Interstate Income Tax Allocation for Corporations involved in Interstate Commerce

Uniform Division of Income Tax Purposes Act

In 1959 Alaska adopted the Uniform Division of Income for Tax Purposes Act (UDITPA).  The  National Conference of Commissioners on Uniform State Laws drafted UDITPA in 1957 to bring unify state tax codes with respect to the interstate income tax allocations for corporations involved in interstate commerce.

The Multistate Tax Compact

In 1970 Alaska adopted the Multistate Tax Compact (MTC). The MTC restated the UDITPA with some minor changes. Alaska codified the MTC  at AS 43.19.010. Per AS 43.19.010, article IV, section 9, the portion of a business’s total income apportioned to Alaska is determined by “multiplying the income by a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is three.” The property factor is the fraction of the taxpayer’s total property and the property attributable to the taxpayer’s business in Alaska; similarly, the sales and payroll factors are fractions of the taxpayer’s respective total sales and payroll attributable to the taxpayer’s business in Alaska.

Allocation Formula for Interstate Income Tax Allocation

Alaska Statute 43.19.010, article IV, section 18 permits DOR to adjust a taxpayer’s tax burden if the statutorily mandated apportionment does not “fairly represent the extent of the taxpayer’s business activity in this state.” Subsection 18(a) allows DOR to apportion the taxpayer’s income based on separate accounting, while subsection 18(c) allows DOR to add “one or more additional factors” to the apportionment formula. The statute effectively requires that any remedy DOR enforces under section 18 be “reasonable.”

Alaska Statute 43.20.144 modifies AS 43.19.010’s apportionment scheme for all taxpayers “engaged in the production of oil or gas . . . in this state or engaged in the transportation of oil or gas by pipeline in this state.”10 Alaska Statute 43.20.144(c) provides three different apportionment formulas for such taxpayers, depending on the nature of the taxpayer’s oil or natural gas business in Alaska. Under AS 43.20.144(c)(1), a taxpayer that only transports oil or gas in Alaska is subject to a two-factor formula based on property and sales. Under AS 43.20.144(c)(2), a taxpayer that only produces oil or gas in Alaska is instead subject to a two-factor formula based on property and extraction. Finally, under AS 43.20.144(c)(3), a taxpayer that both transports and produces oil or gas in Alaska is subject to a three-factor formula based on property, sales, and extraction.

Constitutional Challenges to Interstate Income Tax Allocation

Under the Due Process and Interstate Commerce Clauses of the United States Constitution, a state “may not tax value earned outside its borders.” The central inquiry is “whether the state has given anything for which it can ask return.” But the United States Supreme Court has long recognized that taxing multi-state companies using strict geographic accounting fails to account for “the many subtle and largely unquantifiable transfers of value that take place among the components of a single enterprise.” The unitary business/formula apportionment method of taxation is meant to remedy this problem. Under this method, a taxing state first identifies the unitary business of which the taxpayer’s in-state activities are a part and then apportions the income of this unitary business to the taxing state according to a set formula.

In order for a business to be unitary, and thus amenable to formula apportionment, there must be flows of value between the parent and subsidiary. The United States Supreme Court has distinguished these flows of value from the mere passive flow of funds that arises from any parent- subsidiary relationship. Three “factors of profitability” indicate a unitary business:

  1. functional integration,
  2. centralization of management, and
  3. economies of scale.

Unitary Business Activities Supports Interstate Income Tax Allocation

  1. In Container Corp. of America v. Franchise Tax Board, the United States Supreme Court held a paperboard company to be unitary with its subsidiaries where the parent provided the subsidiaries with loans and loan guarantees, occasional assistance in obtaining equipment and fulfilling personnel needs, and general oversight and guidance. I
  2. In Alaska Gold Co. v. State, Department of Revenue, the Alaska Supreme upheld a finding of functional integration where the parent approved capital expenditures greater than $100,000, handled salaries and payroll for executives, and guaranteed the subsidiaries’ lease obligations.  
  3. In Earth Resources Co. of Alaska v. State, Department of Revenue, the Alaska Supreme Court upheld a unitary business finding where the parent provided the subsidiary with loans and loan guarantees, a uniform pay scale, salary guidelines, and a uniform retirement plan. In each of these cases the courts examined the same sorts of administrative and financial services.
  4. And in Tesoro Corporations and Subs v. State, Department of Revenue, The Alaska Supreme Court upheld a unitary business finding where the parent exercised almost complete control over the credit facilities, budgeting, cash management, project selection, personnel, uniform services in the fields of environmental compliance and safety, information services and technology, internal auditing, legal affairs, insurance, risk management, purchasing, and accounting.

 

 Selection of Taxation Regime Requires More Planning than Identifing a lower Rate

Just because the accountants can identify a better tax scheme in the code doesn’t mean that you can take advantage of the code.  In Tesoro’s case the company wanted both the economies of scale in management and it wanted to reduce the taxes by more favorable allocations.  Unfortunately the presence of unitary business activities precluded the independent activity allocations.  Accordingly, they now face penalties and interest from taxes outstanding for more than a decade.

