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TEI files amicus brief in Cuno case, citing danger for economy if Ohio ruling stands: e-Filing, mutual assistance procedures prompt IRS meetings.

Tax Executives Institute has urged the Supreme Court to review a lower court decision overturning Ohio investment tax credits intended to foster economic development (DaimlerChrysler Corp. v. Cuno, U.S., No. 04-1704.) In Cuno, a federal court in Ohio ruled that the States's investment tax credit is unconstitutional because it affords in-state development preferential treatment, thereby impermissibly burdening interstate commerce.

In its July 15 "friend of the court" brief, TEI argued that the United States Court of Appeals for the Sixth Circuit erroneously applied prior Supreme Court opinions on the Commerce Clause, and urged the high court to clarify the Constitution's bar on discriminatory taxes. The Institute said the lower court's ruling, if allowed to stand, could reverberate through the economy, upending settled expectations of both businesses and the States.

"Cuno may well be the most significant state tax case to come along in decades," TEI President Judy Zelisko explained, noting that many states have enacted tax incentives to spur economic development that will be threatened unless the ruling is reversed.

30 Years of Cases Explained

The Cuno case arose when a taxpayer group challenged Ohio's grant of a tax credit as violating the Commerce Clause of the Constitution. The 7.5-percent credit was available to any company, whether or not already present in Ohio, that increased its investment in manufacturing in the state; in addition, capital investment occurring within specifically designated areas was eligible for an enhanced credit of 13.5 percent, thereby allowing the state to target economically depressed areas.

In its brief, TEI acknowledged that the Supreme Court had previously invoked the Commerce Clause to invalidate a number of state taxing schemes that unreasonably burdened interstate commerce by discriminating between in-state and out-of-state taxpayers. "While the Sixth Circuit was correct to consider those decisions," TEI stated, "the Court of Appeals erred in concluding that the Court's jurisprudence mandated striking down Ohio's investment tax credit."

In the 1977 Boston Stock Exchange case, TEI explained, the Court held a New York transfer tax that more heavily taxed stock transfers if they occurred outside the state to violate the Commerce Clause. "Boston Stock Exchange has since provided the lens for reviewing the constitutionality of state taxing schemes."

Seven years after Boston Stock Exchange, the Supreme Court decided another New York case, Westinghouse Electric Corp. v. Tully, which involved a franchise tax credit. Clarifying that it made no difference that a transfer tax was not involved or that a tax credit was at issue, the Court concluded the tax scheme was constitutionally flawed because the manner in which the credit was computed created a greater tax burden on receipts from out-of-state DISC sales. A third case, Bacchus Imports Ltd. v. Dias, was decided the same year as Westinghouse, and dealt with a tax exemption from the Hawaii liquor excise tax for certain locally produced alcoholic beverages. The statute on its face did not discriminate against out-of-state distributors, but the reciprocal benefit afforded to Hawaii's local liquor products and industry was found to violate the Commerce Clause's ban on discriminatory treatment of in-state and out-of-state taxpayers.

More recently, in New Energy Co. of Indiana, the Court struck down an ethanol tax credit applied against Ohio's motor vehicle fuel sales tax for fuel produced in the state. New Energy added the principle to the discriminatory-tax-bar landscape that reciprocity will not vitiate otherwise facial discrimination.

"Against the backdrop of these cases," the Institute said, "the Sixth Circuit was called upon to assess whether Ohio's manufacturing investment tax credit crossed the line. The Court of Appeals misapprehended the Court's jurisprudence and improperly invalidated Ohio's investment credit."

TEI argued that not every difference in treatment constitutes discrimination. Four distinguishing characteristics of Ohio's investment tax credit render it constitutional:

(a) Ohio does not discriminate against products manufactured or business operations performed in any other State; (b) the investment tax credit is not related to discrete transactions and it does not target a particular product or industry; (c) the amount of the credit does not change relative to activities in other states; s and (d) Ohio's statute does not discriminate on its face but rather is freely available to any corporation engaging in the prescribed activities in Ohio.

TEI elaborated that the Supreme Court has invalidated state tax incentives in many cases, it has also affirmed the ability of the states to foster economic growth within their borders. Thus, the distinguishing characteristics of the tax credit at issue are highly significant.

"Ideal Opportunity" to Provide Guidance

"Unless the Supreme Court agrees to hear Curio, the settled expectations of both the States and the companies that acted in reliance on the tax incentives will be upset," Eli Dicker, TEI Chief Tax Counsel, said. "The Court has an ideal opportunity to provide needed guidance on what tax incentives the Constitution permits and what incentives are prohibited."

