Federal Tax Liens

Understanding a Federal Tax Lien

A federal tax lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt. The lien protects the government’s interest in all your property, including real estate, personal property and financial assets. A federal tax lien exists after the IRS:

  • Assesses your liability;
  • Sends you a bill that explains how much you owe (Notice and Demand for Payment); and
  • You neglect or refuse to fully pay the debt in time.

The IRS files a public document, the Notice of Federal Tax Lien, to alert creditors that the government has a legal right to your property.

How to Get Rid of a Lien

Paying your tax debt – in full – is the best way to get rid of a federal tax lien. The IRS releases your lien within 30 days after you have paid your tax debt.

Options: When conditions are in the best interest of both the government and the taxpayer, other options for reducing the impact of a lien exist.

  • Discharge of property — Allows property to be sold free of the lien. The seller or buyer can submit Publication 783, Instructions on How to Apply for Certificate of Discharge From Federal Tax Lien.
  • Subordination — Does not remove the lien, but allows other creditors to move ahead of the IRS, which may make it easier to get a loan or mortgage. For more information review Publication 784, Instructions on How to Apply for a Certificate of Subordination of Federal Tax Lien.
  • Withdrawal — Removes the public notice and assures that the IRS is not competing with other creditors for your property. If applying for a withdrawal, use Form 12277, Application for the Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien.

How a Lien Affects You

  • Assets — A lien attaches to all of your assets (such as property, securities, vehicles) and to future assets acquired during the duration of the lien.
  • Credit — Once the IRS files a Notice of Federal Tax Lien, it may limit your ability to get credit.
  • Business — The lien attaches to all business property and to all rights to business property, including accounts receivable.
  • Bankruptcy — If you file for bankruptcy, your tax debt, lien, and Notice of Federal Tax Lien may continue after the bankruptcy.

Avoid a Lien

You can avoid a federal tax lien by simply filing and paying all your taxes in full and on time. If you can’t file or pay on time, don’t ignore the letters or correspondence you get from the IRS. If you can’t pay the full amount you owe, payment options are available to help you settle your tax debt over time.

Lien vs. Levy

A lien is not a levy. A lien secures the government’s interest in your property when you don’t pay your tax debt. A levy actually takes the property to pay the tax debt. If you don’t pay or make arrangements to settle your tax debt, the IRS can levy, seize and sell any type of real or personal property that you own or have an interest in.

Clayton Walker

Alaska Corporation Voluntary Dissolution Outline

Outline for Alaska Corporate Dissolution.

A. Corporation Has Not Issued Stock or Commenced Business.

1. If the corporation has not issued stock and has not commenced business, a voluntary dissolution may be authorized by a majority of the incorporators.

B. Corporation has issued stock or has commenced business.

1. If the corporation has issued stock and has commenced business, the approval of the shareholders is required for voluntary dissolution of the corporation.

2. Shareholder approval is obtained as follows:

a. The board of directors of the corporation adopts a plan of liquidation and refers the plan to the shareholders for action.

b. A majority of shareholders, and a majority of the holders of each class of shares entitled to vote as a class, approve the plan of liquidation.

II. Filings and Notice.

A. Filings.

1. Under the Alaska Business Corporation Act, a Certificate of Election to dissolve is filed initially with the Alaska Corporations Commissioner. Articles of dissolution are filed after the completion of the winding up and liquidation of the corporation. A.S. 10.06.608.

2. Articles of dissolution stating compliance with A.S. 10.06.620.  A.S. 10.06.623.

B. Revocation.

1. The dissolution may be revoked prior to any actual distributions to shareholders under A.S. 10.06.610.

2. Revocation of dissolution is effective on filing.

C. Notice.

1. The corporation must give notice of the dissolution to holders of known claims against the corporation.  The notice must provide for a procedure and deadline for filing claims against the corporation.  See, A.S. 10.06.615 and .620

2. In order to notify holders of unknown claims, notice of the dissolution is published by the corporation in a newspaper. See, A.S. 10.06.653 (The heading discusses publication issues in the context of court and non-court directed winding up of the enterprise.  However, the actual provisions only discuss court winding up.) This notice must also provide for a procedure for filing claims against the corporation.

