1 2008 OFII Tax Conference La Quinta_ CA ORGANIZATION FOR

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					                ORGANIZATION FOR INTERNATIONAL
                         INVESTMENT

             STATE AND LOCAL TAX DEVELOPMENTS

                        Case and Controversy Update

                             Thursday May 1, 2008

Richard A. Leavy
Mayer Brown LLP
1675 Broadway
New York, New York 10019
(212) 506-2310
rleavy@mayerbrown.com


2008 OFII Tax Conference                              La Quinta, CA
                                                        May 2008   1
                 Richard A. Leavy – Biography

   Richard Leavy is partner in the Tax Transactions practice group of Mayer Brown LLP, resident in
   the New York office. Richard's practice includes all areas of state and local taxation,
   concentrating on transactional analysis and planning. Prior to joining Mayer Brown in 2007,
   Richard was an equity partner at another prominent international law firm (1998–2007). During
   the 1995–1996 term, Richard served as judicial intern to The Honorable Leonard I. Garth, US
   Court of Appeals for the Third Circuit. Richard holds an LLM in Taxation from New York
   University School of Law, a JD from Rutgers School of Law – Newark, and an undergraduate
   degree in political science from Rutgers College. Richard is admitted to practice in New York and
   New Jersey.




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I.     Recently Decided United States Supreme Court State Tax Cases
II.    Pending United States Supreme Court State Tax Cases
III.   State Tax Cases Denied Review by the United States Supreme Court
IV.    Recently Decided State Tax Cases




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A. RECENTLY DECIDED UNITED STATES SUPREME COURT STATE TAX CASES
    1. Permanent Mission of India to the United Nations v. City of New York, United States
       Supreme Court Dkt. No. 06-134, June 14, 2007.
        a. Under New York law, real property owned by a foreign government is exempt from
           taxation when used exclusively for diplomatic offices or quarters for ambassadors or
           ministers.
        b. New York City levied property taxes against the Mission for that portion of its diplomatic
           office buildings used to house lower level employees and their families.
        c. The Mission claimed that the Foreign Sovereign Immunities Act of 1976 (FSIA)
           provided protection from suit by the City.
        d. The Court held that the FSIA does not immunize a foreign government from a law suit
           to declare the validity of tax liens on property held by the sovereign for the purpose of
           housing its employees.




2008 OFII Tax Conference                                                         La Quinta, CA
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A. RECENTLY DECIDED UNITED STATES SUPREME COURT STATE TAX CASES
    B. CSX Transportation, Inc. v. Georgia State Board of Equalization, Dkt. No. 06–1287,
       December 4, 2007.
        a. The 4-R Act bars states from discriminating against railroads when levying property
           taxes and provides an exception to the general rule of the federal Tax Injunction Act, 28
           U.S.C. §1341 against interference with matters of state taxation.
        b. Federal courts may provide redress under the 4-R Act if the ratio of assessed value to
           true market value of rail transportation property exceeds by at least 5% the ratio of
           assessed value to true market value of other commercial and industrial property in the
           same assessment jurisdiction.
        c. In order to evaluate an assessment ratio under the 4-R Act, federal courts must
           calculate the true market value of in-state railroad property, which requires a court to
           "look behind" a state's choice of valuation methods.




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II. PENDING UNITED STATES SUPREME COURT STATE TAX CASES
     1. Kentucky Department of Revenue v. Davis, United States Supreme Court Dkt. No. No. 06-
        666, Argued November 5, 2007.
         a. Under Kentucky law, interest earned on Kentucky state and local bonds is exempt from
             state income tax and interest earned on out-of-state bonds is subject to Kentucky state
             income tax (this is the law in more than 40 states).
         b. The plaintiffs filed a class action suit claiming that the Kentucky law taxing interest
             earned on out-of-state bonds violates both the commerce clause and the equal
             protection clause.
         c. The trial court granted summary judgement in favor of the Kentucky Department of
             Revenue, the appeals court reversed holding that the law discriminates in violation of
             the dormant commerce clause and is facially unconstitutional, and the Kentucky
             Supreme Court refused to hear the case.




