On December 1, 2011, the Franchise Tax Board (FTB) decided to begin a formal regulatory process on numerous proposed regulations¸ including Proposed Regulation 25106.5, implementing the Finnigan Rule, codified in Cal. Rev. & Tax. Code § 25135(c); and Proposed Regulation 25106.5-1, modifying the rules governing Deferred Intercompany Stock Accounts (DISAs). The FTB staff’s request to begin a formal rulemaking process on these proposed regulations comes after numerous interested parties meetings in which stakeholders provided feedback to the FTB regarding the scope and language of necessary regulatory guidance.

The interested parties process surrounding Proposed Regulation 25106.5 (Finnigan Rule) did not generate debate. However, Proposed Regulation 25106.5-1 attracted debate regarding the extent to which California’s DISA rules should conform to the federal Excess Loss Account (ELA) regime. The federal ELA provisions allow gain from an intercompany distribution in excess of basis to be deferred leading to the creation of an ELA. The distributee may make a subsequent capital contribution to the distributor to eliminate the ELA.

Similarly, Proposed Regulation 25106.5-1 allows a subsequent capital contribution to cure a California DISA. However, the FTB has declined to agree that a liquidation can cure a DISA to the same extent that it can cure an ELA under the federal consolidated return rules. Hopefully, these issues and others will be resolved in the formal regulatory process that is expected to begin soon.

A recent Florida Department of Revenue Technical Assistance Advisement (TAA) applied costs-of-performance (COP) sourcing for corporate income tax purposes in a manner that is more akin to market sourcing. Tech. Asst. Adv. 11C1-008 (Sept. 15, 2011).   

The TAA applied to receipts from the Taxpayer’s two predominant revenue streams: receipts from subscription programming and advertising. The Taxpayer provided subscription content directly to distributors and had no direct contact with its customers’ customers (i.e., retail subscribers/customers). The Department of Revenue stated that the income producing activity is the Taxpayer’s delivery of programming content to distributors and that such delivery constitutes performance. Thus, the Department found that subscription revenue would be sourced to Florida when the distributor is located in Florida. The Taxpayer’s receipts from subscription services provided to out-of-state distributors would not be sourced to Florida, even if that distributor provided the content to Florida residents.

Continue Reading “Other Sales in Florida”: COP Sourcing in Regulation, Market in Application

Many interstate taxpayers are frustrated with how the Multistate Tax Commission conducts its audit program. In our latest A Pinch of SALT column, Sutherland SALT attorneys Steve Kranz, Diann Smith and Michael Colavito examine the Multistate Tax Compact as it relates to current state tax law and explore the possible implications of how the Commission conducts its activities, particularly its audit program.
Read “To Be or Not to Be…the MTC,” reprinted with permission from the January 2, 2012 issue of State Tax Notes.

In a reminder that there are limits on the retroactive application of tax laws, a California Superior Court rejected the Franchise Tax Board’s attempt to impose retroactive penalties on a tax shelter promoter. Quellos Fin. Advisors, LLC v. Franchise Tax Bd., Case No. CGC-09-487540 (San Francisco Super. Ct., Tentative Statement of Decision, Oct. 31, 2011).

Quellos was promoting the allegedly abusive tax shelter in 2001. California law tied the amount of the applicable penalty to that in I.R.C. § 6700, which established a maximum penalty of $1,000. Cal. Rev. & Tax Cd. § 19177. In 2003, California amended section 19177 to substantially increase the promoter penalty from $1,000 to 50% of the income derived by the promoter from the tax shelter promotion activity. The FTB assessed the 50% promoter penalty against Quellos in November 2009 for its promotion activities alleged to have occurred in 2001. Quellos argued that the pre-2003 law imposed a maximum penalty of $1,000 and the 2003 amendment could not be applied retroactively to Quellos’s 2001 activities.

Continue Reading Promoter Finds Shelter in California Court: Court Rejects FTB’s Retroactive Imposition of Tax Shelter Promoter Penalty

In its inaugural awards edition, State Tax Notes recognized Sutherland SALT Partners Jeff Friedman and Steve Kranz as leaders in state and local taxation.

Jeff received the inaugural “Tax Lawyer of the Year” award, which is bestowed on a lawyer whom both peers and competitors deem the best. At Sutherland, his comprehensive practice represents Fortune 100 companies that are giants in their respective fields, including energy, e-commerce, technology, and telecommunications. He is a go-to adviser for clients involved in high-profile tax controversy and litigation matters, who seek sophisticated planning, advice on critical business transactions, and vital legislative advocacy. In researching Jeff, the editors noted that “numerous government lawyers told State Tax Notes that Friedman was simply the best tax lawyer in the country.”

Steve was recognized in two “Top 10” categories. He joined Jeff on the “Top 10 Tax Lawyers” list and was named one of the “Top 10 Individuals Who Influenced Tax Policy and Practice.” At Sutherland, Steve combines tax controversy and litigation with a unique approach to tax policy advocacy on behalf of his Fortune 100 clients. Taking a holistic approach to tax issues, he often represents companies on issues in litigation while working to address the larger tax policy questions through state legislatures, the U.S. Congress, the National Conference of State Legislatures, the National Governors Association, the Multistate Tax Commission and the Streamlined Sales Tax Governing Board. Combining both types of advocacy sets Sutherland’s SALT practice apart from many others.

Read “The Best of 2011” from the December 5, 2011 edition of State Tax Today.

