By Madison Barnett

The Alaska Supreme Court held that a foreign member of a water’s edge unitary group must include its foreign dividend income in the Alaska apportionable tax base, regardless of whether the income is “effectively connected income” (ECI) for federal income tax purposes. Alaska law incorporates the Internal Revenue Code, including the ECI rules, “unless excepted to or modified” by state law. The taxpayer argued that because the foreign-source dividends were not ECI for federal income tax purposes and were not included in federal taxable income, the income should not be included in the Alaska tax base. The court, however, held that the federal ECI rules are “sourcing rules” that are “fundamentally inconsistent with the formula apportionment required by the Multistate Tax Compact.” The court then compared the federal ECI rules’ treatment of foreign dividends with the state’s 80% dividends received deduction and concluded that the “two formulas are simply inconsistent.” One could question whether the Multistate Tax Compact, which is concerned with apportioning the tax base among various states, is truly inconsistent with a provision of the Internal Revenue Code used to determine the apportionable tax base to begin with. Schlumberger Technology Corp. & Subs. v. State of Alaska, Dep’t of Revenue, Op. No. 6924 (Alaska July 18, 2014).