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 II.   PENDING UNITED STATES SUPREME COURT STATE TAX CASES
        B. MeadWestvaco Corp v. Illinois, United States Supreme Court Dkt. No. No. 06-666, Argued
           November 5, 2007.
            a. The petitioner, a non-domiciliary of Illinois, sold its interest in LexisNexis, another non-
               domiciliary of Illinois, and reported the gain from the sale as nonbusiness income not
               apportionable to business income in Illinois (and therefore not subject to tax in Illinois).
            b. The Illinois Department of Revenue characterized the gain as apportionable business
               income subject to tax in Illinois.
            c. Meadwestvaco claimed that Illinois should not tax the sale because LexisNexis was a
               non-unitary business held for investment purposes.
            d. Both the Cook County Circuit Court and Illinois Appellate Court disagreed and held that
               the tax was proper because Meadwestvaco's investment in LexisNexis served an
               operational (rather than investment) function.




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 III. STATE TAX CASES DENIED REVIEW BY THE UNITED STATES SUPREME COURT
       1. General Electric Co. v. Commissioner, New Hampshire Department of Revenue
          Administration, United States Supreme Court Dkt. No. 06-1210, petition for certiorari denied
          October 29, 2007.
           a. Facial discrimination challenge to the New Hampshire business profits tax (BPT) under
                the Commerce Clause based on the limitation on the deduction provided for dividends
                received from foreign subsidiaries so as to only allow the deduction to the extent that
                the foreign subsidiary conducts income-generating business in the state.
           b. The taxpayer challenged the constitutionality of the state's tax regime arguing that the
                denial of the deduction for dividends received from foreign corporations not doing
                business in the state facially discriminates against foreign commerce.
       2. Florida Department of Revenue v. Piccadilly Cafeterias, Inc., United States Supreme Court,
          Dkt. No. 07-312, petition for certiorari granted December 7, 2007.
           a. After bankruptcy petition filed under Chapter 11, the court approved a sale of the
                corporation's assets and held that the sale was exempt from stamp taxes under
                §1146(c), even though the sale was made prior to the corporation's global settlement
                and prior to any plan confirmation.
           b. The Florida Department of Revenue asserted that §1146(a) (previously numbered as
                §1146(c)) of the federal Bankruptcy Code, which exempts from stamp or similar taxes
                any asset transfer under a plan confirmed under §1129 of the Code, does not apply to
                the transfer of assets made prior to the Chapter 11 plan confirmation.
           c. The bankruptcy court, district court, and 11th Circuit all held that §1146(c) allows a tax
                exemption for pre-confirmation transfers.

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 III.   STATE TAX CASES DENIED REVIEW BY THE UNITED STATES SUPREME COURT
        C. Ford Motor Co. v. Seattle, United States Supreme Court Dkt. No. 07-623, petition for
           certiorari denied February 19, 2008.
            a. Seattle and Tacoma each impose a "business activity" tax on a company's gross
                  receipts from wholesale sales.
            b. Ford Motor Co. asserted that the cities of Seattle and Tacoma, Washington
                  unconstitutionally taxed wholesale activity occurring outside the jurisdictional
                  boundaries of the cities.
        D. Lanco, Inc. v. Director, Division of Taxation, United States Supreme Court Dkt. No. 06-1236,
           petition for certiorari denied June 18, 2007.
            a. Lanco was a Delaware corporation with no officers, employees, or real or tangible
                  personal property in New Jersey. However, Lanco owned and licensed intangibles to
                  its affiliate in New Jersey.
            b. In a decision affirmed by the New Jersey Supreme Court, the Appellate Division of the
                  Superior Court held that that Quill's physical presence nexus requirement is not
                  applicable to income tax and that the New Jersey Corporation Business Tax may be
                  constitutionally applied to income derived by plaintiff from licensing fees attributable to
                  New Jersey.
        E. FIA Card Services NA, f/k/a MBNA America. Bank NA, v. Tax Commission, No. 06-1228,
           petition for certiorari denied June 18, 2007.
            a. West Virginia's statute imposes a tax on financial institutions based on the amount of
                  the financial institutions' economic activity with respect to West Virginia customers.