D. Effect.  The effect of dissolution is to cease the existence of the enterprise for all purposes other than suits, legal proceedings and actions by shareholders, directors and officers.  A.S. 10.06.625.

III. Winding Up and Liquidation.

A. Cessation of Business.

1. The operation of the business of the corporation must cease on or before the filing of certificate of intent to terminate, except as necessary to wind up the business operations and preserve good will.  A.S. 10.06.615.

2. The only continuing activity of the corporation should be that necessary to wind up its affairs and distribute its assets in liquidation.

B. Assemble Assets.

1. The corporation must assemble its assets and sell or otherwise dispose of those assets that will not be distributed to shareholders or to claimants.

2. Particular care should be given to identifying assets such as prepaid items and contingent claims that might otherwise be overlooked.

C. Satisfy Obligations and Liabilities.

1. The corporation must pay or provide for payment of all corporate obligations and liabilities and all claims against the corporation.

2. In the case of disputed or contingent claims, provision may be made for payment by depositing funds into an escrow or liquidating trust.

D. Distribution to Shareholders.

1. The assets of the corporation remaining after payment of or providing for claims should be distributed to the shareholders.

2. All known assets should be transferred with appropriate forms of transfer or conveyance, such as deeds, bills of sale, or assignments.

3. Unknown assets can be transferred to shareholders by an assignment specifically covering such assets.

4. A statement of the fair market value of all assets transferred should be provided by the corporation to each shareholder. This statement will be required for the shareholders’ income tax returns.

E. Stock Certificates.

1. All stock certificates of the corporation should be collected and canceled.

2. Stock certificates should be collected from shareholders in exchange for the assets distributed to them.

F. Timing.

1. If installment obligations of the corporation will be distributed in the liquidation, the liquidation should be completed within 12 months following the adoption of the plan of liquidation to enable noncorporate shareholders to report gain attributable to the installment obligations on the installment basis.

2. In other cases, the liquidation should proceed as quickly as possible. A protracted liquidation may result in the corporation’s being subjected to personal holding company or accumulated earnings taxes.

IV. Tax Filings.

A. Corporation.

1. Form 966 must be filed by the corporation with the Internal Revenue Service within 30 days after adoption of the plan of complete liquidation.

2. Forms 1099-DIV must be issued to all shareholders who have received $600 or more in the liquidation by January 31 of the year following the liquidation, and copies of these forms must be filed with the Internal Revenue Service, accompanied by Form 1096.

3. The corporation’s final income tax return must be filed by the 15th day of the third month following the close of its final tax year, which will generally be the date on which its assets are distributed to shareholders.

B. Shareholders.

1. Shareholders must report any gain or loss on the liquidation on their income tax returns for the year in which the liquidation occurs. If the shareholders have a loss, it may qualify as an ordinary loss under IRC §1244.

2. Shareholders must file certain information regarding the liquidation with those returns.

The following is my Outline for Corporate Dissolution.

 

A. Corporation Has Not Issued Stock or Commenced Business.

1. If the corporation has not issued stock and has not commenced business, a voluntary dissolution may be authorized by a majority of the incorporators under the Model Business Corporation Act.

2. If the corporation has not issued stock or has not commenced business, a voluntary dissolution may be authorized by a majority of the incorporators or by a majority of the members of the initial board of directors under the Revised Model Business Corporation Act.

B. Corporation has issued stock or has commenced business.

1. If the corporation has issued stock and has commenced business, the approval of the shareholders is required for voluntary dissolution of the corporation.  Under the Model Business Corporation Act, shareholder approval is required if the corporation has either issued stock or commenced business.