IRA Beneficiary Designation Mistakes

August 17, 2013

IRA Beneficiary Designation Mistakes

Americans held over $18 Trillion in IRA and other retirement assets. Retirement assets are protected from judgment execution in most states and grow tax deferred or tax free.  Putting money in has been a very wise decision. You still need to address your beneficiary designation issues to keep from losing all that value. Continue reading “IRA Beneficiary Designation Mistakes”

Alaska Wrestles with Veil Piercing

In an Alaska Supreme Court opinion issued on Friday, August 17th, the court wrestled with corporate veil piercing issues and their interplay with bankruptcy law.  Only corporations are normally liable for their debts.  The officers, shareholders and directors aren’t liable for corporate debts.  This concept of limited corporate liability is referred to as a veil.  Veil piercing refers to a court’s decision to disregard the veil and hold people behind the veil liable.   In a split decision the court ruled that the jury award for damages against the officer, shareholder and directors would stand.

The Claim

An employee sued a  corporation and its president for back wages in superior court. The corporation filed for Chapter 11 bankruptcy the very next day. The bankruptcy court discharged the corporation’s debts.  The superior court dismissed the corporation, but  allowed the employee to proceed to trial  against the president on a veil-piercing theory. A jury found that the corporation was a mere instrumentality of the president, and that the president owed the former employee wages under a bonus agreement. Continue reading “Alaska Wrestles with Veil Piercing”

Alaska Applies Single Occurrence Clause

Friday, August !7, 2013

USAA v. Neary, 

Supreme Court Nos. S-14580/14600

The Backdrop

In a single occurrence, a child fired a single shot from a revolver belonging to his parents, killing a friend and seriously wounding another. The victims parents sued the child, his parents, and their insurance company.

The insurance policy provided a $300,000 limit for “Each Occurrence” of “Personal Liability.” The trial court multiplied the limits by the number of insured and ruled that the policy afforded $900,000 of coverage.   The trial court explained that the child and his parents were each entitled to a separate per-occurrence policy limit.

Continue reading “Alaska Applies Single Occurrence Clause”

Alaska Paves Way for More Employment Discrimination Claims

Yesterday the Alaska Supreme Court issued opinion

Employment Discrimination Claims
Hall Sign

No. 6809 S-14762 Kennedy v. Municipality of Anchorage.  The case concerned employment discrimination claims.  The opinion’s focus was discovery issues, jury instructions, evidence and argument on Mental Anguish Damages.  Employment discrimination victims are entitled to compensation for mental anguish, among other things.

Employment Discrimination Claims — Recovering Mental Anguish Damages

Mental anguish on the other hand is fairly ephemeral.  Just how much is a bad day worth? How do you quantify embarrassment?  What evidence may an employer force the employee to give them to test whether the employee: is faking a bad day; having a bad day from some other reason; or, has a preexisting bad day condition.

Employment Discrimination Claims — Discovery Scope

The general rule on discovery is:  you get to seek not just admissible evidence; but, also those things that will lead to admissible evidence.  Many states simply adopted the rule that when a person makes a mental anguish claim, the defendant gets to look at their mental health medical records.  Many of the decisions underlying the original rule arise from tort claims and not employment.  The torts of intentional or negligent infliction of emotional distress also provide for compensation.  For the claimant to recover the claimant must suffer severe emotional distress.  As a bright line rule courts adopted severe distress required medical treatment.  Statutory discrimination claims were created in part to lower the evidentiary standard for damage recovery.

Alaska Rejects Automatic Disclosure in Employment Discrimination Claims

Alaska rejected the automatic disclosure rule and paved the way for “garden variety” emotional distress claims in employment discrimination claims.  In Alaska, Employees can now assert embarrassment and bad day claims without automatically exposing their mental health medical records to their employer, juries and the public.  The employee can choose to limit exposing their medical records by carefully limiting their claim and the testimony that they give.  These non severe “garden variety” claims will be compensated in Alaska employment discrimination claims.  Alternatively, the employee can claim severe mental damages and waive your privilege to keep your medical records confidential.

To discuss which may be a better choice for you give us a call at 907-375-9277.

 

Clayton Walker, JD

Alaska Law Offices, Inc.

 

 

 

 

 

 

Chilkoot Charlies Headed to Trial on Alcohol Server Case

Today the Alaska Supreme Court in a three to two decision, sent Chilkoot Charlies to trial on an Alcohol Server wrongful death claim.  The Alaska statute only imposes liability on bars and servers of alcohol if they serve alcohol to someone who is visibly drunk.  The plaintiff did not offer testimony that the person was intoxicated when they Chilkoot Charlies served the alcohol. Instead, the plaintiff offered circumstantial evidence about the drinkers condition before and after leaving Chilkoot Charlies, and how much they had drunk at Chilkoot Charlies.  The Alaska Supreme Court stated circumstantial evidence was sufficient to allow the Plaintiff’s to present their case to a jury.

No. 6805 S-13899 Kalenka v. Jadon [other civil]

Clayton Walker, JD