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Current corporate income tax developments.

This two-part article discusses a plethora of recent state pronouncements issued in the corporate income tax area. Part I addresses nexus and tax base; Part II, in the next issue, examines apportionment, administration and other developments.

During 1999, an overwhelming number of 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cases were decided; regulations were proposed, issued and modified; and bulletins and rulings were issued, released and withdrawn. Because it is impractical to summarize all of these activities, Part I of this two-part article focuses on some of the more interesting items in the corporate income tax areas of nexus and tax base. Part II, in the April 2000 issue, will discuss apportionment, administration and other significant income tax and nonincome tax developments.


Application of P.L. 86-272

P.L. 86-272 prohibits a state from taxing a business whose only connection with the state is the solicitation of orders for sales of tangible personal property sent out of the state for approval or rejection, and, if approved, filled and shipped by the business from a point outside the state. Several rulings and legislation addressed whether a taxpayer's in-state activities fall within the protection of P.L. 86-272.

* Alabama

The Department of Revenue (DOR) issued Tax Policy Letter 99-001,(1) explaining the difference between the state's nexus rules (Reg. 810-27-1-4.19) and the Multistate Tax Commission's "Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States Under Public Law 86-272" (MTC Statement). For Alabama tax purposes, owning, leasing, maintaining or using certain property in the state creates nexus only if it is conducted on a regular or systematic basis; however, no definition of "regular or Systematic" is provided in either the MTC Statement or Alabama's policy statement. In addition, the DOR's treatment of intangible personal property is in lieu of the MTC Statement's "unprotected activities," under which nexus is created by entering into franchising or licensing agreements and by selling or otherwise disposing of franchises and licenses.

As to the transfer of property to the franchisee or licensee, the DOR's treatment applies to the selling of "intangible personal property which is neither an isolated nor transient event nor intrinsic to the related" tangible personal property, rather than to the "selling or otherwise transferring of tangible personal property" under the franchise or license, as provided in the MTC Statement.

* Arizona

SB 1235, signed into law as Chapter 191, provides that a taxpayer otherwise protected under P.L. 86-272 will not be subject to income tax as a result of the presence of consignment inventory in the state if: (1) the presence of such inventory is a requirement of the taxpayer's contract with its customer; and (2) the inventory is located on the customer's property. The new law applies retroactively to tax years beginning on and after Dec. 31, 1998.

* California

In Legal Ruling 99-1,(2) the Franchise Tax Board (FTB) addressed the application of P.L. 86-272 to sales from California to Puerto Rico. The FTB found that commerce with Puerto Rico is interstate commerce under P.L. 86-272 and that it should be considered a state for P.L. 86-272 purposes. The FTB concluded that Puerto Rico has no jurisdiction to tax a corporation's Puerto Rico destination sales if the corporation's activities there are limited to solicitation of orders for the sale of tangible personal property. Consequently, the corporation's Puerto Rico destination sales shipped from California will be included in the numerator of the California sales factor under the throwback rule.

Other Nexus-Creating Activities

* Alabama

For tax years beginning after 1999, Act 99-665 provides that every financial institution conducting (1) a credit card business through the issuance of credit cards to Alabama residents or businesses or (2) a business employing moneyed capital coming into competition with the business of national banks, will be subject to tax.

* Louisiana and Oregon

These states joined the MTC National Nexus Program, bringing the total number of states participating in that program to 39. The National Nexus Program is a voluntary disclosure program under which nonfilers or their representatives may contact the National Nexus Program to work out a multistate disclosure agreement.

* Maryland

In three recent cases, the Maryland Tax Court held that an out-of-state affiliate of a Maryland corporation is not subject to state corporate income tax if the affiliate is a nonphantom entity (i.e., if it has some substance). The court ruled that the licensing of trademarks in the state does not constitute substantial nexus as required by the Commerce Clause. Further, the Comptroller failed to follow the proper rulemaking requirements when it amended its policy on taxing foreign trademark subsidiaries. The Comptroller has appealed all three decisions.