2. Shareholder approval is obtained as follows:

a. The board of directors of the corporation adopts a plan of liquidation and refers the plan to the shareholders for action.

b. A majority of shareholders, and a majority of the holders of each class of shares entitled to vote as a class, approve the plan of liquidation.

II. Filings and Notice.

A. Filings.

1. Under the Alaska Business Corporation Act, a Certificate of Election to dissolve is filed initially with the Alaska Corporations Commissioner. Articles of dissolution are filed after the completion of the winding up and liquidation of the corporation. A.S. 10.06.608.

2. Articles of dissolution stating compliance with A.S. 10.06.620.  A.S. 10.06.623.

B. Revocation.

1. The dissolution may be revoked prior to any actual distributions to shareholders under A.S. 10.06.610.

2. Revocation of dissolution is effective on filing.

C. Notice.

1. The corporation must give notice of the dissolution to holders of known claims against the corporation.  The notice must provide for a procedure and deadline for filing claims against the corporation.  See, A.S. 10.06.615 and .620

2. In order to notify holders of unknown claims, notice of the dissolution is published by the corporation in a newspaper. See, A.S. 10.06.653 (The heading discusses publication issues in the context of court and non-court directed winding up of the enterprise.  However, the actual provisions only discuss court winding up.) This notice must also provide for a procedure for filing claims against the corporation.

D. Effect.  The effect of dissolution is to cease the existence of the enterprise for all purposes other than suits, legal proceedings and actions by shareholders, directors and officers.  A.S. 10.06.625.

III. Winding Up and Liquidation.

A. Cessation of Business.

1. The operation of the business of the corporation must cease on or before the filing of certificate of intent to terminate, except as necessary to wind up the business operations and preserve good will.  A.S. 10.06.615.

2. The only continuing activity of the corporation should be that necessary to wind up its affairs and distribute its assets in liquidation.

B. Assemble Assets.

1. The corporation must assemble its assets and sell or otherwise dispose of those assets that will not be distributed to shareholders or to claimants.

2. Particular care should be given to identifying assets such as prepaid items and contingent claims that might otherwise be overlooked.

C. Satisfy Obligations and Liabilities.

1. The corporation must pay or provide for payment of all corporate obligations and liabilities and all claims against the corporation.

2. In the case of disputed or contingent claims, provision may be made for payment by depositing funds into an escrow or liquidating trust.

D. Distribution to Shareholders.

1. The assets of the corporation remaining after payment of or providing for claims should be distributed to the shareholders.

2. All known assets should be transferred with appropriate forms of transfer or conveyance, such as deeds, bills of sale, or assignments.

3. Unknown assets can be transferred to shareholders by an assignment specifically covering such assets.

4. A statement of the fair market value of all assets transferred should be provided by the corporation to each shareholder. This statement will be required for the shareholders’ income tax returns.

E. Stock Certificates.

1. All stock certificates of the corporation should be collected and canceled.

2. Stock certificates should be collected from shareholders in exchange for the assets distributed to them.

F. Timing.

1. If installment obligations of the corporation will be distributed in the liquidation, the liquidation should be completed within 12 months following the adoption of the plan of liquidation to enable noncorporate shareholders to report gain attributable to the installment obligations on the installment basis.

2. In other cases, the liquidation should proceed as quickly as possible. A protracted liquidation may result in the corporation’s being subjected to personal holding company or accumulated earnings taxes.

IV. Tax Filings.

A. Corporation.

1. Form 966 must be filed by the corporation with the Internal Revenue Service within 30 days after adoption of the plan of complete liquidation.

2. Forms 1099-DIV must be issued to all shareholders who have received $600 or more in the liquidation by January 31 of the year following the liquidation, and copies of these forms must be filed with the Internal Revenue Service, accompanied by Form 1096.

3. The corporation’s final income tax return must be filed by the 15th day of the third month following the close of its final tax year, which will generally be the date on which its assets are distributed to shareholders.