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III.   STATE TAX CASES DENIED REVIEW BY THE UNITED STATES SUPREME COURT
           2. In a decision affirmed by the West Virginia Supreme Court, the Circuit held that the
                corporate net income and business franchise taxes had been properly imposed on
                MBNA, since the gross receipts attributable to a West Virginia source far exceeded the
                statutory threshold for nexus and concluded that MBNA had substantial nexus with the
                state for the years in question such that imposition of the corporate income and
                business franchise taxes was proper.
           3. The Court rejected the "bright-line physical presence test" established in Bellas Hess
                and adhered to in Quill because the taxes at issue in this case were not sales and use
                taxes. Specifically, the Court found as a matter of law that physical presence was not
                required to establish substantial nexus to satisfy the Commerce Clause when imposing
                corporate net income and business franchise taxes.
           4. In reaching its decision, the Court focused on the many benefits MBNA was deemed to
                receive from the state, such as the banking and consumer credit laws and access to
                the state's courts, all of which enabled MBNA to generate income from West Virginia
                customers. The Court noted in particular that because MBNA extends substantial
                unsecured credit to citizens of West Virginia, the fact that MBNA had access to West
                Virginia courts was essential to its business operations.
       F. Fluor Enterprises, Inc. v. Michigan Department of Treasury, United States Supreme Court
          Dkt. No. 07-149, petition for certiorari denied October 9, 2007.
           a. A taxpayer challenged the Michigan single business tax apportionment statute as
                violating the Commerce Clause by classifying receipts for services rendered outside
                Michigan as Michigan sales.
           b. The corporation's employees performed engineering and architectural services outside
                of Michigan that were related to real estate improvement projects constructed in
                Michigan, thereby constituting "services performed" for "construction activities" that
                took place within Michigan.


2008 OFII Tax Conference                                                          La Quinta, CA
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IV. RECENTLY DECIDED STATE TAX CASES - Alabama
     1. Alabama
         a. Graduate Supply House, Inc. v. Alabama Department of Revenue, Alabama
             Department of Revenue, Administrative Law Division, No. S. 05-751, November 20,
             2007.
              i. The physical presence of the taxpayer's income-producing property in Alabama
                  established substantial nexus and taxability.
              ii. Even if the in-state company's representatives were not deemed to be agents, the
                  caps and gowns that were being rented in Alabama from which it derived
                  substantial income created nexus.
         b. Garrison v. Alabama Department of Revenue, Alabama Department of Revenue,
             Administrative Law Division, No. INC. 07-699, November 1, 2007.
              i. A faxed notice of appeal does not constitute a proper filing of an appeal, absent an
                  agency rule to the contrary.
              ii. The taxpayer's attorney sent a faxed letter that to the Alabama Income Tax
                  Division's Individual Hearing Section, which was docketed by the Administrative
                  Law Division as an appeal of a personal income tax assessment.