SYL, Inc. v. Comptroller of the Treasury(3) involved a Delaware subsidiary holding and managing trademarks, service marks and tradenames. It maintained an office with furniture in Delaware. The corporate and financial records were kept, and mail was received, at the Delaware office. The subsidiary had its own bank account and an employee and the requisites for corporate existence were met. In addition, legal counsel was retained by the subsidiary for purposes of protecting its marks.

Crown Cork & Seal (Delaware), Inc. v. Comptroller of the Treasury(4) involved a Delaware subsidiary that licensed back to its parent trademarks and patents the parent had contributed to it. As in SYL, Inc., the court found that the subsidiary is a viable entity established for valid business purposes, including protecting valuable intellectual property rights from hostile takeover. The subsidiary maintained an office in Delaware, met all corporate formalities, had separate bank accounts and employees performing services under written employment agreements. In addition, the subsidiary received royalty income from third parties (other than its parent or an affiliate) during some of the years in issue.

MCI Int'l Telecommunications Corp. v. Comptroller of the Treasury(5) involved an out-of-state operating company receiving a management fee from a related Maryland company. Again, the court found that the taxpayer was not a phantom corporation. The taxpayer performs income-generating activity (i.e., the transfer of inbound and outbound calls over international territory). Revenues were earned from non-affiliated, as well as affiliated, entities. In addition, the taxpayer has substantial property on its books and has incurred personnel expense through the payment of management fees to its parent.

* North Carolina

DOR Directive CD-99-1(6) provides that a mortgage lender that does not maintain a place of business in the state has nexus for corporate income and franchise tax purposes if it (1) makes more than $5 million in loans secured by North Carolina real property and (2) uses employees, agents or independent contractors to perform services or activities in the state to solicit or finalize such loans. A corporation that invests in a loan by buying it (in whole or in part) from another person does not "make" a loan and does not have nexus.

* North Carolina

In Perkins Restaurants,(7) the Tax Review Board ruled that Perkins was doing business in North Carolina by virtue of its ownership of a limited partnership interest in a partnership doing business in the state.

* Oregon

SB 26, signed into law as Sec. 4, Chapter 30, Laws 1999, provides that out-of-state financial institutions may take, acquire, hold and enforce notes secured by mortgages or trust deeds and make commitments to purchase such notes without being subject to corporate income tax. An out-of-state financial institution also may foreclose the mortgages or trust deeds in the state's courts, acquire the mortgaged property, hold, own and operate the property for up to five years and dispose of the property without being subjected to corporate income tax. These provisions apply to tax years beginning after 1996.

* Tennessee

Under current law, financial institutions are "doing business" in Tennessee for franchise and excise tax purposes if they have sufficient business contacts in the state, regardless of physical presence. The doctrine of economic nexus was challenged by J.C. Penney National Bank (JCPNB), whose only activities and/or presence in the state were the existence of thousands of credit cards held by Tennessee residents. In J. C. Penney National Bank v. Comm'r of Rev.,(8) the court of appeals reversed a chancery decision and held that JCPNB did not have substantial nexus with Tennessee. It rejected the chancery court's finding that the 11,000-17,000 state credit cards constituted a physical presence, stating that the presence of such cards was not "constitutionally significant." The court also rejected the chancery court's findings that the unaffiliated retail stores operated by JCPNB's parent and the activities of JCPNB's affiliates and contractors that provided other aspects of the credit card operation gave JCPNB physical presence in Tennessee.

It is expected that Tennessee will request the state supreme court to review this decision.

* Wisconsin

AB 133, Laws 1999, expanded the "doing business" definition to include issuing credit, debit or travel and entertainment cards to Wisconsin customers.

State Tax Base

The majority of states imposing a corporate income-based tax begin the computation of state taxable income with taxable income as shown on the Federal corporate income tax return (Form 1120, U.S. Corporation 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' addition and subtraction modifications.

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 apportioned among all of the states in which the corporation has nexus by use of a statutory apportionment formula; nonbusiness income generally is assigned to the state in which the corporation is domiciled or the property that was disposed of is located. UDITPA generally defines business income as income arising from transactions and activity in the regular course of the corporation's trade or business and includes income from tangible and intangible property if the acquisition, management and/or disposition of the property constitute integral parts of the corporation's regular trade or business. All other income is nonbusiness income.