The Indiana Tax Court granted a motion for partial summary judgment to AE Outfitters Retail Co. and held that the Indiana Department of State Revenue may require combined reporting only after first determining that other alternative apportionment methodologies would result in an equitable apportionment of the taxpayer’s income. AE Outfitters Retail Co. v. Ind. Dep’t of State Revenue (Ind. Tax Ct. Oct. 25, 2011).

The dispute in the case was whether the Department was required to first apply statutorily provided remedies to adjust a taxpayer’s income before applying combined reporting. Like many states, Indiana statutes provide alternative apportionment methods for re-determining income if the taxpayer’s income is not fairly represented, including separate accounting, the exclusion of factors, the inclusion of additional factors, or any other method to effectuate an equitable allocation and apportionment of the taxpayer’s income. Ind. Code § 6-3-2-2(l). Furthermore, in the case of commonly owned or controlled businesses, the statute allows the Department to “distribute, apportion or allocate the income derived from sources within the state of Indiana between and among those organizations, trades or businesses in order to fairly reflect and report the income derived from sources within the state of Indiana by various taxpayers.” Ind. Code § 6-3-2-2(m). The statute, however, limits the Department’s ability to use combined reporting in situations where it “is unable to fairly reflect the taxpayer’s adjusted gross income for the taxable year through use of other powers granted to the department by” those other statutory provisions.

Continue Reading Indiana Combination Is Last Resort

In the October 24, 2011, edition of Tax Analysts, Contributing Editor David Brunori opines on the course offerings, or lack thereof, when it comes to state and local tax programs at accredited law schools in his column “Not Enough Respect: State and Local Tax in Law Schools.”

“If it were up to me,” he writes, “teaching state and local tax law would be a prerequisite for being named to the top 25 law schools.” However, only 80 of the 199 ABA-accredited law schools offer a course on state and local tax law. Georgetown University Law Center is mentioned as one of the few schools that does offer such a course, and its instructors include Sutherland SALT’s very own Jeff Friedman.

Thumbnail image for Mustard1.jpg“They allow ponies in this neighborhood?!?” “You could ride him to work!” “He’s bigger than me!” “Put a saddle on that thing!!”

Yea, yea, Mustard (the attention-magnet-only-“child” of Sutherland SALT extern Ted Friedman and his wife, Caroline) has heard it all before…and he no longer takes offense to the horse comments.

Mustard is a 17-month-old Great Dane, who is very proud that he just broke through to the 140+ pound weight class. Despite his imposing stature, his mom’s nickname for him, “Sweet Baby Angel,” is well-deserved. Mustard is the sweetest dog around—a true gentle giant—and is the most popular (and recognizable) dog in the neighborhood.Mustard2.jpg

Mustard laughs at the fact that his coloring (Mantle-Merle) is not recognized by the AKC as “show-quality”… like he needs any more attention! He has no use for a “Best in Show” ribbon and no interest in traveling to the New York Stock Exchange to ring the bell (one of the “perks” of winning the Westminster Kennel Club Dog Show).

Mustard spent his formative months in Denver, Colorado, but is now so obsessed with rubbing shoulders with the movers and shakers on the D.C. streets that he will likely stay in this city forever. Plus, he loves the international vibe at the dog park.

Mustard has an exquisite palate, which the top-shelf stuff from the pet store cannot always please, and he is not afraid to go on a hunger strike to make his demands known. Consequently, his mom and dad spend a lot of time preparing organic grass-fed ground beef, steel-cut oatmeal, and long-grain brown rice (not the instant kind). Colorado really rubbed off on him.

Mustard is so proud that he is a SALT Pet of the Month…he will be adding it to his resume soon (resumes are a prerequisite for Great Danes trying to rent an apartment in the city). See attached!

North Carolina

North Carolina H.B. 692 contains several important, and somewhat disconcerting, changes for unclaimed property holders. The bill provides that for amounts due to the apparent owners of intangible property valued at $50,000 or more, holders must report the following information with respect to the owner: “full name, last known address, SSN or TIN, date of birth, driver’s license or state identification number, email address…a description of the property, the identification number, if any, and the property amount.” If amounts are held or owing under an annuity or life or endowment insurance policy, a holder must report “the full name and last known address, SSN or TIN, date of birth, driver’s license or state identification number, and email address of the annuitant or insured and of the beneficiary.” The Bill further provides that the dormancy period for “wages or other compensation for personal services” is reduced from two years to one year! 

Delaware

At the end of the 2011 Delaware legislative session, H.B. 229 was introduced. If enacted, the bill will make significant revisions to the Delaware Unclaimed Property Law. First, the “look back” period for a state-initiated audit could not extend to “any calendar year prior to 1995.” This bill will trim 14 years off of an unclaimed property look back period (which is currently 1981).

Second, with respect to any holder who enters into a Voluntary Disclosure Agreement (VDA) with the state, the state would be precluded from conducting an audit or examination of records, or from “seeking payment of any amounts of property,” for any calendar year prior to 2001. This provision shortens Delaware’s VDA “look back” authority by 10 years.

Third, the legislation requires the state to be timely in any request for payment from a holder. Currently, there is a six-year limitations period in which the state may request payment after receipt of any report. H.B. 229 would limit the period to three years. However, the bill also provides that “if no report is filed or if a holder has filed a fraudulent report,” the state may make a “request for Payment” to the holder at any time.

The bill has been assigned to the House Judiciary Committee for review, which will begin when the legislature is back in session in January.