State Income Tax Base Calculation: Complex Issues in Income - - PowerPoint PPT Presentation

State Income Tax Base Calculation: Complex Issues in Income Modification

Reporting for Multi-State Companies to Minimize Tax and Maximize Deductions

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Presenting a live 110-minute teleconference with interactive Q&A

John Daly, Tax Manager, WithumSmith+Brown, Princet on, N.J. Jeffrey Reed, At t orney, Mayer Brown, New Y

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State Income Tax Base Calculation: Complex Issues in Income Modification

John Daly, WS +B jdaly@ withum.com

• Dec. 18, 2013

Jeffrey S . Reed, Mayer Brown jreed@ mayerbrown.com

Today’s Program

Introduction and Overview [Jef f rey Reed] Conformity and Non-Conformity to the Federal Income Tax Base [Jef f rey Reed] S tate S tatutes Designed to Curb S tate Tax Planning [Jef f rey Reed] Apport ionable or Allocable Income [Jef f rey Reed] Types of Report ing [Jef f rey Reed] Apport ionment Issues [John Daly] S lide 7 – S lide 9 S lide 10 – S lide 17 S lide 18 – S lide 21 S lide 22 – S lide 28 S lide 29 – S lide 34 S lides 35 - S lides 79

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Calculating the State Income Tax Base

Strafford Publications

Jeffrey S Reed

(212) 506-2104 jreed@mayerbrown.com

December 18, 2013

Introduction

• Overview of State Income Tax Computation
• Conformity and Non-Conformity to the Federal Income

Tax Base

• State Statutes Designed to Curb State Tax Planning
• Combined Reporting
• Apportionable and Allocable Income
• Partnerships and Apportionment

8

Overview of State Income Tax Computation

• Typical approach

– Start with federal income tax base. – Make state modifications to the base. – Determine what income is apportionable / allocable.

• States with a gross receipts base

– Ohio, Washington and Texas

• Statutory construction

– State tax law can “depart from Federal tax law.” – States can “take a different path from that of the Federal government” with respect to taxation.

9

Conformity and Non-Conformity to the Federal Income Tax Base

Federal Income Tax Base

• Different Approaches

– Incorporate by reference (Federal Income Tax Base for the taxable year). – Static base (federal income tax code as of a certain year).

• Generally, conformity is to income only

– No conformity to parts of the IRC unrelated to “income,” for example withholding.

11

Dividends

• Different approaches.

– Exclude all dividends from the tax base (Kentucky). – All dividends from subsidiaries excludable (New York). – Foreign source dividends excluded (Georgia).

• Litigation

– Some states limit the DRD to income already taxed in the state

• r only to dividends received by corporations taxable in the

state. – Farmer Brothers (California).

12

Deductions Related to Income Excluded from the Tax Base

• Examples

– FL disallows expenses attributable to foreign source dividends. – GA disallows expenses relating to federal obligations. – New York disallows interest deductions attributable to subsidiary capital.

13

Net Operating Losses

• Varying approaches

– Some states do not let you carry back a loss. – Some states allow a carryforward that differs from the federal carryforward.

• Types of conformity

– Conformity based on amount (NOL = line from 1120 form). – “In the same manner” as the NOL deduction.

14

Net Operating Losses – Change in Ownership

• IRC 381 + 382 provide rules for transferring tax attributes

in a transaction.

– Some states conform to these sections. – Other states do not allow NOLs to transfer in, for example, a

• merger. (e.g., in Massachusetts case law states that the NOLs of

the corporation absorbed in the merger are lost but the NOLs of the surviving corporation are retained); Macy’s East v. Commissioner. – North Carolina (NELs and Libson Shops/COBE doctrine). – Net operating losses sustained by a “taxpayer” can be carried

• forward. Conflicting litigation.

15

Consolidated Return Regulations

• Range of issues

– Deferred intercompany transactions – Inventory adjustments – Disposition of stock of a subsidiary – Basis adjustments – related to 338(h)(10) conformity – Charitable Contribution Deductions + MA FMR case

• State Group Different than Federal Group

– What if only one of the two relevant group members is in the state?