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).

* Alabama

In response to a hostile takeover attempt, Uniroyal Inc. spun off its tire division to Uniroyal Tire Co., Inc. (Uniroyal Tire) in 1985. In 1986, Uniroyal Tire and B.F. Goodrich entered into a joint partnership venture and transferred their assets to the partnership. Uniroyal Tire sold its partnership interest in 1990, realizing a significant capital gain.

In Uniroyal Tire Co., Inc. v. State DOR,(9) the court of civil appeals upheld the circuit court's finding that the Alabama definition of business income includes both transactional and functional tests. The Alabama Supreme Court recently granted Uniroyal Tire's petition for certiorari.

* California

A court of appeal held that a taxpayer's pension reversion income was not includible in business income under either a transactional or functional test.(10) Under the functional test of Rev. & Tax Code [sections] 25120(a), income is business income if it arises "from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations." The court held that "acquisition, management and disposition" of an asset are intended to represent the indicia of owning corporate property. Hoechst Celanese Corp. (Celanese) did not hold title to the pension assets. It did not report the plan assets on its balance sheets or the plan earnings on its income statement. Although it used the pension reversion income in a stock redemption program, it did not own the asset that generated the gain. Thus, the court found that the indicia of corporate ownership were not present. Further, in the regular course of its business, the plan assets generated income for the plan beneficiaries, not for Celanese. Therefore, the plan assets were not part of Celanese's regular trade or business operations.

* Kansas

The Kansas Board of Tax Appeals (BTA) held that a loss incurred by a company from a loan taken to defend against a hostile takeover was nonbusiness in nature and had to be allocated to its state of domicile (i.e., not apportionable to Kansas).(11) The loss resulted from the deduction of interest paid on a $1.4 billion loan taken in the late 1980s. The loan proceeds were primarily used to pay dividends to stockholders of record. The BTA held that the taxpayer's regular course of business is the retail sale of groceries; fending off a hostile takeover is not an activity in the regular course of that business. Further, the loan was not obtained to bolster operating income. Thus, the interest expense and resulting loss were nonbusiness in nature and had to be allocated to the taxpayer's state of domicile.

* Massachusetts

The Appellate Tax Board (ATB) held that the income of a Rhode Island corporation's property management division was includible in net income subject to apportionment for Massachusetts corporate excise (income) tax purposes.(12) The corporation claimed that income earned by the property management division could not be included in the apportionable base in calculating Massachusetts tax liability, because the management division did not own property in Massachusetts and the two divisions perform diverse business activities. However, the Board found the degree of centralized management and controlled interaction between the divisions indicated that they were part of a unitary business.

* Massachusetts

In a recent case,(13) the gain on the sale of a taxpayer's investments in its subsidiaries was not subject to corporate excise tax, because the subsidiaries were not unitary with the taxpayer. The taxpayer sold its investments in its noncore businesses as part of a plan to decrease the possibility of a hostile takeover. The ATB found that the taxpayer's subsidiaries were not unitary, because there was no coordination or integration of the subsidiaries with the taxpayer's specialty chemical business.

* Minnesota

HF 2420, Laws 1999, provides for full apportionment of all unitary business income (except nonbusiness income) and defines nonbusiness income as income that cannot be apportioned by Minnesota because of the U.S. Constitution. The new law provides a credit for taxes paid to another state if that state treats the same income as nonbusiness income allocated to that state. The new law is effective for tax years beginning after 1998. For tax years beginning before 1999, the new law provides an amnesty for corporate taxpayers that treated all items of income as business income on their original returns; the DOR cannot adjust those items to treat them as nonbusiness.

