In their article for State Tax Notes, Sutherland attorneys Jonathan Feldman, Stephen Burroughs and Timothy Gustafson analyze the Multistate Tax Commission’s Arm’s-Length Adjustment Service (ALAS) program. While most taxpayers instinctively cringe at any new MTC initiative, the ALAS program is a potential positive for corporate taxpayers due to some disturbing trends arising in state corporate income tax audits:

  • States have increasingly used statutory variations of IRC section 482 to either disregard entities and intercompany transactions as shams or deny intercompany expense deductions without performing any substantive transfer pricing analysis.
  • State tax authorities often justify those adjustments by arguing that either:
    all intercompany transactions, no matter the underlying terms, are per se non-arm’s-length; or
    they lack the resources to determine whether an intercompany transaction satisfies the arm’s-length standard.
  • These justifications misapply state’s transfer pricing authority and the ALAS may provide a superior alternative.

View the full article reprinted from the April 25, 2016, issue of State Tax Notes.