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Income Taxes: Principles of Formulary Apportionment (Portfolio 1150)

Be a trusted advisor to your clients with Bloomberg BNA Tax Portfolios. In this Portfolio, our expert authors discuss the apportionment of income for state tax purposes. 

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DESCRIPTION

To forestall unwanted congressional action, the states have attempted to demonstrate that they can ameliorate the uniformity problem themselves. Specifically, the National Conference of Commissioners on Uniform State Laws adopted the Uniform Division of Income for Tax Purposes Act (UDITPA) in 1957. To date, most states have either adopted UDITPA as the exclusive or optional method, or have adopted it with some changes.

 

The Income Taxes: Principles of Formulary Apportionment Portfolio zeroes in on the three–factor formula contained in UDITPA and analyzes important variations from (and distortions of) this formula.


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AUTHORS

JOHN S. WARREN, ESQ.

John S. Warren has been a partner in the Los Angeles law firm of Loeb & Loeb since 1960 and was an adjunct professor of law at the Loyola University School of Law in Los Angeles from 1977 to 1988. He is the past chairman of the Committee on State and Local Taxes, Section of Taxation, American Bar Association (1981–1983), and presently is a member of the Executive Committee, California State Bar Section of Taxation. Prior to private practice, he was associate tax counsel to the California Franchise Tax Board. He has served as a consultant to the California Department of Finance, the California Senate Fact Finding Committee on Revenue and Taxation, and the federal General Accounting Office. John has long had an extensive practice in the state and local tax field and has handled significant California tax litigation at both the administrative and court levels. He has lectured widely on state tax matters and has also published numerous articles on both state and federal tax problems. In 1988, he received the Dana Latham Memorial Award from the Los Angeles County Bar Association.

 

Credentials / John received his B.S. in Law degree from the University of Minnesota in 1943 and his Bachelor of Law from the University of California Hastings College of Law in 1950.


DIANN SMITH, ESQ.
Diann Smith is counsel in the law firm of McDermott Will & Emery LLP and is based in the Firm's Washington, D.C., office. Diann focuses her practice on state and local taxation with an emphasis on tax challenges relating to compliance, controversy, planning and legislative activity. Diann has experience representing clients in nexus, tax base, business and non-business income classification, apportionment and FIN 48 compliance issues. She has also counseled clients on multi-state unclaimed property compliance and voluntary disclosure opportunities. Diann has represented clients from a broad range of industries, including retail, insurance and communications services. Diann has significant experience representing clients before the Multistate Tax Commission (MTC). Prior to joining McDermott, Diann was counsel at another international law firm, where she also focused on state and local taxation. She also previously served as general counsel for the Council On State Taxation (COST). While at COST, Diann worked on nearly every major state and local tax issue confronting multi-state businesses. From 1998 to 2005, Diann was an adjunct professor at Georgetown University Law Center for the LL.M. in taxation program.

TABLE OF CONTENTS

Detailed Analysis

1110.01. INTRODUCTION

1110.02. OVERVIEW OF RULES DEFINING A UNITARY BUSINESS

A. General Statement of Rules

B. Unity Determined by Applying Rules to Facts

1110.03. CONSTITUTIONAL LIMITATIONS ON THE UNITARY BUSINESS CONCEPT

Introductory Material

A. Early Application of Concept in Capital Stock and Property Tax Cases

B. Earlier State Income Tax Cases

C. Later State Income Tax Cases

1. Mobil and Exxon Provide the Background

2. ASARCO and Woolworth Appear to Limit Unitary Business Doctrine

3. The Woolworth Decision

4. The Dissent in ASARCO and Woolworth

5. The Container Decision

1110.04. AMBIGUITIES CREATED BY CONTAINER

1110.05. ALLIED–SIGNAL CONFIRMS THE UNITARY PRINCIPLE

1110.06. STATE STANDARDS IN DEFINING A UNITARY BUSINESS

A. Traditional Standards Giving Way to Liberal Standards

1. Multistate Tax Commission Regulations

2. Criticism of MTC Regulations

3. Checklists of Unitary Factors Are Misleading

B. The Traditional Approach: Economic Interrelationship Between Members of a Group at Operational Level

C. Application of Fact Situations to the Traditional Approach

1. Segments Involved in the Manufacture and Sale of Products (Vertical Integration)

2. Segments Involved in Central Purchase and Multistate Sale of Inventory (Horizontal Integration)

3. Segments Involved in Similar Operations; Central Management, Central Transfer of Technical Information, and Similar Services

a. Nonintegrated Oil and Gas Operations

b. General Contractors and Service Operations

4. Segments Involved in Similar Operations; Limited Central Management and Services

a. ASARCO, Woolworth, and Container Cases

b. Department Store Chain May or May Not Be Unitary

c. Defining Same Line of Business

5. Involved in Diverse Operations; Central Management and Services (Conglomerates and Other Diverse Businesses)

a. Massachusetts, Alaska, Montana, Nebraska, and Minnesota Courts Apply a Liberal Standard

b. Maryland, Michigan, and Pennsylvania Courts Apply a Conservative Standard

c. New York Situation Clarified

d. California Situation Clarified

1110.07. COMBINED REPORTS AND OTHER MATTERS RELATED TO CORPORATE GROUPS

Introductory Material

A. COMBINED REPORTS

1. Authority for Combined Reports

2. Form for Combined Reports

3. Stock Ownership Requirements

4. Combining Corporations and Partnerships

5. Combining General Corporations and Corporations Using Special Formulas

B. UNITARY RELATIONSHIP WITH PASSIVE HOLDING COMPANY

1. In General

2. California

a. Prior Case Law

b. Appeal of PBS Building Systems, Inc.

3. Other States

C. CONSOLIDATED RETURNS

1. Methods of Apportioning Income

2. States May Require Consolidated Returns

D. TAXATION OF DIVIDENDS

1. Factor Representation

1110.08. FINAL COMMENT

1110.09. STATE-BY-STATE ANALYSIS OF THE UNITARY PRINCIPLE

A. In General

B. States

1. Alabama

2. Alaska

3. Arizona

4. Arkansas

5. California

6. Colorado

7. Connecticut

8. Delaware

9. District of Columbia

10. Florida

11. Georgia

12. Hawaii

13. Idaho

14. Illinois

15. Indiana

16. Iowa

17. Kansas

18. Kentucky

19. Louisiana

20. Maine

21. Maryland

22. Massachusetts

23. Michigan

24. Minnesota

25. Mississippi

26. Missouri

27. Montana

28. Nebraska

29. Nevada

30. New Hampshire

31. New Jersey

32. New Mexico

33. New York

34. North Carolina

35. North Dakota

36. Ohio

37. Oklahoma

38. Oregon

39. Pennsylvania

40. Rhode Island

41. South Carolina

42. South Dakota

43. Tennessee

44. Texas

45. Utah

46. Vermont

47. Virginia

48. Washington

49. West Virginia

50. Wisconsin

51. Wyoming


WORKING PAPERS

Working Papers

Item Description Sheet

Worksheet 1 Multistate Tax Commission Corporate Tax Handbook – Excerpt

Worksheet 2 California Regs. § 25120.

Worksheet 3 New York Regs. § 6-2.1 - 6-6.3.

Worksheet 4 CONTAINER CORPORATION OF AMERICA v. FRANCHISE TAX BOARD, 463 U.S. 159 (1983)

Opinion

Bibliography