* New Mexico

HB 349, signed into law as Chapter 47, Laws 1999, eliminates the liquidation exception established in McVean Barlow, Inc.,(14) and eradicates a potential problem with the functional test portion of the business income definition. The new law adds to the definition of business income "income from the disposition or liquidation of a business or segment of a business." In addition, the functional test now reads, "[b]usiness income includes income from tangible and intangible property if the acquisition, management or disposition of the property constitute integral parts of the taxpayer's regular trade or business"; prior law had used "and."

* North Carolina

In Polaroid Corp. v. Offerman,(15) the North Carolina Supreme Court reversed a court of appeals decision holding that the state recognizes only one meaning of business income, the transactional test. The taxpayer received damages from a patent infringement suit. The court held that the definition of business income includes both the transactional and functional tests; satisfaction of either test will result in business income. The court also held that because Polaroid's recovery constituted income in lieu of profits, that income was business income, because it represented the disposition of assets integral to Polaroid's regular trade or business.

* North Carolina

In light of Polaroid, the North Carolina Supreme Court ordered the state court of appeals to reconsider its nonbusiness income holding in Union Carbide Corp. v. Offerman.(16) Fearing a hostile takeover after a 1984 chemical gas leak in Bhopal, India, Union Carbide adopted a restructuring plan designed to increase stock prices. As part of the corporate restructuring, Union Carbide effected a reversion of $500 million of pension plan funds from its overfunded pension plan; the funds were used to buy the company's stock.

The court of appeals found that the reversion income was nonbusiness income under the functional test, because (1) Union Carbide did not own any interest in the pension plan trust; (2) there was no evidence that the pension plan was or is essential to Union Carbide's chemical business; (3) the pension plan was not legally mandated (i.e., its creation by Union Carbide was voluntary); and (4) Union Carbide does not rely on its employees' pension plan to create corporate income. Because the court found that the income was nonbusiness income under both the transactional and the functional tests, it affirmed its prior decision in full, with one dissent. The decision was appealed to the North Carolina Supreme Court, which is expected to rule in the near future.

* Tennessee

The court of appeals held that approximately $13.65 million in dividends received by a taxpayer from two 20%-owned foreign subsidiaries was not includible in the taxpayer's apportionable tax base and, thus, not subject to Tennessee corporate excise (income) tax.(17) Connections between the taxpayer and its subsidiaries included: (1) the taxpayer had held no less than a 20% interest in the subsidiaries since their incorporation in 1966; (2) the taxpayer held one of five seats on one subsidiary's board of directors; (3) the taxplyer's chief financial officer and chairman served as one of the subsidiary's assistant controller and director; and (4) during the audit period, six of the taxpayer's executives were "on loan" to one subsidiary to train salespeople. The court found that the totality of undisputed facts revealed that the taxpayer and subsidiaries "had very little in common, much less in kind" and that "their economies were functionally separate entities."

State and Federal Tax Add-Backs

* Indiana

The Indiana Tax Court held that the Michigan single business tax (SBT) is not an add-back for purposes of Indiana's financial institutions tax.(18) Citing Trinova Corp.(19) and other states' decisions on the SBT, the Tax Court held that the SBT is a type of value-added tax, not a tax based on or measured by income. Although the decision related to the add-back for financial institutions tax now found in Ind. Code [sections] 65.5-1-2(a)(1)(C), the same modification language is found in Ind. Code [sections] 6-3-1-3.5(b) (3) for Indiana adjusted gross income tax purposes.

* Massachusetts

In Directive 99-9,(20) the DOR announced that it had determined that the following state taxes are disallowed as deductions in arriving at state corporate net income: (1) Delaware gross receipts tax (merchants' and manufacturers' license taxes); (2) Indiana gross income tax; (3) Los Angeles city tax; (4) Louisiana franchise tax; (5) Michigan SBT; (6) New Hampshire business profits tax; (7) New Hampshire insurance premiums tax; (8) Ohio franchise tax; (9) Pennsylvania franchise tax; (10) San Francisco business tax (including the San Francisco payroll expense tax); (11) Texas franchise tax; (12) Washington business and occupation tax; and (13) West Virginia business and occupation tax.

