Alabama –Corporate Income Tax: U.S. Supreme Court Asked to Hear Addback Challenge
News
CCH (cch.taxgroup.com) reports:
In a case engendering widespread interest, a taxpayer has asked the U.S. Supreme Court to consider its challenge to an Alabama statute requiring that certain royalty payments to related parties be added back to income subject to the state’s corporate income tax. At present, approximately 20 states have some version of an addback statute, all of which could be put at risk if the high court decides to accept the taxpayer’s request.
Background: In 2001, Alabama enacted its addback statute, which requires a corporation to add back to its taxable income otherwise deductible intangible expenses paid to related members of its corporate group. The statute includes exceptions to this addback requirement, including an exception when the corresponding income is subject to a tax based on net income in Alabama or any other state.
The taxpayer, a clothing manufacturer with operations in Alabama, did not add back to its 2001 Alabama income royalties paid to related companies for the use of their trademarks. The related companies are Delaware corporations that do not file Alabama income tax returns. Delaware does not tax royalty payments. The Alabama Department of Revenue issued an additional assessment based on its determination that the taxpayer was required to add back a portion of the deductions taken for the royalty payments.
The taxpayer challenged the addback statute in state court on state statutory and federal constitutional grounds. The challenge was successful at the trial court level on the statutory grounds. However, the Court of Civil Appeals reversed. In addressing the constitutional challenges, the appellate court held that the addback statute does not discriminate against interstate commerce because the subject-to-tax exception does not benefit in-state corporations to the detriment of out-of-state corporations. Also, the court held the taxpayer had not demonstrated that the addback statute resulted in taxation of income that is not fairly attributable to Alabama. (TAXDAY, 2008/02/13, S.2) The Alabama Supreme Court affirmed, adopting the appellate court’s opinion as its own. (TAXDAY, 2008/09/23, S.1)
Questions presented: The taxpayer has asked the U.S. Supreme Court to consider two questions: (1) whether Alabama’s addback statute discriminates against interstate commerce in violation of the Commerce Clause by denying a deduction for ordinary business expenses because they are paid to corporations located outside Alabama in a state that has chosen not to tax those payments, and (2) whether the statute violates the federal Due Process and Commerce Clauses by denying a deduction for ordinary business expenses paid to corporations located outside Alabama based on the tax policy of the state in which those corporations are located.
Subscribers to CCH Tax Research NetWork can view the petition.
VFJ Ventures, Inc. v. Surtees, U.S. Supreme Court, Dkt. 08-916, petition for certiorari filed January 21, 2009