B. Shareholders.

1. Shareholders must report any gain or loss on the liquidation on their income tax returns for the year in which the liquidation occurs. If the shareholders have a loss, it may qualify as an ordinary loss under IRC §1244.   Shareholders must file certain      information regarding the liquidation with those returns.

 

Fun at work

“Unless you have fun, you can’t truly bring your intellect, your skills, and your deep knowledge to push the boundaries of the unknown, to invent and create.” Vandebroek

Alaska Eminent Domain

Alaska Statutes address Eminent Domain at 09.55.240 through .460.  When a governmental entity makes a taking, there are actually two portions to the valuation process.   First, the taken parcel’s value and the remaining parcel’s diminished value.   The government will  focus the target’s attention solely on parcel taken.  Typically people will forget to consider the affect to the remaining parcel.

Government offers frequently select valuation methods that support low prices.  For example they will suggest that vacant land value should be measured by a gross proportion of the whole.  By measuring the property as a percentage of gross they pay the lowest cost on the valuation.

I advise against providing the entity with a right of entry on the premises prior to resolving the property valuation and damages issues.  Absent a project deadline the entity has no pressure related to making a full and fair offer on the property.  You will generally fair better by withholding the right of entry permit.  The following provides a summary of a few of the important provisions in Alaska.

Valuation Date

 

  1. The valuation date for the taking is the day the government enters the property and begins construction.  Alaska Stat. 09.55.280. Wickwire v. City & Borough of Juneau, 557 P.2d 783 (Alaska 1976).
  2. The taking “. . . shall be located in the manner that will be most compatible with the greatest public good and the least private injury. . .”  Alaska Stat. 09.55.280.
  3. If the property boundaries change at all, the agency must apply for and obtain a preliminary replat approval before the acquisition and then shall also obtain a final plat.  Alaska Stat. 09.55.275.

Hearings

  1. If you object to the taking, the extent of the taking, the value of the consideration paid, the manner or nature of crossings you have a right to a hearing before the court.  Alaska Stat. 09.55.300.
  2. You have a right to a jury trial as to damages and the value of property.  Alaska Stat. 09.55.320.
  3. If you do not reach an agreement on value and damages then in a court action value is established on the day the suit is filed.  Alaska Stat. 09.55.330.
  4. If those attempting to condemn the property file an action, they may also seek an order to allow them to take possession before the value is determined.  Alaska Stat. 09.55.380.  When they do this then they must also pay interest from the date of suit until the final value determination.  Alaska Stat. 09.55.330.
  5. If there is a hearing and judgment rendered, the entity taking the property must pay within 30 days of judgment.  Alaska Stat. 09.55.350.
  6. If they fail to pay then you are entitled to vacate the condemnation award.  Alaska Stat. 09.55.360.

Damages

  1. When the state takes a parcel you are entitled to the value of the parcel and all the appurtenances on the parcel.  Alaska Stat. 09.55.310(a)(1)
  2. When the state takes only a portion of a larger parcel you are entitled to the damages related to the remaining parcel that they failed to take.  Alaska Stat. 09.55.310(a)(2).
  3. When the benefit of the state’s investment to a parcel not taken, exceeds the damages to the remaining parcel, you only get the value of the parcel taken.  Alaska Stat. 09.55.310(a)(3).
  4. As far as practicable, compensation shall be assessed for each source of damages separately.  Alaska Stat. 09.55.310(b).
  5. Alaska has very little settled case law on the sources and methods of establishing other damages.  The list from other jusidictions can be very long.  Some of the more common Damages Sources include:
    1. Just compensation for real estate that is taken;
    2. Severance damages to property impacted, but not directly taken;
    3. Tenant lease value damages;
    4. Property and business fixture damages;
    5. Loss of going concern damages when a business is destroyed by a taking;
    6. Residential and homeowner relocation damages;
    7. Business relocation damages;
    8. Highway and right-of-way accesses damages;
    9. Construction related damages;
    10. Minimum compensation damages to make business owners whole;
    11. Diminution of value damages in land use cases;
    12. Attorney’s fees payments to landowners; and,
    13. Loss of land development potential damages.

