Maine --Corporate Income Tax: State High Court Upholds Unitary Business and Apportionment Formula

The Maine Supreme Judicial Court held that a corporation's cable, broadcast news, and newspaper affiliates constituted a single unitary business for Maine corporate income tax purposes, and that taxing the corporation on an apportioned share of the income earned from the sale of its cable affiliate was constitutionally permissible.

Maine defines a "unitary business" as a business activity that is characterized by unity of ownership, functional integration, centralization of management, and economies of scale. To support its conclusion that the corporation operated a unitary business in Maine, the court noted that the corporation provided intercompany services to the affiliates "at cost," the affiliates shared operational expertise and legal services, centralized health and benefit plans were in place, a system of interlocking directors and officers existed, and a common pool of cash was available for capital and operating expenses.

In determining that Maine's apportionment formula, as applied to the corporation, did not violate the Due Process Clause, the court had to consider whether the value of the parent corporation's activities in Maine and the income it received from the sale of its cable affiliate were rationally related, and whether the relationship resulted in some sharing or exchange of value. Since all of the corporation's operating components formed a functionally integrated corporation, which benefited from an exchange of value among those various components in Maine and elsewhere, Maine's apportionment formula was declared valid.

Finally, the court found that the corporation failed to show by clear and convincing evidence that the apportionment formula resulted in gross distortion in violation of the Commerce Clause. The corporation's unitary business was considerably more profitable after the sale of its cable affiliate. In addition, the corporation's business benefited as a whole from the functional integration and exchange of value that its various components provided to each other. Therefore, Maine's apportioned share of the larger amount of income, which amounted to approximately 0.33%, was not unreasonable or disproportionate.

Other References:

Explanations at ¶11-520.

New York --Corporate Income Tax: Attribution of Expenses to Business or Investment Capital Discussed

The New York Department of Taxation and Finance has issued a corporate franchise tax advisory opinion regarding an S corporation that is an investment securities manager and that also serves as the general partner in various limited partnerships operating as hedge funds. The S corporation requested an opinion on whether its payments for certain expenses, including compensation of employees responsible for the management of a limited partnership, should be treated as deductions attributable to business or investment capital. The S corporation receives a management fee as the general partner of the limited partnership and, in exchange for the fee, is required to provide services for and pay the expenses of the limited partnership. The fee is payable pursuant to the written partnership agreement. Therefore, the S corporation is required to report the management fee income as business income and may make the election to attribute the expense deductions reimbursed by the management fee to business income, provided that those expenses do not exceed business income and the nature and amount of the expenses are substantiated. Whether a specific expense is reimbursed through the management fee and is thus deductible from business income is determined by examining the written agreement and verifying the nature and amount of the expenses reimbursed, through an examination of the S corporation's books and records. Such an examination takes place in the conduct of an audit and is not determinable in an advisory opinion. All other expenses not reimbursed by the management fee pursuant to a written agreement that are deducted by the S corporation must be either directly or indirectly attributed to the appropriate class of capital. Whether an expense is directly attributed to a particular class of capital is determined by whether the expense proximately, and not incidentally, benefits a certain class of capital. If a particular noninterest deduction is attributable to more than one class of capital, the S corporation should directly attribute a portion of that deduction to the class of capital that was proximately benefitted by the expense giving rise to the deduction. Any residual noninterest deductions are indirectly attributed to each of the classes of capital by a formula allocation. The amount of the residual noninterest deductions is determined by subtracting the sum of those noninterest deductions attributed directly to each class of capital from the total amount of attributable noninterest deductions.

¶406-224

Other References:

Explanations at ¶10-645