* Michigan

The court of appeals reversed a court of claims decision and held that the Federal environmental tax represents a tax "on or measured by net income" under the Single Business Tax Act.(21) Therefore, the taxpayer had to add the environmental tax to its Federal. taxable income in computing its SBT base.

* Virginia

In P.D. 99-126,(22) the Tax Commissioner addressed the deductibility of the Illinois and Ohio franchise taxes. The Illinois franchise tax, which is imposed on corporations for the privilege of exercising their franchise or authority to transact business in the state, is based on paid-in capital. Thus, it need not qualify as a tax to be added back in the computation of Virginia taxable income.

The Ohio franchise tax is tentatively computed on both the net worth basis and the net income basis; payment must be made on the computation that produces the greater tax. If the tax is computed and paid on the net worth basis, it does not qualify for the add-back. However, in the future, if the tax based on income is higher than the net worth tax, the entire Ohio tax is required to be added back in determining Virginia taxable income.

* Wisconsin

The court of appeals reversed a circuit court decision and held that the Michigan SBT is not deductible for years before a 1994 legislative change specifying that single business and value-added taxes are not deductible in computing the franchise tax base.(23) Given the Tax Appeals Commission's (TAC) experience in interpreting the franchise tax laws and exemption statutes, the court of appeals accorded the TAC's decision great weight deference, and concluded that the TAC's determination, that the SBT is a tax "on or measured by all or a portion of" gross receipts, is not less reasonable than the taxpayer's interpretation.


* Alabama

The Alabama Supreme Court ruled that Sonat, Inc. (Sonat) could deduct, for corporate income tax purposes, dividends received from a subsidiary.(24)

Sonat acquired Sonat Offshore Drilling, Inc. (SODI), a corporation registered to do business in Alabama. SODI was a party to a lease agreement involving Alabama property with another Sonat subsidiary also doing business in Alabama, Southern Natural Gas Company (SNG). SODI paid substantial dividends to Sonat, which Sonat deducted from its Alabama net taxable income, under Ala. Code Section 40-[18]-35(a)(14). This provision limits the deduction to dividends received from subsidiaries subject to the Alabama corporate income tax.

The DOR disallowed Sonat's deduction on the grounds that the lease transaction between SODI and SNG was entered into merely so that Sonat could avoid paying taxes on the dividends received from SODI. The court ruled that the dividends were deductible by Sonat under a strict interpretation of the statute, dismissing SODI'S and SNG's motives for entering into the lease agreement as irrelevant.

* Hawaii

Tax Information Release No. 99-2(25) announced that a 100% dividends-received deduction (DRD) is being administered without regard to the discriminatory requirements. A corporation may claim a 100% DRD under Haw. Rev. Stat. Section 235-7(c) for (1) qualifying dividends (as defined in Sec. 243(b)) received by members of an affiliated group, but without the requirement that they be from domestic corporations; and (2) dividends received by a small business investment company operating under the Small Business Investment Act of 1958 on shares of stock of another corporation, regardless of the percentage of business it does in the state.

* Massachusetts

DOR Directive 98-1(26) indicated that, to qualify for the 95% DRD under M.G.L. c.63 [sections] 38(a)(1), the dividend recipient must own at least 15% of the payor's voting stock. The Directive provides that, in determining ownership for [sections] 38(a)(1) purposes, the DOR generally will not apply the Sec. 318 constructive ownership rules.

DOR Directive 98-2(27) provided that the Sec. 958(b) constructive ownership rules generally apply in determining whether deemed dividends of subpart F income are eligible for a DRD. As long as the U.S. shareholder receiving the deemed dividend owns at least 15% of the payor's voting stock (either directly or constructively under Sec. 958(b)), the deduction will be available.

DOR Directive 98-3(28) provided that a distribution from a wholly owned second-tier subsidiary to the "grandparent" corporation that is treated as a dividend for Federal income tax purposes is treated first as a constructive dividend from the second-tier subsidiary to its immediate parent, followed by a constructive dividend from the parent/first-tier subsidiary to the grandparent. Each of these dividends qualifies for the 95% DRD under M.G.L. c.63 [sections] 38(a)(1).

