This advisory discusses the recently approved Proposition 39, a California ballot initiative that requires corporations conducting a multistate business to apportion their income using a single-sales factor apportionment formula beginning January 1, 2013. Two other recent developments in California raise significant questions regarding the effectiveness of Proposition 39’s single-sales factor apportionment requirement. In Gillette Co. v. Franchise Tax Board, the Court of Appeal of California held that a corporate taxpayer could elect to apportion its income using either the statutory formula or the equally weighted, three-factor Multistate Tax Compact formula. The California Assembly attempted to eliminate that election by enacting legislation, SB 1015, shortly before Gillette was issued. However, there are serious concerns regarding the validity of that legislation. It therefore remains to be seen whether corporate taxpayers will indeed be required to apportion their income in accordance with Proposition 39 or may instead elect to apportion under the Compact’s equally weighted, three-factor formula.
The advisory is provided in PDF on the Alston & Bird website:
www.alston.com/advisories/state-and-local-tax-advisory-proposition-39
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This advisory discusses LTR 201222014, which ruled that persons contributing property to a new corporation in exchange for stock can form a control group with other persons contributing the stock of another corporation (target), and therefore enjoy Section 351 nonrecognition treatment. This might seem obvious to practitioners familiar with combined reorganization/351 contributions that were first treated favorably under Section 351 by LTR 9143025. The transaction often takes the form of a double dummy drop down, whereby a new holding company puts the contributed property in one subsidiary and holds the acquired target corporation as the other subsidiary.
The advisory is provided in PDF on the Alston & Bird website:
www.alston.com/advisories/federal-tax-report-september-2012
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It was perhaps viewed as a close shave prior to the California Court of Appeal’s issuance of its opinion in Gillette Co. & Subsidiaries v. Franchise Tax Board, No. A130803 (Ct. App., July 24, 2012), but in fact, the court soundly rejected the California Franchise Tax Board’s (FTB) arguments that taxpayers were not entitled to make a so-called “Compact election” and file California tax returns using the Uniform Division of Income for Tax Purposes Act’s (UDITPA) equally-weighted, three-factor apportionment formula. This advisory explains how the court’s decision has ramifications beyond California and how it likely impacts most multistate businesses.
The advisory is provided in PDF on the Alston & Bird website: www.alston.com/publications/SALT-advisory-gillette-ftb
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A memorandum dated July 19, 2012, from the MTC Counsel to the chair of the MTC Income and Franchise Tax Uniformity Subcommittee proposes adoption of a uniform regulation akin to, or actually adopted under the states’ version of, I.R.C. Section 482. The proposal is posted on the MTC website.
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On June 21, 2012, the North Carolina General Assembly enacted its annual updates and so-called technical revisions of the revenue laws. Session Law 2012-79.
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The Governor of North Carolina signed Session Law 2012-43, which suspends the authority of the NCDOR to force corporate combinations for years beginning on or after January 1, 2012 until the DOR issues and has approved an administrative rule defining the standards for forced combinations.
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Armour v. City of Indianapolis, 132 S. Ct. 2073 (2012) ruled that a city did not violate the Equal Protection Clause of the Fourteenth Amendment when it chose to forgive remaining unpaid installments of a special assessment for sewage improvements but not to refund those taxpayers who had paid in full without choosing to pay in installments.
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In what is hopefully one of the last of the old modifiable decisions in tax cases by North Carolina Administrative Law judges, the NCDOR allowed the ALJ to relieve a shareholder of transferee tax liability, but still modified the ALJ opinion. 10 REV 04058; Cherry v. Dep't of Revenue (May 16, 2012).
The Case: The DOR wanted to collect a corporation’s sales taxes from one of its shareholders. The corporation had operated a restaurant that closed. The DOR auditor caused the petitioner Cherry to sign sales and use tax forms after the fact. When the taxes were not paid the DOR attempted to collect them from Cherry under the “responsible person” statute. The ALJ rejected the DOR claims due to Cherry’s lack of control over the day to day operations of the corporation.
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The usual Friday release of a large number of letter rulings by the IRS included several rulings of interest on reorganizations and consolidated return issues.