16

Slide Intentionally Left Blank

State Statutes Designed to Curb State Tax Planning

State Statutes Designed to Curb State Tax Planning

• Overview

– Intercompany deductions – Intangible Holding Company Structures – REIT Structures – Captive Insurance Company Structures – 80/20 Planning

19

Addback Statutes

• These statutes require that taxpayers “add back” to

income expense deductions relating to certain expenses paid to a “related member.”

– In many states intangible expenses only. – In some states interest expenses or management expenses.

• Exceptions:

– Subject to Tax – Conduit – Reasonableness – Foreign Country with Treaty

20

Captive REIT Statutes

• Background
• Approaches

– Combine the REIT and the recipient of the dividends. – Deny the DPD. – Eliminate the DRD. – May attempt to assert nexus over the dividend recipient.

21

Apportionable or Allocable Income

Basic Distinction

• Apportionable Income

– Apportioned using the state’s apportionment formula.

• Allocable Income

– Attributed to source of income.

23

Business Income or Nonbusiness Income

• Business income

– Apportionable – In some states all income is business income within constitutional limits. – UDITPA: “income arising from transactions and activity in the regular course of the taxpayer’s trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer’s regular trade or business

• perations.”
• Nonbusiness income - allocable

24

Business Income – Cessation of a Business

• Overview of Fact Pattern
• Case Law

– Transactional Test – Arose in Regular Course of the Taxpayer’s Trade or Business (frequent, regular). – Functional Test – Property Sold used in the Taxpayer’s Trade or Business.

• Recent Trends

– Arizona First Data case.

25

Unitary and Non-Unitary Income Distinction

• Unitary Income

– SCOTUS: “the linchpin of apportionability is the unitary business principle.” – Constitutional (non-statutory) concept. – Apportionable, can be included in the tax base. – Serves an Operational Function.

• Non-Unitary Income

– Allocable. – Serves an Investment Function.

26

Unitary Business Principle

• There must be a minimal connection between the state

and the income the state is attempting to tax.

• Types of unitary

– Is a division/entity unitary with the taxpayer? – Is an asset unitary with the taxpayer’s business?

• Unitary factors

– “Flow of value.” – Vertical integration, horizonal integration .

27

Slide Intentionally Left Blank

• Types of Reporting

Combined Reporting – Approaches

• Separate Entity Reporting
• Federal Consolidated Reporting
• Nexus only Consolidated Reporting
• Mandatory Unitary Combined Reporting
• “Forced Combination” or Combination Based on

Distortion

30

Mandatory Unitary Combined Reporting

• Control Requirement
• Unitary Requirement
• 80/20 Companies Often Out
• 20/80 Companies Sometimes In
• Water’s Edge v. Worldwide
• Companies in Foreign “Tax Havens” Sometimes included

in the Group

• Recent trend (DC, MA, etc.)

31

Forced Combination and Decombination

• States that have forced combination can pull a company

into a combined return if there is “distortion” or to “reflect the true earnings” of the corporations.

• Examples of states that allow for forced combination

– Indiana – New York – North Carolina – South Carolina

• Decombination

– IT USA

32

Separate Entity Reporting vs. Combined Reporting – Tax Computation

• Separate entity reporting

– Run the numbers on an entity-by-entity basis.

• Combined reporting

– Treat all the entities in the group as “one taxpayer” and run the computations (including apportionment) at the group level.

33

Slide Intentionally Left Blank

35 35

WithumSmith+Brown, PC | Certified Public Accountants and Consultants | www.withum.com

Presented by: John Daly

WSB SALT Income Apportionment for C Corporations & Flow Throughs

36 36

37 37 STATES LACKING A MAJOR TAX AND RANK:

• No individual income tax: AK(#4), FL(#5), NV(#3), SD(#2),

TX(#11), TN (TN Income tax on interest and dividends only) (#15), WA(#6), & WY(#1) .