NOL Deduction

* Connecticut

Under Act 173 (SB 1), Laws 1999, effective for operating losses incurred in tax years beginning after 1999, the net operating loss (NOL) carryforward provision is extended from five years to 20 years to conform to Federal law. However, losses still cannot be carried back.

* District of Columbia

The court of appeals reversed a lower court decision and ruled that unincorporated businesses are entitled to NOL carrybacks and carryovers.(29) D.C. taxes unincorporated businesses in a manner similar to its taxation of corporations; with some significant exceptions, partnerships, sole proprietorships and all other unincorporated businesses doing business in D.C. are subject to a net-income-based tax. Ever since the D.C. NOL provision was enacted effective in 1988, the Department of Finance and Revenue has maintained that unincorporated businesses are not entitled to an NOL carryback or carryover deduction. The District has been granted a rehearing en banc.

* District of Columbia

Similarly, the court of appeals reversed a trial court decision and ruled that corporations can take NOL deductions on D.C. corporate returns filed on a separate-company basis, even if those losses were fully offset by the income of affiliated corporations on a prior Federal consolidated return.(30) The decision was based in part on the above decision. The District has been granted a rehearing.

* District of Columbia

For tax years beginning after 1999, law changes enacted by the Tax Parity Act of 1999 provided that NOLs may be claimed by unincorporated businesses, eliminated the NOL carryback, conformed the carryforward period to Federal law and provided that taxpayers filing Federal consolidated returns must compute the NOL on a separate-company basis. The new law also provides that Sees. 381, 382 and 384 and the amount of an NOL allowed as a carryover are based on the loss apportioned to D.C.

* Idaho

HB 109, signed into law as Chapter 70, conforms the corporate NOL carryover periods to Federal law. Accordingly, the NOL carryback period has been changed from three to two years; the carryforward period has been changed from 15 to 20 years. The changes apply to losses incurred in tax years beginning after 1998. The new law also clarifies that deductible losses must be attributable to Idaho. If at least one corporation in a combined group was transacting business in Idaho during the tax year in which the loss was incurred, the NOL may be subtracted.

* Maine

The supreme judicial court ruled that, for Maine income tax purposes, the income of a unitary group is calculated under the Internal Revenue Code without regard to its filing of consolidated returns at the Federal level.(31) In this case, the state tax assessor had disallowed the unitary group's NOL carryforward, which for Federal tax purposes had been absorbed by other members of the Federal consolidated return.

* Massachusetts

The court of appeals ruled that the NOLs of three subsidiaries cannot be used to offset the income of profitable subsidiaries in a combined group.(32) According to the court, the "taxable net income" of a corporation in a group must be determined by calculating the corporation's gross income and then calculating its net income as gross income less deductions. The court pointed out that the relevant statutes and regulations provide that an NOL carryforward is available only to the corporation that created the loss and concluded that, because the taxpayer's three subsidiaries had no income for tax year 1991, the NOL carryforward of those three subsidiaries was unavailable to the group's combined tax return.

* Minnesota

In Rev. Notice 99-07,(33) the DOR explained how to apply the Sec. 382 limit on NOL deductions after the occurrence of certain corporate ownership changes. According to the notice, in a post-change year, the amount of Minnesota net income used to determine the NOL deduction, with regard to pre-change losses, is limited to the Sec. 382 limit determined for that year. This limited net income is then multiplied by that post-change year's apportionment percentage to determine the limited amount of (apportioned) taxable net income eligible for an NOL deduction for those losses being carried forward from pre-change years. The Sec. 382 limit does not reduce the total amount of pre-change Minnesota NOLs available for carryforward but, similar to Federal treatment, restricts the amount of NOLs from pre-change years that can be applied to the income in a post-change year.

