Sep 25, 2017
From KPMG TaxWatch
Recently, an Alaska Administrative Law Judge (ALJ) addressed the treatment of a dividend received from a domestic subsidiary that was excluded from the Alaska combined group because its business activities were primarily outside of the U.S. Under IRC section 243(a), a taxpayer may exclude 100 percent of dividends received from a corporation that is a member of the taxpayer’s affiliated group. If the payor is not in the taxpayer’s affiliated group (but is at least 20 percent owned) IRC section 243 (c) allows 80 percent of the dividend to be excluded. The question before the ALJ was which provision of IRC section 243 applied and the answer to this turned on whether the domestic subsidiary was considered a member of the taxpayer’s “affiliated group.”
The ALJ noted at the outset that although the question was simple, the answer was not. In sum, the taxpayer argued that the federal definition of affiliated group applied and therefore because the domestic subsidiary was a member of the taxpayer’s federal affiliated group, the 100 percent dividend exclusion applied. The Department, on the other hand, primarily asserted that the term affiliated group should be interpreted to mean the Alaska water’s-edge combined group. After a rather lengthy discourse on the legislative process whereby Alaska adopted water’s edge combined reporting, the ALJ noted that the taxpayer’s position would lead to a foreign Commerce Clause violation because dividends from domestic entities with mostly foreign income would be excluded while dividends from foreign subsidiaries would be included. For Alaska purposes, a domestic corporation with 80 percent or more foreign business activity is comparable in all material ways to a foreign corporation with 80 percent or more foreign business activity and, in the ALJ’s view, the best approach was treat these similarly-situated companies identically. Thus, the ALJ affirmed the Department’s interpretation of the relevant statutes observing that this was a “logical result” based on the purpose of the statute. This interpretation also implemented legislative intent to treat domestic and foreign subsidiaries alike, and was consistent with the tenets of statutory construction. Please contact Jonathan Drugge at 206-913-4422 with questions on Costco Wholesale Corp.
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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.