• No corporate income tax: NV(#3), SD(#2) (SD corp income tax
• n banks only), WA(#6), & WY(#1).
• No Sales Tax: AK(#4), DE(#13), NH(#8), MT(#7), & OR(#12),

38 38 WHAT IS BUSINESS INCOME:

• UDITPA 1957: “Business income” means income arising from

transactions and activity in the regular course of the taxpayer’s trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer’s regular trade or business operations.

39 39 STAT

ATE CORP APPO P APPORTIONME MENT CALCULATION IONS

• Business income is apportioned among jurisdictions by use of a
• formula. Nonbusiness income is {generally} specifically

assigned or allocated.

• Apportionment Formulas: Three Factor; Double Weighted Sales

Four Factor; Single Sales Factor (SSF).

40 40 STATE

TE A APPORTI TION ONMENT C NT CALCULATI TIONS NS

• Most states use some version of the Payroll/ Property/Sales

apportionment calculation.

• Equal sales weighting: AK, DE, HI, KS, MO, MT, NM, ND, RI.
• Sales only: CA (2013), CO, CT, GA, IA, IL, IN, ME, MI, MN (2014 SSF; 2013 SF

is 96%) NE, NY, OR, PA (2013), SC, TX, UT, WI. NJ started phase in 2012.

• With other states, sales have added weight in the factor.

41 41 PROP

ROPERTY F FACTOR OR = = FED ED

• Most states use original cost, while some use NBV.
• NYC does not include LI cost/AD in property (Provided the

improvement reverts to the lessor at the end of the lease).

• Mobile property (e.g. busses, trucks, etc.) is “typically”

valued by some ratio method. Rules vary by state (e.g. percentage of use or mileage ratio).

• Rent includes amounts paid for TPP and real property.
• Rent factor x 8.

42 42 PAYR

YROLL LL F FACT CTOR

• Use gross (SUI) compensation paid to individuals treated as

employees for FICA purposes.

• Compensation to employees & officers must be accounted for

separately for NYC purposes.

• Payroll is apportioned based on where employee actually works,

not where the employee lives.

• States generally do not include amounts paid to independent

contractors in factor.

• Few states have addressed the inclusion of amounts paid to

“leased employees” in the payroll factor, but where it has been addressed the states/courts have concluded they should be included in the factor.

43 43

MTC TC REG IV IV.14 (U 14 (UDIT ITPA A ALS LSO): ): P PAYROLL LL IS IS SOURCED T TO A STATE IF IF…… ……

• Employee’s service is performed entirely in state, or
• Service is performed within and without, but the service

performed without is incidental, or

• Service is performed within and without, and

a) employee’s base of operations is there, or b) no base of operations in any state in which part of the services is performed, but the place from which the service is directed or controlled is in the state, or c) If the base of operations, or the place from which the service is directed or controlled is not in any state in which a portion of the service is performed, but the employee’s residence is in the state.

44 44

PAYR YROLL OLL SOURCING NG EX EXAMPLE LE 1 1

• Employee’s service is performed partly in NY, NJ, CT,

and PA.

• Employee lives in CT.
• Employees office where his management is located

is in NJ. He also works here approx 50% of the time.

• How is his payroll sourced for Payroll apportionment

purposes (to one state or four or…..)?

• Where does his employer pay SUI on this employee

(to one state or four or……)?

45 45

PAYR YROLL OLL SOURCING NG EX EXAMPLE LE 2 2

• Employee’s service is performed partly in NJ, and partly in PA.
• Employee lives in CT.
• Employees office where his management is located is in NJ

where he works Jan-Sept.

• He works in PA Oct-Dec.
• How is his payroll sourced for Payroll apportionment purposes

(to one state or three or…..)?

• Where does his employer pay SUI on this employee (to one

state or three or……)?

46 46 NYC

YC COR ORP PAYR YROL OLL S SOUR OURCING NG

• Employees within New York City (numerator of the

payroll factor) include all employees regularly connected with or working out of an office or other place of business maintained in New York City, regardless of where their services were performed.

• However, if part of the payroll was paid to employees

attached to a New York City office who performed a substantial part of their services outside the city, the department may permit the factor to be computed on the basis of the amount of compensation paid for services actually rendered within and without the city.