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IV.   RECENTLY DECIDED STATE TAX CASES - Alabama
         3. Alabama Department of Revenue v. Hoover, Inc., Alabama Court of Civil Appeals, Dkt.
            No. 2060142, August 31, 2007.
             i. Collateral estoppel barred the Alabama Department of Revenue from relitigating
                  the issue of whether sufficient justification existed for a sales tax scheme that the
                  Alabama Supreme Court had previously held to be facially discriminatory against
                  interstate commerce.
             ii. In 2006 the Alabama Supreme Court determined that Alabama's policy of
                  imposing Alabama sales tax on sales of products delivered in Alabama to out-of-
                  state governmental entities, while exempting sales of products delivered in
                  Alabama to Alabama state and local governmental entities, violated the federal
                  Commerce Clause.
             iii. Even though the case concerned different tax years and different sales tax
                  assessments, it involved the same fundamental issues so the principle of
                  collateral estoppel applied because inasmuch as the issue was identical to the
                  issue litigated in the prior action, the issue was actually litigated in the prior
                  action, the resolution of the issue was necessary to the prior judgment, and the
                  same parties were involved in both actions..




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 IV.   RECENTLY DECIDED STATE TAX CASES - Alabama
          4. Surtees v. VFJ Ventures, Inc., Alabama Court of Civil Appeals, No. 2060478, February
             8, 2008.
              i. The Alabama Court of Civil Appeals held the disallowal of deductions under
                   Alabama's addback statute for royalty payments a manufacturing corporation
                   made to certain related intangible management companies proper.
              ii. Because the statute provides that the addback requirement does not apply if it
                   would be "unreasonable," but does not define the term, the higher court gave
                   deference to the consistent agency interpretation that an addback would be
                   unreasonable if the resulting tax would be out of proportion to the corporation's
                   activities in Alabama.
              iii. To construe the unreasonableness exception as requiring only a showing of a
                   business purpose or economic substance would render the rule ineffective
          5. Tate & Lyle Ingredients Americas, Inc. v. Alabama Department of Revenue, Alabama
             Department of Revenue, Administrative Law Division, No. CORP. 07-162, January 15,
             2008.
              i. An out-of-state corporation was not subject to Alabama corporate income tax on
                   the gain it realized from selling its one-third stock interest in a European
                   company, despite the fact that the two companies were in the same general line
                   of business (i.e., selling cereal sweeteners) and were owned by the same holding
                   company.
              ii. The assertions that the companies were unitary and operationally related were
                   found to be speculative and unsupported by the evidence.
              iii. The determining question was whether there was a flow of value between the
                   companies, as evidenced by functional integration, centralization of management,
                   and economies of scale.
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IV.   RECENTLY DECIDED STATE TAX CASES - Arizona
      B. Arizona
          a. Arizona Department of Revenue, Case No. 200600082-C, Decision of Hearing Officer,
              June 15, 2007 (released August 2007).
               i. Gain from sales of assets and property by holding companies that were members
                   of a taxpayer's affiliated group and included in the taxpayer's consolidated
                   Arizona corporate income tax return were held to be apportionable business
                   income since the business of the holding companies was to hold the assets and
                   property sold.
               ii. Royalty income from patents held by holding companies was business income
                   where the business of the holding companies was to hold the patents.
          2. Richardson v. Arizona Department of Revenue, Arizona State Board of Tax Appeals,
              No. 1949-06-I, July 18, 2007 (released October 2007).
               i. An Arizona law imposing personal income tax on a taxpayer's income from out-of-
                   state municipal bond interest, while excluding Arizona municipal bond interest
                   from tax, was held not to violate the Commerce or Equal Protection Clauses of
                   the United States and Arizona Constitutions, or the Uniformity Clause of the
                   Arizona Constitution.
               ii. The Board of Tax Appeals based its decision on (i) having no authority to
                   recognize an administrative class refund claim or class action on behalf of the
                   taxpayer and other similarly-situated taxpayers and (ii) having no authority to
                   declare a statute unconstitutional (although it could apply constitutional doctrines
                   to resolve claims).
          3. Southwest Airlines Co. v. Arizona Department of Revenue, Arizona Court of Appeals
              Dkt. No. 1 CA-TX 07-0002.
               i. Personal property tax was properly imposed on avionics software installed in
                   flight computers aboard the taxpayer's aircraft in Arizona.

