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.

 

The Virginia Department of Taxation refused to consider whether a taxpayer was entitled to claim an exception from the state’s addback statute because the taxpayer failed to follow the statutory procedure. P.D. 11-174 (Oct. 12, 2011).

Virginia law requires the addback of intangible expenses and costs, which includes losses related to, or incurred in connection with, factoring transactions. The taxpayer paid factoring fees to a related company and deducted them on its federal income tax return. The taxpayer claimed an exception from Virginia’s addback requirement on its original Virginia return based upon the exception that it had a valid business purpose other than the avoidance of tax. Upon audit, the Department disallowed the exception from the addback rules because the sales lacked a valid business purpose.

The Department disallowed the taxpayer’s claimed exception because the taxpayer did not petition the Department to consider whether there was clear and convincing evidence that the related party transactions had a valid business purpose other than the avoidance or reduction of tax. Because the taxpayer had claimed the business purpose exception on its original return—rather than applying the addback, paying the tax, and petitioning for relief—the Department upheld the assessment. 

The ruling went on to recognize that facilitating the securitization of receivables and complying with lending requirements of unrelated third-party lenders may be a valid business purpose. The Department invited the taxpayer to follow the proper procedures within the applicable statute of limitations to claim the valid business purpose exception.

While the attorneys and admins on the Sutherland SALT Team may have been a bit camera-shy this Halloween, their kids (and even a pet) were happy to show off their costumes for us. We hope you enjoy these photos of Sutherland SALT’s Halloween 2011.

Continue Reading Trick or Treat: Sutherland SALT Families Celebrate Halloween

The Massachusetts Appellate Tax Board recently upheld the Commissioner of Revenue’s denial of deductions for interest expense on intercompany loans. Sysco Corp. v. Comm’r of Revenue, Docket Nos. C282656 & C283182 (Mass. App. Tax Bd., Oct. 20, 2011).

In Sysco, the taxpayer employed a common cash management arrangement in which cash was swept on a nightly basis from its subsidiary entities to a common “cash manager” for investment purposes. If Sysco received more money from an operating company than it disbursed to it, the subsidiary earned interest (prime rate less 1%) on the balance, and if Sysco disbursed more money than it received, Sysco earned interest (prime rate) from the subsidiary.

The Board determined that the loans were not true indebtedness. The Board found that the purported loans were not memorialized in writing (whether in the form of promissory notes or formal agreements) and there were no repayment schedules or fixed maturity dates. Also, the Board determined that the upstream payments were intended to remain with Sysco for use in its corporate activities, including paying dividends. The Board found that Sysco had no intention of repaying the funds transferred by the operating companies and that the operating companies never once requested repayment from Sysco. The Board placed great reliance on the fact that the aggregate amount Sysco owed to its operating companies increased dramatically from approximately $700 million in 1996, to more than $1.8 billion in 2001. Further, the Board gave no weight to Sysco’s experts because they “failed to demonstrate the existence of ‘an unconditional and legally enforceable obligation for the payment of money’ in the context of Sysco’s cash-management system.”

The Board’s decision is troubling because it interferes with a common intercompany arrangement for large multi-entity businesses that is meant to reflect the compensation for the use of each legal entity’s capital in an efficient manner. Some states have even imputed a charge on intercompany transactions when a taxpayer has not charged a related company for such an arrangement. See, e.g., United Parcel Serv. Gen. Servs. Co. v. Director, Div. of Taxation, 25 N.J. Tax 1 (2009). Finally, it is worth noting that the sting of the Board’s decision is lessened by Massachusetts’ shift to combined reporting.

Recently, there has been significant activity in Congress related to sales tax nexus.

  • In July, Sen. Richard Durbin (D-Ill.) introduced the Main Street Fairness Act (the “Durbin Bill”), the first of three bills introduced this year that would allow states to collect sales taxes from remote sellers.
  • On October 13, 2011, Rep. Steve Womack (R-Ark.) and Rep. Jackie Speier (D-Cal.) introduced the Marketplace Equity Act of 2011 (the “Womack Bill”) that would allow states to impose a sales or use tax collection requirement on remote sellers with no physical presence in a state.
  • Yet another bill, the Marketplace Fairness Act, was introduced by Sen. Michael Enzi (R-Wyo.) on November 9 (the “Enzi Bill”). This bill appears to have bipartisan support, as senators on both sides of the aisle are co-sponsors: Sens. Durbin, Lamar Alexander (R-Tenn.) Tim Johnson (D-S.D.), John Boozman (R-Ark.), Jack Reed (D-R.I.), Roy Blunt (R-Miss.), Sheldon Whitehouse (D-R.I.), Bob Corker (R-Tenn.), and Mark Pryor (D-Ark.).
  • In contrast to these bills, Sens. Ron Wyden (D-Ore.) and Kelly Ayotte (R-N.H.) introduced a resolution opposing the enactment of “new burdensome or unfair” tax collection requirements on small Internet sellers. Sen. Res. 309 (Introduced Nov. 2, 2011).

Despite the resolution, Congress will seriously consider the three proposed acts. The three acts attempt to address the same issue through slightly different approaches. All three would allow states to collect tax from remote sellers if certain uniformity requirements are met. The uniformity requirements are similar, for the most part, but with some slight differences as discussed below.

Continue Reading Nexus? Who Said Anything about Nexus?: A Summary of the Federal Nexus Bills