47 47 NYC

YC PAYROLL S SOUR OURCING NG

• For NYC, when the payroll factor is to be computed on the basis of

the amount of compensation paid for services performed within NYC, the amount treated as compensation for services performed within the City will be deemed to be:

– (1) in the case of an employee whose compensation depended directly

• n the volume of business secured by him, such as a salesman on a

commission basis, the amount received by him for the business attributable to his efforts within NYC will be NYC payroll; – (2) in the case of an employee whose compensation depended on other results achieved the proportion of the total compensation which the value of his services within NYC bears to the value of all his services; and – (3) in the case of an employee compensated on a time basis, the proportion of the total amount received by him which the working time within NYC bears to the total working time.

48 48

CO CORP RPORATE T E TAXP AXPAYE YER RECEI RECEIPTS SOUR OURCING NG

49 49

SAL SALES: U UDIT DITPA (SEC ECTION 1 1(G)) G)) AND THE M MTC ( (RE REGU GULATION IV.15(B 15(B)): ): S SALES ES A ARE RE?

• All gross receipts generated by the taxpayer in the regular

course of business.

• Sales of tangible personal property.
• Services.
• Rental income.
• Royalties.
• Receipts and net gains from sales of business assets

(Often conditional, e.g. not if distortive).

• Certain interest, & dividends.

50 50

TANG NGIBLE P PERS RSONAL PROP ROPERT RTY (T (TPP) S ) SALES?

• Goods manufactured and sold.
• Goods purchased and resold.
• Destination sourcing: Sale sourced to location where customer takes possession.
• Invoice ship to address typically accepted by states.

51 51

TPP SALE SALES SO S SOURCING E EXAM AMPLE LES F FOR CO CORPS

• ABC Appliances, Inc. ships an air conditioner from its NJ

warehouse to NY in its own truck. State ? sale.

• ABC Appliances, Inc. ships an air conditioner from its NJ

warehouse to NY via common carrier. State ? sale.

• ABC Appliances, Inc. sells an air conditioner in its NJ store and the

NY customer leaves with the unit and brings it back to his NY

• apartment. State ? sale.
• ABC Appliances, Inc. (a NJ based internet seller) sells an air

conditioner via its website and the unit is shipped from ABC’s 3rd party supplier in Delaware to its customer in MD. If ABC has nexus in MD it is a MD sale. If ABC (Corp) has no nexus in MD, it will be a NOWHERE sale.

52 52

NEW JERSEY’S THROW OUT RULE

• For Privilege Periods beginning on or

after July 1, 2010, the regular place of business rule gone for corporations.

• Enacted in 2013, but effective for 2012,

the regular place of business rule no longer applies to NJ partnerships.

• In NJ, both corp and unincorporated

businesses with one location only in NJ can apportion.

• They can both have nowhere sales? NOT

53 53 NOWHERE

ERE SAL SALES ES EXAMP EXAMPLE

• A manufacturer of door mats is located in Newark, NJ.
• Manufacturer has nexus in NJ, NY, and TX
• Manufacturer ships door mats via common carrier from

facility in Newark to 7 other states.

• If only 45% of his sales are to customers in NY, NJ, and

TX, this manufacturer will pay state income tax on less than 50% of his taxable income.

54 54 THR

HROWBACK RU RULE LE

• Throwback: Goods are thrown back into the numerator of

a ship from state if there is no nexus in ship to state.

• Most effective tool states have to counter black hole

sales.

• Many states for example, CA, IL, KS, MA, MI, MO, & WI

have throwback rules.

• States like FL, GA, NY, NJ, PA do not have a throwback

rule.

55 55

NEW J W JERSE RSEY CBT CBT SIN SINGLE SA SALES F S FACT CTOR

• For privilege periods that began in 2012, sales factor

counts as 70% of the apportionment calculation.

• For priv. periods beginning during 2013 it will account for

90%.

• For priv. periods beginning in 2014, and thereafter, NJ

will be 100% SSF.

• Who benefits? NJ companies or companies with a heavy

NJ physical presence.

56 56 SER

SERVICE E RECEI RECEIPTS

• Many states source service receipts based on UDITPA’s Costs of

Performance (COP) rules.