Bankruptcy Reorganization: LTR 201208036 addresses the use of qualified settlement funds, disputed ownership funds and liquidating trusts (all referred to as trusts) to hold both some of the assets of the debtor and the securities of Newco, the corporation into which the debtor was reorganized. This debtor evidently was brought down in part by environmental liabilities. It is not clear what assets the debtor transferred to Newco in exchange for securities, but the debtor also transferred plant and equipment to one trust, other assets to another trust and Newco securities to two other trusts.
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Technocom Business Systems Inc. v. North Carolina Dep't of Revenue; No. COA11-655 (NCAPP 2/21/2012). Taxpayer sold and leased equipment. It also serviced the equipment sold and leased and charged customers for the maintenance service. It also bought property to use in performing its service agreements. It did not pay use tax on the purchases of that property. A final determination was made that taxpayer owed use tax on its purchases of such property. Taxpayer also erroneously collected sales tax on the charges for its maintenance agreements, which were services and not taxable sales of property. A final determination was made that such maintenance agreement charges were not subject to sales tax.
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LTR 201140009 ruled that a circular flow of cash can be used to effect a section 351 exchange, evidently for foreign tax reasons; it was treated as if the cash flow did not occur. Evidently the taxpayer felt it needed a letter ruling here due to the circular flow of cash.
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LTR 201140008 is the latest ruling approving the rescission of a corporate transaction. It is unusual in that it does not specifically state that the rescission occurred in the year of the original transaction, and the reason for the rescission is odd.
Facts: P is the common parent of a group containing at least S1, 2, 3 and 4. S3 owns S5, which owns some stock in S6, the rest of which is owned by P. The facts do not state that S5 and S6 are in the group. S1 sells some S3 stock to S2 at book value. Then taxpayer realized that S3 owned some assets not intended to be indirectly owned by S2, so S3 sold those assets to S2 at book value and S2 sold them to S1 at book value. Then taxpayer realized that S3 indirectly owned some of S6.
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Please click here to read an article by Ethan Millar and Kendall Houghton on current developments in unclaimed property. This article was published in the Sept. 12 edition of State Tax Notes.
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Please click here for a recent paper by Atlanta SALT partners Jeff Glickman and Mike Petrik regarding two of the most significant issues in state tax during 2011: click-through nexus provisions (or "Amazon laws") and the taxation of cloud computing.
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Corporations have become very concerned about “best practices” and “risk management” in the wake of the Enron scandal and enhanced enforcement rules of government agencies and auditing rules of accountants. One way to address those concerns is for corporate boards to adopt guidelines for employees. One area in which such guidelines can be useful is in application of the economic substance doctrine.
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The two bills have just passed the California Legislature that would allow companies to become a benefit corporation (AB 361) or a flexible purpose corporation (SB 201), fundamentally changing California’s Corporations Code.
Under either law, California would allow a new type of corporation if part of its mission is to improve society and the environment, and the corporation creates a “general public benefit” or “material positive impact on society and the environment.”
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Click here to read a chapter by SALT partner Mary Benton (with Art Rosen and Cass Vickers) that recently appeared in the materials for the 2011 NYU Institute on State and Local Taxation conference.
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States have recently started to use third party contract auditors to conduct transfer pricing audits of taxpayers. Such audits have resulted in large assessments made pursuant to the states' "discretionary authority." This article, recently published by Kendall Houghton and Maryann Luongo in the IPT's August 2011 Tax Report (see p. 15), discusses the use of third party contract auditors in the transfer pricing arena as well as some of the issues that arise during such audits.
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This presentation was given by Tim Fallaw at this year's CBIZ and MHM Annual Conference.
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Last week, Alston & Bird’s Jack Cummings served as local counsel to the Council On State Taxation (COST) in the preparation and filing of COST’s amicus brief urging the N.C. Supreme Court to review the Delhaize case. The case involved North Carolina’s forced combination of Delhaize and one of its affiliates. The argument portion of the brief can be viewed by clicking here. We will update this blog as soon as we learn whether the N.C. Supreme Court has decided to grant review in this case.
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