Intangible Expense Addback Developments

Southeastern Association of Tax
Administrators
64th Annual Conference
Intangible Expense Developments:
Where Were We, Where are We Going?
Scott D. Smith
Baker Donelson Bearman Caldwell & Berkowitz, P.C.
Nashville, Tennessee
Overview
• Post-2000 Trends
• Recent Legislative and Judicial Developments
• The Exceptions
• “Embedded Intangibles”
• Management Fees and Other Expenses
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Intangible Expense Add-Back – Enactment Trend
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Enactments by State/Year
Pre2000
2001
2002
2003
2004
2005
2006
2008
2009
2012
2015
CT
OH*
AL
MS
NC
MA
NJ
NY*
AR
MD
VA
IL**
KY
GA
IN
DC
MI
MN**
RI
WI
WV
TN*
PA
* Ohio – since repealed with enactment of CAT
* New York – amended effective 1/1/2013
* Tennessee – amended effective 7/1/2012
** Illinois – applicable to 80/20 companies
** Minnesota – applicable to FOCs
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State Corporate Income Tax Collections – 2000-2013
* Source: U.S. Census
Bureau
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State Corporate Income Tax Collections – Longer Term
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State Corporate Income Tax Collections – Recovery?
•
2013 reflected a 7.9% Y-o-Y increase in state corporate income
tax collections; third straight year of increases
• 2013: $45,021,252,000
• 2007: $52,915,455,000
•
All state tax collection trend
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Other Trends
•
Expansion of unitary combined reporting – District of Columbia,
Massachusetts, Michigan, New Mexico (certain retailers), New
York, Rhode Island (2015), Texas, Vermont, West Virginia,
Wisconsin
• Current: 26 states (10 added since mid-2000s)
• Prior to 2000, only two states were east of Mississippi River
• Since 2000, all of new adopters, except two, are east of
Mississippi River
•
IRC § 482 transfer pricing audits
• MTC’s “Arm’s Length Adjustment Service”
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Other Trends (con’t)
•
Alternative apportionment challenges by states
• “Mississippi and Tennessee are emboldened because they
have won big cases” (Rick Pomp)
• Heads we win, tails you lose
•
Substance over form challenges by states
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Legislative Developments
•
Kentucky: KRS § 141.205(1)(d) (H.B. 440) – same intangible
expense add-back exceptions now apply to the add-back of
management fees as of 1/1/2014.
•
New York: S. 2609/A. 3009 amends/”repeals” 2003 statute and
adopts MTC model statute as replacement.
• TSB-M-13(6)C (Aug. 8, 2013): further guidance
•
Oregon: H.B. 3069 repeals add-back statute for tax years
beginning on or after 1/1/2013; includes exception for payments
to related foreign corporations for years 1/1/2010 through
12/31/2012.
•
Pennsylvania: H.B. 465 enacts intangible expense add-back.
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Legislative Developments (con’t)
•
Tennessee: 2012 amendments to T.C.A. § 67-6-2006 and
related provisions.
•
Virginia: H.B. 5001 enacted retroactive change to Virginia’s
“subject to tax” exception (back to 2004 or original enactment of
Virginia’s intangible expense add-back statute) to limit exception
to apportioned intangible expense.
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Judicial Developments – The “Unreasonable”
Exception to Add-back
•
Alabama: Surtees v. VFJ Ventures, Inc., 8 So. 3d 950 (Ala. Ct.
Civ. App. 2008) - Unreasonable exception requires resulting tax
be out of proportion to what is reasonably attributable to the
state.
•
Massachusetts: Kimberly-Clark Corp. v. Comm’r of Revenue,
981 N.E. 2d 208 (Mass. Ct. App., Jan. 6, 2013) - Clear and
convincing evidence standard applied to taxpayer’s argument
that the “unreasonable” exception to add-back applied.
•
New Jersey: Beneficial New Jersey, Inc. v. Director
(unpublished) (N.J. Tax Ct. 2010) – Exception applies if
economic substance and business purpose satisfied.
• Tax Court rejected limiting to only cases of double taxation
and centralized cash management systems.
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Judicial Developments – The “Subject to Tax”
Exception to Add-back
•
Alabama: VFJ Ventures, Inc. - Exception applies only to extent
of the apportioned amount of intangible income that is taxed by
another state.
•
New Jersey: Beneficial New Jersey, Inc.
• NJ statute: Exception applies if other state “rate of tax” is not
greater than 3% less than NJ rate
• Tax Court upheld regulation that “rate of tax” means effective
rate; compare NJ and other state(s) ETRs
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Judicial Developments – The “Subject to Tax”
Exception to Add-back (con’t)
•
Virginia: Numerous rulings; 2014 retroactive legislation
• Wendy’s International, Inc. v. Dept. of Taxation, (City of
Richmond Cir. Ct., March 29, 2012)
• Kohl’s Department Stores, Inc. v. Dept. of Taxation (pending;
City of Richmond Cir. Ct.)
• Lorillard Tobacco Co. v. Dept. of Taxation (pending; City of
Richmond Cir. Ct.)
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Intangible Expense Disallowance – Beyond Royalties
• “Embedded Intangibles”
•
Defined: Intangible expense paid to one related party that is
included (or deemed included) in the cost or price of a product or
service provided to another related party
•
Intangible expense disallowance by regulation/audit, not statute
• Massachusetts: 830 CMR 63.31.1(3)(a)
• Alabama: Ala. Admin. Code r. 810-3-35-.02(3)(d)1, Example
• Georgia: Ga. Admin. Rule 560-7-3-.05(3), Examples (a) and
(b)
• Wisconsin: Wis. Rule 3.01(2)(n), Example 1
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Intangible Expense Disallowance – Beyond Royalties
• Embedded Intangibles - Developing Case Law
• Massachusetts: Kimberly-Clark Corp.
• Rebates were not a horse of a different color
•
Tennessee: J.C. Penney Corp., Inc. v. Roberts, No. 13-1578-IV
(Tenn. Chancery Court)
• Case is pending; filed November 7, 2013
•
Virginia: Ruling of Commissioner, P.D. 13-213 (Nov. 18, 2013)
•
West Virginia: Griffith v. ConAgra Brands, Inc., 728 S.E. 2d 74
(W. Va. 2012)
• Implicit in the nexus holding
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Intangible Expense Disallowance – Beyond Royalties
• Embedded Intangibles – How are States Vulnerable?
•
Underlying statutes are not models of clarity; open to ambiguities
•
Are the regulations and audit positions valid statutory
interpretations?
•
Federal authorities, interpretations, and state conformity
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Intangible Expense Disallowance – Beyond Royalties
• Management Fees
•
Kentucky: KRS § 141.205(1)(d)
•
Wisconsin: Wis. Stat. §§ 71.01(7v) and 71.26(2)(a)7
•
Virginia: Ruling of Commissioner, P.D. 13-140 (July 19, 2013)
• A change to Virginia’s historic position?
• Ruling of Commissioner, P.D. 14-60 (April 30, 2014)
•
Indiana: Letter of Findings No. 02-20120310 (July 31, 2013) and
Letter of Findings No. 02-20120690 (Aug. 28, 2013)
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Intangible Expense Disallowance – Beyond Royalties
• Accounts Receivable Factoring
•
Indiana: Letter of Findings No. 02-20120612 (Nov. 27, 2013)
•
Tennessee: Letter Ruling # 12-32 (Dec. 19, 2012)
• Accounts receivable do not satisfy definition of “intangible
property”
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Questions?
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