• “Costs of performance” means direct costs determined in a

manner consistent with generally accepted accounting principles. Include payments to Indep. Contractors.

• Rule states, a) Income producing activity is in the state where

performance occurs. b) If performance for a single business activity occurs partially inside and partially outside the state, the sale is sourced to the state where the largest amount of direct costs were incurred.

• States where lesser amounts of costs of performance occur are

typically are not happy with COP method.

57 57 CO

COP A ALTERN TERNATIVES ES 1

• Market based approach mimics destination sourcing with TPP

sales.

• Sales are sourced to the location of the customer (recipient of

the service) CA (2011), GA, IL, IA, ME, MI, MN, OH, UT, WI.

• Market based apportionment helps to make nowhere sales

possible.

• Example: Home state is a market state, customer is located in

a performance based appt. state.

• Tax planning opportunity? Neither state wants the sale.

Example: MI service provider – NJ customer.

58 58 CO

COP A ALTERN TERNATIVES ES 2

• Allocate the sale of a service performed in multiple

jurisdictions by ratio of costs of performance, or amount

• f time spent, or “some other reasonable method.”
• E.g. New Jersey & New York….
• Texas uses the wording, ”fair value of the services…

rendered.”

• Each method designed with goal of sourcing service

revenue to multiple locations where performance occurs.

59 59

NEW J W JERSE SEY Y SERVICE ICE PROVIDE IDER S SOURCIN CING EXAMP MPLE LE ( (RESE SEAR ARCH CH CORP) P)

• 50% of costs (Staff) incurred in NJ to provide services.
• 25% of costs (Staff) incurred in PA (COP) to provide services. Employee

home offices.

• 25% of costs (President & founder) incurred in VA (COP) to provide
• services. Worked from home.
• One office located in N.J.
• $1,000. Total Sales. 45% of Customers in NJ , 35% in PA, 20% in VA.
• In 2010, 100% of sales sourced to N.J. (Throwout/Regular Place of

Business)

• In 2011, 50% of sales sourced to N.J. (Throwout/Reg Pl. Bus. ended)
• In 2011, 60% of income sourced to N.J. (Full 4 factor calc)
• In 2014, 45% of income sourced to N.J. (SSF phased in) & PA 35% (SSF

2013 Market Sourcing 2014).

60 60

NJ NJ DRAFT S SER ERVIC VICE A E ALLOC OCATION ION RE REGS

• “The Division is proposing amendments to N.J.A.C. 18:7-8.10,

Receipts, compensation for services performed in the State, allocation for certain special industries.”

• “A new subsection (b) is added to require that in determining

whether services are performed in the State, a taxpayer shall include in the numerator of the receipts fraction receipts derived from customers within this State.”

• This proposed regulation was put out by the state for public

comment in June-July of 2012.

• Since then, not a word of any change has been mentioned.

61 61

California Major Changes

• For 2011 & 2012, CA businesses (corps, pshps, etc.),
• ther than those deriving > 50% of receipts from

agriculture, financial activities, & extractive businesses could make an irrevocable election to apportion using SSF.

• For 2011 & 2012, sales of other than sales of

TPP (services), were sourced according to the costs of performance approach if SSF is NOT elected .

• For 2011 & 2012, sales of other than sales of

TPP (services), were sourced according to the market based approach (where the benefit is received), only when SSF is elected (Code Sec 25136).

61

62 62

California Major Changes

• Beginning on or after January 1, 2013, most

businesses must apportion using SSF (Prop 39 2012).

• Beginning on or after January 1, 2013, Sales
• f services are in California to the extent the

purchaser receives the benefit of the services in California. No election required.

• In 2013, businesses that derive more than 50% of their gross receipts

from agriculture, extractive business, savings and loans, or banks and financial activities will continue to use equally-weighted 3-factor apportionment formula and source using COP.