2008 OFII Tax Conference                                                           La Quinta, CA
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IV.   RECENTLY DECIDED STATE TAX CASES - Arkansas
      C. Arkansas
          a. Citifinancial Retail Services Division of Citicorp Trust Bank, FSB v. Weiss, Arkansas
              Supreme Court, No. 07-551, January 17, 2008.
               i. A company that provided financing on consumer retail purchases was not a
                    "taxpayer" under the Arkansas bad debt statute and therefore was not entitled to
                    claim a refund of sales taxes that it had paid to retailers on credit accounts on
                    which consumers defaulted, even though it was an assignee of the retailer.
               ii. To qualify for a refund under the bad debt statute, a person must be liable for
                    remitting sales tax on the purchase.
               iii. Although the financing company paid the sales tax to the retailer, the retailer
                    remained the person liable for reporting and remitting the sales tax to the state.




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IV.   RECENTLY DECIDED STATE TAX CASES - California
      D. California
          a. General Mills, Inc. & Subsidiaries v. Franchise Tax Board, California Superior Court for
               the County of San Francisco, No. 439929, September 26, 2007.
                i. Receipts from a taxpayer's sales transactions in the commodity futures market
                     could not be treated as "gross receipts" in calculating the taxpayer's sales factor
                     for California corporation franchise and income tax apportionment purposes.
                ii. The court held that although a party realized the same gross profits from a futures
                     contract as from a cash market sale, the economic reality of a futures transaction
                     was significantly different from that of a cash market sale and justified disparate
                     treatment for apportionment purposes.
                iii. Some of the factors deemed relevant included (i) the rarity of an actual purchase
                     or sale of a commodity, (ii) the ability of either party to unilaterally decide to offset
                     the contract, (iii) the primary function of the contracts as a way to expose parties
                     to price fluctuations, (iv) the claiming of gross receipts equal to the nominal price
                     of a grain futures contract and the amount realized from the sale of products
                     resulting in double-counting of futures transactions in a manner that did not fairly
                     reflect actual business gains, (v) .the GAAP recording of gains and losses
                     resulting from hedging activities, and not gross sales, and (vi) the lack of a profit
                     motive (the hedging motive).



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 IV.   RECENTLY DECIDED STATE TAX CASES - California
          2. Barnesandnoble.com LLC v. State Board of Equalization, California Superior Court,
             San Francisco County, Case No. CGC-06-456465, October 11, 2007, filed October 12,
             2007.
              i. The use by a brick-and-mortar company of coupons in its shopping bags to
                  provide a discount on any one online purchase from its Internet retailer sister
                  company (taxpayer) did not create nexus sufficient to impose California use tax
                  registration, collection and remittance obligations.
              ii. The court held that the concept of agency requires something significantly more
                  than the passive distribution of coupons and the agent must have the authority to
                  bind the principal.
          3. County of Los Angeles v. Superior Court of Los Angeles County, California Court of
             Appeal, Second Appellate District, B198118, January 24, 2008
              i. A challenge to county utility user tax could be certified as a class action despite
                  both a state law restriction on class actions for tax refunds and the failure of
                  individual class members to comply with either the state's Government Claims Act
                  or the county's claims ordinance.
              ii. The class was required to show some compliance with each claims requirement
                  and substantial compliance with all the requirements, and the county had not
                  contended that the class failed to meet the substantial compliance test.




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 IV.   RECENTLY DECIDED STATE TAX CASES - Delaware
       E. Delaware
           a. Lehman Bros. Bank, FSB v. State Bank Commissioner, Delaware Supreme Court, No.
               656, 2006, November 7, 2007.
                i. A federally chartered savings bank, with its principal office and a small staff of
                     employees in Delaware, was held to be liable for Delaware franchise tax
                     assessments, even though most of the bank's employees, including senior
                     management, were located in New York because the bank was domiciled in
                     Delaware for franchise tax purposes.
                ii. The tax was held not to violate the Commerce or Due Process clauses of the
                     United States Constitution because the bank had the requisite minimum contacts
                     with Delaware and received state benefits and protections.
                iii. The Delaware Bank Commissioner was found to have abused his discretion when
                     he refused to abate penalties for additional tax without providing an explanation
                     for the three-year delay in notifying the bank of the tax deficiency.