* New York

In TSB-A-99(15)C,(34) the New York State Department of Taxation and Finance (Department) ruled that a corporation may not claim an NOL deduction under Article 9-A of the Tax Law for an NOL carryforward from tax years in which it was subject to Article 9 taxation. The taxpayer is a trucking corporation that was subject to New York State franchise tax under Sections 183 and 184 of Article 9 of the Tax Law until Dec. 31, 1997. Effective Jan. 1, 1998, the taxpayer was subject to Article 9-A of the Tax Law (i.e., the franchise (income) tax). The taxpayer had an NOL carryforward at Dec. 31, 1997 for Federal income tax purposes and would have had an NOL carryforward for New York State franchise tax purposes had it been taxable under Article 9-A of the Tax Law before 1998. According to the Department, Section 208.9(f)(2) of the Tax Law and Section 3-8.2(b) of the Article 9-A Regulations preclude the taxpayer from using losses sustained in earlier years when it was not subject to Article 9-A tax.

* Tennessee

The court of appeals reversed the chancery court and held that a corporation surviving a statutory merger may not use NOLs generated by the corporation that was dissolved in the merger.(35) However, the court held that the survivor could use industrial machinery credits generated by the merged corporation. Legislation enacted in 1999 clarifies that in the case of a merger, consolidation, etc., the successor is prohibited from using NOLs or credits generated by the predecessor entity before the merger, consolidation, etc. An exception applies when the predecessor merges out of existence and into a successor that has no income, expenses, assets, liabilities, equity or net worth.

Other Modifications

* California

The court of appeals reversed a trial court decision and held that the interest offset is not a tax on dividends of nonunitary subsidiaries and does not discriminate against interstate commerce.(36) The U.S. Supreme Court has granted the taxpayer certiorari.

* Colorado

Under HB 1125, Laws 1999, effective for tax years beginning 1999, the computation of the amount of foreign-source income for corporate taxpayers electing to claim foreign taxes paid or accrued as a credit on their Federal income tax return is adjusted to reflect the current Federal corporate income tax rates.

* New York

The Department addressed the calculation of depreciation deductions for property placed in service outside the state in tax years 1985-1993.(37) For property placed in service outside the state for tax years after 1984 but before 1994 (subject property), New York State did not allow the accelerated cost recovery system (ACRS) or the modified ACRS (MACRS) depreciation deduction determined under Sec. 168. The City of New York had the same provision for purposes of the New York City corporation tax. However, the state supreme court held that the New York City provision is unconstitutional, because it violates the Commerce Clause by discriminating against owners of out-of-state property.(38) New York State will follow this decision.

Accordingly, taxpayers will now be allowed to claim the same depreciation as was claimed on their Federal return for property placed in service outside New York State in tax years 1985-1993. However, the Department realizes that it may be burdensome or unfair to require all taxpayers to switch to Sec. 168 depreciation for the subject property. Therefore, the Department will allow taxpayers, at their option, to continue to use the Sec. 167 deduction, or to switch to the Sec. 168 deduction. The deduction chosen by the taxpayer must be used on all subject property it owned.


* Louisiana and Oregon became the 38th and 39th states to join the MTC National Nexus Program.

* Three Maryland cases held that an out-of-state affiliate of a Maryland corporation is not subject to state corporate income tax if the affiliate is a nonphantom entity.

* 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 and (2) the acquisition, management, use and disposition of the property are integral parts of the corporation's regular business operations.

(1) Ala. DOR, Tax Policy Letter 99-001 (3/16/99).

(2) Cal. FTB, Legal Ruling 99-1 (1/6/99).

(3) SYL, Inc. v. Comptroller of the Treasury, Md. Tax Ct., No. C-96-0154-01 (4/26/99).

(4) Crown Cork & Seal (Delaware), Inc. v. Comptroller of the Treasury, Md. Tax Ct., No. C-97-0028-01 (4/26/99).

(5) MCI Int'l Telecommunications Corp. v. Comptroller of the Treasury, Md. Tax Ct., No. C-97-0028-01 (4/26/99).

(6) NC DOR, Directive CD-99-1 (2/19/99).

(7) Sec'y of Rev. of NC v. Perkins Restaurants, NC Tax Rev. Bd., Admin. Dec. No. 351 (1/28/99).