62

63 63

PA APPORTIONMENT

In 2013, PA goes to the single sales factor for corps. The also state adopts “market-based” sourcing for the Corporate Net Income Tax sales apportionment factor with regard to the sale of services. Such sales will be sourced to where the benefit is being derived by the customer. The change is effective January 1,

• 2014. Sales of intangibles will continue to be sourced based upon

cost of performance rules.

64 64

PARTNERSHI HIPS

65 65 PARTNERSHIPS

• California: Partnership Sales Allocation Rules:
• For taxable years beginning on or after January 1, 2013,

partnership income is sourced to California using Single Sales Factor, and sales of services are in California to the extent the purchaser received the benefit of the services (Market State Method) in California.

• Before 2013, the use of a four-factor formula consisting of

property, payroll, and a double-weighted sales factor.

66 66 PARTNERSHIPS

• Delaware: Partnership Sales Allocation Rules:
• Services are sourced in Delaware to the location where the

services were performed.

• Washington DC: Partnership Sales Allocation Rules:
• Service income is considered occurring in DC if the income

producing activity or service is performed:

– In DC; or – Based on the Costs of Performance Method, the proportion

• f the income-producing activity or service performed in DC is

greater than that performed in any other jurisdiction, based on performance cost.

67 67 PARTNERSHIPS

• Maryland: Partnership Sales Allocation Rules:
• Gross receipts from contracting or service-related

activities shall be included in the numerator if the receipts are derived from customers within this State.

–Example 1: An attorney, a partner in law firm A located in the District of Columbia, renders legal advice to a domiciliary of

• Maryland. Assuming sufficient nexus between the law firm

and Maryland so as to require the filing of a Maryland income tax return, the fee earned from the service rendered to the Maryland domiciliary is included in the numerator of A's Maryland sales factor.

68 68 MI PARTNERSHIPS VS MI CORPS

• Michigan: Partnership Sales Allocation Rules:
• 2012 Pshp Return & Corp CIT Return apportionment are based on SSF.
• Pshps do not file a return in MI in 2012 unless doing a composite filing.
• MI Pshps 2012: Sales, other than sales of tangible personal property, are in this

state under Costs of Performance if: – The income-producing activity is performed in this state; or – The income-producing activity is performed both in and outside this state and a greater proportion of the income-producing activity is performed in this state than outside this state, based on costs of performance

• MI CIT: All receipts from the performance of services are included in the

numerator if the recipient of the services receives all of the benefit of the services in MI.

• If the recipient of the services receives some of the benefit of the services in

MI, the receipts are included in the numerator of the apportionment factor in proportion to the extent that the recipient receives benefit of the services in MI.

69 69 PARTNERSHIPS

• New Jersey Partnership Sales Allocation Rules:
• The amount of service income to be allocated to NJ by a

partnership includes services performed by partners, employees, agents, agencies or independent contractors

• f the business situated at or sent out from, the offices
• f the business (or its agencies) located in New Jersey.

For example:

– If a salesperson working out of the New Jersey office covers the states of New Jersey, New York and Pennsylvania, all sales made are to be allocated to New Jersey and reported on Line 2a. – If a lawyer working out of the New Jersey office travels to NY to defend his client in court, for NJ pshp sourcing purposes 100% of that revenue s/b sourced to NJ. – NY partnership sourcing mimics NJ’s. NY would also view the revenue created by the NJ lawyer in the above example as NJ sourced revenue

70 70 NJ PARTNERSHIPS

• Prior to 2012, the NJ 1065 instructions read as follows: ”if the

business has no regular place of business outside New Jersey, it may not allocate income

• Posted 03/13/13 on:

http://www.state.nj.us/treasury/taxation/2013NRA_Notice.sht ml: “An unincorporated business which carries on its business activities both inside and outside New Jersey, may allocate its business income to determine the amount from New Jersey

• sources. The business is not required to maintain a regular

place of business outside of New Jersey in order to allocate its income”

71 71

NJ CORPORATE SALES ALLOCATION RULES

• Services performed both within and outside the state are

sourced based upon the cost of performance, the amount

• f time spent in the performance of these services or

some other reasonable method which reflects the trade or business and economic realities underlying the generation

• f the compensation for such services and without regard

for where the amounts were payable or where they actually were received. [N.J. Admin. Code §18:7-8.10(a)].