To establish the individual components of each of these elements of damages you will need to have admissible evidence.  The evidence will need to be reasonably certain in the measurement of the damages.  You typically will need to enlist the services of not only counsel but, appraisers, site analysts and engineers to evaluate and present evidence supporting the value of these damages.

 

Valuation

  1. Valuation is based on “fair market value” or the price a willing buyer would pay a willing seller for the property.  State v. Alaska Continental Dev. Corp. 630 P.2d 977 (Alaska 1980).
  2. Value is established by what the owner has lost and not what the condemner gains.  Gacksetter v. State, 618 P.2d 564 (Alaska 1980) (owner of residential property lost residence and value was set based on that loss not on the value of the gravel pit developed after condemnation).
  3. Owner’s loss in value does not include the value of the project giving rise to the project.  But, if the taking is unrelated to another project that adds value to the owner, the owner does capture the other projects value.  See, e.g., State v. Alaska Continental Dev. Corp. 630 P.2d 977 (Alaska 1980).
  4. Owner’s improvements made in anticipation of condemnation is ordinarily not relevant or admissible even with knowledge of the prospects of taking; unless, the improvements are made solely to enhance their award.  Babinec v. State, 51 P.2d 563 (Alaska 1973) rev’d on other grounds, 586 P.2d 966 (Alaska 1978).
  5. Valuing a larger parcel generally results in a lower value.
  6. Severence Damages

Attorney’s fees and experts

You are not entitled to be compensated for your experts or your counsel unless the fact finder determines that the value the government offered you was more than 10% less than the value they should have offered to you.  This rule pretty much guarantees that the government is always going to take your property at a discount to the actual full and fair value.

Alaska AHFC Energy Rebate should Not Be Taxable

Q. IS THE AHFC HOME ENERGY REBATE TAXABLE INCOME? I HEARD THAT I WILL RECEIVE A 1099 FORM FROM AHFC.   AHFC has received a legal opinion from the State of Alaska Department of Law that requires AHFC to issue a 1099-G to individuals who receive payments under this program. It is up to the recipient to contact their tax advisor about any possible tax consequences. – See more at: .  Indeed AHFC reports the amount in block 6 and reports the amount as a “taxable grant.”

The Internal Revenue Code provides for the exclusion from income of Energy conservation subsidies provided by public utilities under 26 USC § 136.

(a) Exclusion

Gross income shall not include the value of any subsidy provided (directly or indirectly) by a public utility to a customer for the purchase or installation of any energy conservation measure.
(b) Denial of double benefit
Notwithstanding any other provision of this subtitle, no deduction or credit shall be allowed for, or by reason of, any expenditure to the extent of the amount excluded under subsection (a) for any subsidy which was provided with respect to such expenditure. The adjusted basis of any property shall be reduced by the amount excluded under subsection (a) which was provided with respect to such property.
(c) Energy conservation measure
(1) In general
For purposes of this section, the term “energy conservation measure” means any installation or modification primarily designed to reduce consumption of electricity or natural gas or to improve the management of energy demand with respect to a dwelling unit.
2) Other definitions
For purposes of this subsection—

(A) Dwelling unit

The term “dwelling unit” has the meaning given such term by section 280A (f)(1).
(B) Public utility
The term “public utility” means a person engaged in the sale of electricity or natural gas to residential, commercial, or industrial customers for use by such customers. For purposes of the preceding sentence, the term “person” includes the Federal Government, a State or local government or any political subdivision thereof, or any instrumentality of any of the foregoing.
(d) Exception
This section shall not apply to any payment to or from a qualified cogeneration facility or qualifying small power production facility pursuant to section 210 of the Public Utility Regulatory Policy Act of 1978.
Other Precedent
There are no reported decisions as of the date of this post.  There are only three private letter rulings regarding the statute and its application.  The letter agreements can only be relied upon by the parties that obtained the letter rulings.  However, at least two of those letter rulings support the finding that Alaska Homeowners should not be paying tax on the AHFC energy rebates.  The other ruling appears to not be relevant.