(8) J.C. Penney Nat'l Bank v. Ruth E. Johnson, Comm'r of Rev., State of Tenn., Davidson Chancery Docket No. 96-276-I, Appeal No. M1998-00497-COA-R3-CV (12/17/99).

(9) Uniroyal Tire Co., Inc. v. State DOR, Ala. Ct. of Civ. Apps., No. 2971007 (5/28/99).

(10) Hoechst Celanese Corp. v. FTB, Cal. Ct. App., Third App. Div., No. C030702 (12/3/99).

(11) Appeal of Kroger Co., Ks. BTA, Docket No. 1998-2850-DT (7/21/99).

(12) Jacob Licht, Inc. v. Comm'r of Rev., Mass. App. Tax Bd., Docket No. 206695 (1/28/99).

(13) W.R. Grace & Co. v. Comm'r of Rev., Mass. App. Tax Bd., Docket No. F239586 (11/19/99).

(14) McVean Barlow, Inc., 88 NM 521 (1975).

(15) Polaroid Corp. v. Muriel K. Offerman, 349 NC 290 (1998), cert. den.

(16) Union Carbide Corp. v. Muriel K. Offerman, NC Ct. of Apps., No. COA97-956 (4/6/99).

(17) L.M. Berry & Co. v. Joe B. Huddleston, Tenn. Ct. of Apps., No. 01-A-01-9809-CH-00487 (10/28/99).

(18) First Chicago NBD Corp. v. Dep't of State Rev., Ind. Tax Ct., No. 49T10-9712-TA-00197 (3/31/99).

(19) Trinova Corp. v. Mich. Dep't of Treasury, 498 US 358 (1991).

(20) Mass. DOR. Directive 99-9 (8/10/99).

(21) Consumers Power Company v. Dep't of Treasury, Mich. Ct. of Apps., No. 203894 (4/30/99).

(22) Va. Ruling of Comm'r, P.D. 99-126 (5/28/99).

(23) Delco Electronics Corp. v. DOR, Wisc. Ct. of Apps., District IV, No. 98-170898-1708 (5/13/99).

(24) Ex parte Sonat, Inc., ala. Sup. Ct., No. 1961585 (8/27/99).

(25) Tax Info. Release No. 99-2, Hawaii Dep't of Tax'n (7/23/99).

(26) Mass. DOR Directive 98-1 (10/26/98).

(27) Mass. DOR Directive 98-2 (10/26/98).

(28) Mass. DON Directive 98-3 (10/26/98).

(29) School Street Associated LP v. District of Columbia, DC Ct. of Apps., No. 97-TX-1442 (2/25/99).

(30) Sovran Bank/D.C. National v. District of Columbia, DC Ct. of Apps., No. 97-TX-2001 (6/24/99).

(31) Fairchild Semiconductor Corp. v. State Tax Assessor, Me. Sup. Jud'l Ct., Docket No. Ken-99-146 (11/23/99).

(32) Farrell Enterprises, Inc. v. Comm'r of Rev., Mass. Apps. Ct., No. 97-P-1642 (3/30/99).

(33) Minn. DOR, Rev. Notice 99-07 (8/9/99).

(34) Walton Milk Hauling, Inc., NYS Comm'r of Tax'n and Finance, TSB-A-99(15)C (3/1/99).

(35) Little Six Corp. v. Ruth Johnson, Comm'r of Rev., Tenn. Ct. of Apps., No. 01-A-01-9806-CH-00285 (5/28/99).

(36) Hunt-Wesson, Inc. v. FTB, Cal. Ct. App., First App. Dist., Div. Three, No. A079969 (12/11/98).

(37) NYS Comm'r of Tax'n and Finance, TSB-M-99(1) and -99(1)C (2/16/99).

(38) R.J. Reynolds Tobacco Co. v. City of New York Dep't of Finance, 667 NYS2d 4 (1997).

Karen J. Boucher, CPA Senior Tax Manager Arthur Andersen LLP Milwaukee, WI
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Title Annotation:state taxation; part 1
Author:Boucher, Karen J.
Publication:The Tax Adviser
Geographic Code:0JSTA
Date:Mar 1, 2000
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