State & Local Tax Blog

ALABAMA Income Tax Law Survives Challenge

The Alabama Court of Civil Appeals on Friday overturned a lower court decision in a corporate tax case that might have resulted in a a multimillion-dollar revenue loss to the state. The vote wasn’t close. The 5-0 order by the appeals court reversed Circuit Judge Tracy McCooey of Montgomery, who had ruled that VFJ Ventures’ (Vanity Fair) deductions were not unreasonable as that term was defined in the law. What was the definition of “unreasonable” in the law. That was the key to the lower court’s ruling — it was not defined.
State officials had said the ruling last year could have cost the state $30 million to $50 million in annual corporate income tax collections and forced the state to pay as much as $100 million in refunds.

You may remember back in 2001 that Alabama passed a law that required companies to add back as taxable income deductions they took on interest and royalty payments made to sister companies. It was to attack a holding company strategy where you value your intangibles and place them in a separate legal entity and that company charges your other entities royalties and interest for using those patents or trademarks.

However, there was one exception in the law says a company doesn’t have to add back the deductions if it proves such adjustments were “unreasonable”. VFJ argued that it wasn’t unreasonable for a corporation to deduct these payments. The lower court agreed. The appeals court vacated that lower decision. It looks like the AL law will live to fight another day.

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