TEI's amicus brief noted that investment tax credit schemes are widely used by States to encourage growth in economically distressed areas to spur investment, increase jobs, and thus increase the tax base. Cuno could deny states the ability to manage their economies and deprive taxpayers of the certainty required to plan and conduct their business affairs, it said.

"Should the result in this case remain unchanged, the existing boundaries within which States have worked for years to promote economic growth through tax incentives will be blurred," TEI said. "The Court should review the decision in order to clarity the Commerce Clause's bar on discriminatory taxation and restore certainty to the area."

Corporate E-Filing Advances

TEI continues its efforts with the IRS to make the agency's e-filing mandate more administrable. The IRS-TEI Forms and Attachment Task Group met on July 12 in Washington, D.C., to receive an update on the initiative. TEI's representatives included E. Don Blaicher, Fred Holt, William Marx, and Roni Robinson, as well as Eli Dicker, Mary Lou Fahey, and Jeffery Rasmussen of the TEI staff. On July 13, representatives from CorpTax, Vertex, RIA, and Tax Technologies joined the group.

During the meeting, the IRS announced that 52/53 week taxpayers will NOT be excluded from the e-filing requirements for 2005; short-year fliers may also be included. This represents a change from its original announcement.

Although no decisions are final, the IRS has grouped the return's forms and schedules into four categories of filing methods: (1) XML format; (2) summary of transactional data; (3) PDF format; and (4) alternatives for filing international forms (other than Form 1118).

The IRS explained its rationale to support the categories, as follows:

* Forms that affect the computation of tax liability (e.g., Forms 1120, 2220, 4626, 8050, etc.) will generally be filed in XML format, including Form 1118 (Foreign Tax Credit). Forms that contain substantial amounts of detailed transactional data--e.g., Forms 1120 (Schedule D), 4562, 4797, and 8873 may be submitted in summary format in XML with details with respect to the transactions provided upon request; the threshold for the "details-upon-request" approach is 100 lines per section of the form.

* Some forms may be permitted to be filed in PDF format. The IRS reported that its systems can receive up to 5,000 pages of data in this format (approximately 1 gigabyte). No one file submitted in this format, however, can exceed 500 pages (approximately 60 megabytes). Forms potentially within this PDF category include Forms 926, 970, 1122, 4466, and 8832. In respect of the Form 851 (Affiliations Schedule), part 1 would be required to be filed in XML; parts 2 and 3 could be filed in PDF format. TEI suggested adding forms such as the 8283 (Non-Cash Contributions) to the list of PDF-able forms.

The IRS noted that filing in PDF format will be an interim, one-year option; a long-term solution for some forms will be addressed at a later date.

Issues relating to filing international forms were also discussed. During the first year, Forms 5471, 5472, 5713, 8858, and 8865 may well be subject to a paper-filing option. The IRS recognizes that many companies use a different software program for the international information and is working to provide a short-term solution.

Left unresolved at this point are issues relating to the types of waivers to be permitted, and the methods for correcting errors within five days of a rejection of an e-filed return. If transactional data are permitted to be filed in summary format, no waivers would likely be required since the issue can be handled through a change to the IRS's Publication 4163 (which is being revised).

Additional meetings with the IRS are planned for this fall.

Update on Competent Authority Procedures

In July, TEI representatives met with IRS officials to discuss possible revisions to Rev. Proc. 2002-52, which sets forth the agency's Competent Authority procedure. The IRS delegation to the meeting was led by Robert L. Green, IRS Director of International Tax Programs, and included members of his staff and the Office of Chief Counsel. TEI was represented at the meeting by Janice L. Lucchesi, vice chair of TEI's International Tax Committee, and TEI General Counsel Mary Lou Fahey.

Although a major revision of the revenue procedure is not contemplated, possible areas discussed as ripe for change include (1) providing that documents submitted by taxpayer to one party must be submitted to the other; (2) permitting taxpayers to submit a request to the Competent Authority that resolutions of issues affecting later years may be carried forward (assuming the material assumptions do not change); and (3) updating the protective claim letter every year rather than every six months.


Amicus brief in DaimlerChrysler v. Cuno, a case involving the constitutionality of Ohio's investment tax credit, see page 369.

E-Filing updates are periodically posted on TEI's website,
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Title Annotation:Tax Executives Institute
Publication:Tax Executive
Date:Jul 1, 2005
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