt. No. C255116 (4/3/03).

(5) Acco Brands, Inc. f/k/a ACCO USA. Inc. v. Dep't of Treasury, MI Ct. of App., No. 242430 (11/20/03).

(6) Gillete v. Dep't of Treasury 497 NW2d 505 (MI Ct. of App. 1993).

(7) NYS Dep't. of Tax'n and Fin., TSB-A-03(2)C (4/4/03).

(8) Educational Resource's, Inc. v. Tolson, Wake County Sup'r Ct., Nos. 00CVS14723 and 14724 (5/18/03). The ruling was delivered on two separate assessments: sales tax, and corporate franchise aim income tax, both argued separately.

(9) LSDHC Corp. v. Zaino, OH Sup. Ct., Nos. 2001-2073 and 2001-2074 (4/30/(13).

(10)SC DOR, Rev. Rul. 03-4 (12/9/03).

(11)TN DOR, Rev. Rul. No. 02-16 (6/7/02).

(12) TN DOR, Rev. Rul. No 02-22 (7/19/02).

(13) TX Policy Ltr. Rul. 200302742L (2/11/03).

(14) VA Pub. Doc. No. P.D. 03-35 (4/15/03).

(15) IN DOR, Supplemental Ltr. of Finding 01-0063 (1/13/03).

(16)IN DOR, Ltr. of Finding 01-0132 (10/1/03).

(17) Compt'r v. SYL, Inc. and Compt'r v. Crown Cork & Seal Co., 825 A2d 399 (MD Ct of App 2003), cert. den.

(18) Cambridge Brands, Inc. v. Comm'r of Rev., MA ATB, Dkt, No. C259013 (7/16/03).

(19) Lanco, Inc. v. Dir., Div'n. of Tax'n, NJ Tax Court No. 005329-97 (10/23/03)

(20) A&F Trademark, Inc. v Sec'y of Rev., NC Sup'r Ct., No. 02-CV-007467 (5/22/03).

(21) VA Pub. Doc. No. PD 03-73 (10/15/03).

(22) Farmer Brothers. Co. v. Franchise Tax Bd., CA App. No. B160061 (5/21/03).

(23) See Chapter 143, [subsection] 4 and 5, amending G.L. c. 63, [subsection], 30.

(24) Hutchinson Technology, Inc. v. Comm'r of Rev., MN Tax Ct., Nos. 7398-R and 7504-R (9/15/03).

(25) D.D.I., Inc. v. State of N.D., 657 NW2d 228 (ND S.Ct. 2003).

(26) Il. Dep't of Rev. v. ABC Reinsurance Co., IL Dep't of Rev Hearings, IT 03-2 (2/3/03).

(27) See Amend. Rule 810-3-35-.02, AL Admin. Monthly (7/31/03).

(28) See Act 1286 (SB 334), Laws 2003; AR Code Ann. [section] 26-51-423(g)(1).

(29) See HB 6806, Laws 2003 and CT Public Act 03-1.

(30) See SB 1949, Laws 2003; MA Gen. Laws [section] 31I.

(31) MA DOR, Tech. Info. Rel 03-19 (9/4/03).

(32) IN DOR, Ltr. of Finding No. 02-0509 (11/1/03).

(33) FMR Corp. v. Comm'r of Rev., MA ATB, Dkt. No. C258964 (10/1/03).

(34) MI Dep't of Treasury, Legal Policy Determ'n 2003-5 (11/26/03).

(35) NYC Dep't of Fin. Memo. No. 03-1 (3/7/03).

(36) SC DOR, Rev. Rul. 03-6 (12/10/03)

(38) Allied Signal, Inc. v. N.J., 112 S.Ct. 2251 (1992).

(39) Kimberly-Clark Corp. v. Al. Dep't of Rev. Dkt. Nos. Corp. 01-983 and Corp. 01-995 (3/11/03).

(39) Appeal of American General Realty Investment Corp. Inc., CA SBE, No. 156726 (6/25/03).

(40) Appeal of Oryx Energy Co. & Sun Co., Inc., CA SBE, No. 59288 (7/9/03)

(41) CT Legal Rul. No. 2003-3 (7/14/03).

(42) Mead v. II. Dep't of Rev, IL Cir. Ct. Cook Cty., No. 00 CH 7854 (3/18/03).

(43) American States Ins. Co., v. Il. Dep't of Rev., Il. Cir. Ct., Cook Cty., No. 01 L 05940 (4/25/03).

(44) IN DOR, Ltr. of Finding 00-0441 (7/1/03).

(45) IN DOR, Ltr. of Finding 02-0098 (9/1/03).

(46) IN DOR, Ltr. of Finding 02-0309 (9/1/03).

(47) IN DOR, Ltr. of Finding 01-0041 (9/1/03).

(48) IN DOR, Supp. Ltr. of Finding 99-0438 (9/1/03)

(49) W.R. Grace, Inc. v. Comm'r of Rev., MA App. Ct., Dkt. No. 00-P-254 (7/2/03).

(50) General Mills, Inc. v. Comm'r of Rev., MA Sup. Ct., SJC-08935 (9/15/03).

(51) Nabisco Brands, Inc. v. Dep't of Rev., OR Sup. Ct., No. TC-MD 010109A (4/3/03).

(52) Canteen Corp. v. Comm'th of Pa., PA Comm'th Ct., No. 856 F.R. 1997 (3/6/03).

(53) Osram Sylvania, Inc. v. Comm'th of Pa., PA Comm'th Ct., No. 310 F.R. 1998 (3/6/03).

EXECUTIVE SUMMARY

* Numerous decisions and rulings focused on the economic substance of trademark/ tradename royalty arrangement with DHC and other affiliated companies.

* Due to the negative revenue effect of the Federal bonus depreciation provisions, the majority of states have decoupled from conformity to the Federal provisions.

* Several states have changed provisions on DRDs and interest and intangible expenses paid to related companies.

Karen J. Boucher, CPA 

Senior Manager

Deloitte & Touche LLP 

Milwaukee, WI

Shona Ponda, J.D.

Manager

Deloitte & Touche LLP

Atlanta, GA