72 72 NJ-1065 UNDER WITHHOLDING PROBLEM

The NJ-1065 Part 100 NJ Nonresident Non-corporate Partner Tax is calculated in the NJ- 1065 partners directory which uses the NJ “corporate allocation factor.” If the corporate allocation factor is smaller than the partnership NJ Business allocation percentage from schedule NJ-NR-A, as it often is, the nonresident partners will be under withheld. Solution? You must override the corporate allocation factor in the partner’s directory in tax software (e.g. Fast Tax).

72

73 73 CORPORATE PARTNERS

• When the corporate partner and the partnership are not part of a

single unitary business, separate accounting apportionment should be used to arrive at corporate income.

• If the entities are part of a single unitary business flow through

apportionment should be used with respect to the incomes of the two entities.

74 74 UNITARY CORPORATE PARTNERS

• Facts that suggest a corporation and partnership are part of a

unitary business are as follows:

– Substantial intercompany- partnership transactions; – The partnership interest is the only or the most substantial asset of the corporation; – The partnership interest produces all or most of the income of the corporation; – The corporation and the partnership are in the same line of business; – There is substantial overlapping of employees and offices; and/or – There is sharing of operational facilities, technology and/or know-how. – BIS LP?

75 75 CORPORATE PARTNERS

• Separate accounting apportionment means:

– The corporation's distributive share of the partnership's business income would be apportioned to New Jersey by computing the

apportionment factor by only taking into account the corporate partner's share of the receipts, payroll and property of the partnership.

– Then, the corporation's entire net income, excluding its distributive share of the partnership's income is apportioned to New Jersey by

computing the apportionment factor for that business by only taking into account the receipts, payroll, and property of the business that the corporation carries on directly. – Third, these two amounts would be added together to arrive at the corporation's entire net income apportioned to New Jersey.

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CORP NON UNITARY PARTNERSHIP EXAMPLE

• Corp A has no nexus with NJ other

than a 50% general pshp interest in a pshp, which is not unitary with the corp.

• The corp would calculate its

allocation factor and allocated income exclusive of the activities

• f the pshp. In this case, the

allocation % is zero and the corp does not allocate any of its income to NJ.

• The partnership would allocate its

income as a separate entity.

• The allocated income from both

calculations are then combined to compute the tax liability of the corp.

Corp Pshp Net Income $5,000 $1,000 Prop Factor 0.75 Receipts Factor 0.5 Receipts Factor 0.5 Payroll Factor 0.75 Total 2.5 Corp Alloc Factor 0.625 Allocated Income $0 $625 Note that the apportionment formula is the corporate formula, not the GIT Pshp formula.

77 77 CORPORATE PARTNERS

• Flow through accounting apportionment means:

–The corporate partner shall separately compute the property, payroll and receipts fractions attributable to the partnership activity. –The corporate partner next computes the property, payroll and receipts fractions attributable to the corporate activity. –An allocation factor combining the factors of the corporation and the partnership is then applied to the corporation's entire net income including its distributive share of the partnership's income.

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CORP UNITARY PARTNERSHIP EXAMPLE

• Corporation A is unitary

with a partnership and holds a 50 percent general partnership interest in a general partnership.

• The taxpayer should use

the flow through method of allocation since there is a sufficient integration of assets and business activities between the corporation and partnership.

Unitary Corp Pshp Comb Net Income $5,000 $1,000 $6,000 Prop Factor $9,000 $750 $9,750 Prop Factor $10,000 $1,000 $11,000 0.886364 Receipts Factor $3,000 $10,000 $13,000 Receipts Factor $10,000 $20,000 $30,000 0.433333 Receipts Factor $3,000 $10,000 $13,000 Receipts Factor $10,000 $20,000 $30,000 0.433333 Payroll Factor $6,000 $750 $6,750 Total $10,000 $1,000 $11,000 0.613636 Total Factors 2.366667 Income Allocation Factor (Total/4) 0.591667 Allocated NJ Taxable Income $3,550 Note that the apportionment formula is the corporate formula.