Utility customers participating in test of “smart grid” technology utilizing new solar photovoltaic system to be installed in homes by taxpayer utility were not required to include value thereof in income per IRC § 61 because same was excludable as IRC § 136 “energy conservation measure;” nor was IRC § 6041 information reporting required. Private Letter Ruling 201046013, 2010 PLR LEXIS 2352.

As IRC § 136 did not apply to homeowner who received one-time renewable energy credit from utility upon installation of residential renewable energy system, homeowner was required to include gain from sale of associated environmental credits and benefits triggered by resulting electricity generation in income and to credit for 30% of expenditure. Private Letter Ruling 201035003, 2010 PLR LEXIS 1080.

Payments to residential customers by exempt entity to promote energy efficiency through state program were not income to recipients under I.R.C. § 61 but were energy conservation subsidies excluded under section 136; because payments were not income to customers, entity did not have to report payments under section 6041. Private Letter Ruling 200717010, 2007 PLR LEXIS 93.

It would be nice if AHFC would obtain a private letter ruling establishing that Alaska homeowners are not liable for taxes on the AHFC Energy rebate.  The cost of the letter agreement exceeds the benefit to any single homeowner.  But, AHFC would establish a lot of good will and keep more money in Alaska instead of shipping it off to DC.  Instead, they issue the 1099 and give you the following advice.  The IRS also provides advice here.  

The U.S. Treasury Department requires us to advise you that this written advice is not intended or written by our firm to be used, and cannot be used by any taxpayer, for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code. Written advice from our firm relating to Federal tax matters may not, without our express written consent, be used in promoting, marketing or recommending any entity, investment plan or arrangement to any taxpayer, other than the recipient of the written advice.

Clergy Parsonage Allowance Under Attack

In a decision released November 22, 2013, U.S. District Judge Barbara B. Crabb of the Western District of Wisconsin held that a portion of Section 107 of the tax code (the provision dealing with the clergy housing allowance is unconstitutional). Specifically, Section 107(2), which permits clergy to receive a tax-free cash housing allowance was found to violate the establishment clause of the First Amendment. Section 107(1), which allows clergy tax-free use of a church-provided parsonage, was left intact.

A copy of the case is attached, and for convenience, I have copied the judge’s order below. As you can see from the order, the judge’s injunction against the government does not take effect until the conclusion of any appeal by the government (or the deadline for appeal passes).

————————————————–

ORDER

IT IS ORDERED that

1. The motion for summary judgment filed by defendants Timothy Geithner and Douglas Schulman (now succeeded by Jacob Lew and Daniel Werfel), dkt. #40, is GRANTED with respect to plaintiffs’ Freedom from Religion Foundation, Inc.’s, Annie Laurie Gaylor’s and Dan Barker’s challenge to 26 U.S.C. § 107(1). Plaintiff’s complaint is DISMISSED as to that claim for lack of standing.

2. Defendants’ motion for summary judgment is DENIED as to plaintiffs’ challenge to 26 U.S.C. § 107(2). On the court’s own motion, summary judgment is GRANTED to plaintiffs as to that claim.

3. It is DECLARED that 26 U.S.C. § 107(2) violates the establishment clause of the First Amendment to the United States Constitution.

4. Defendants are ENJOINED from enforcing § 107(2). The injunction shall take effect at the conclusion of any appeals filed by defendants or the expiration of defendants’ deadline for filing an appeal, whichever is later.

5. The clerk of court is directed to enter judgment in favor of plaintiffs and close this case.

Entered this 21st day of November, 2013.

BY THE COURT:
/s/
BARBARA B. CRABB District Judge

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.

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