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IV.   RECENTLY DECIDED STATE TAX CASES - Florida
      F. Florida
          a. City of Tampa v. Addison, Florida Court of Appeal, Second District, No. 2D06-3168,
               August 8, 2007.
                i. Challenge to the constitutionality of the occupational license tax as applied to
                     attorneys practicing law in Tampa.
                ii. An order of class certification was affirmed for members of the Florida bar
                     challenging the constitutionality of the city of Tampa's occupational license tax
                     because the city's objections were without merit.
          b. Technical Assistance Advisement, No. 07C1-007, Florida Department of Revenue,
               October 17, 2007.
                i. An out-of-state financial services processing company was held to have
                     established a taxable nexus with Florida for corporate income tax purposes based
                     on business dealings with unrelated authorized vendors.
                ii. The taxpayer did not maintain real or tangible personal property or employ
                     personnel or agents in Florida but was licensed by the Office of Financial
                     Regulation.
                iii. "Doing business "in Florida means actively engaging in any transaction for the
                     purpose of financial gain; physical presence is not required to impose the state's
                     corporate income tax.
                iv. The presence of the unrelated vendors was sufficient to create corporate income
                     tax nexus, because without them, the taxpayer could not operate its business in
                     Florida.

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IV.   RECENTLY DECIDED STATE TAX CASES - Florida
         3. Golden West Financial Corp. v. Florida Department of Revenue, Florida District Court
            of Appeal, First District, No. 1D07-0135, February 19, 2008.
             i. Florida Rule 12C-1.-13(14)(j) purports to prohibit a deduction for a NOL carryover
                 sustained in a prior taxable year for which a Florida consolidated return was not
                 filed and Florida corporate income tax returns were not filed for all members of
                 the group.
             ii. The corporate income tax separate return limitation year (SRLY) rule applied to
                 net operating losses (NOLs) was held to be invalid because it impermissibly
                 "enlarges, modifies, or contravenes the specific provisions" of the two enabling
                 statutes and, therefore, it is a prohibited invalid exercise of delegated legislative
                 authority.




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IV.   RECENTLY DECIDED STATE TAX CASES - Idaho
      G. Idaho
          a. Decision No. 19311, Idaho State Tax Commission, July 30, 2007.
               i. Income from the sale of a subsidiaries' stock and minority interests in several
                    partnerships was held to constitute apportionable business income for Idaho
                    corporate income tax purposes.
               ii. The existence of a unitary business demonstrated that the subsidiaries served an
                    operational rather than an investment function and served as the necessary
                    predicate to apportioning the gain.
               iii. The subsidiaries furthered the parent's delivery of integrated service packages to
                    its customers to expand its markets by providing installation and maintenance
                    services, materials and supplies, managerial, technical, accounting, and
                    administrative services to the parent company's operating subsidiaries.
               iv. The subsidiaries had previously been included in the parent corporation's
                    combined reports.




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IV.   RECENTLY DECIDED STATE TAX CASES - Idaho
         2. Decision No. 19853, August 16, 2007.
             i. The sale of an ownership interest in a former subsidiary was held to be
                 apportionable business income for Idaho corporate income tax purposes.
             ii. The prospective agreement entered into by the seller and the purchaser of the
                 subsidiary guaranteeing the continued supply of the former subsidiary's products
                 and a no-competition clause in the sale agreement demonstrated that the sold
                 subsidiary was not a passive investment and could not rebut the strong
                 presumption that income from stock or other securities is business income.




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IV.   RECENTLY DECIDED STATE TAX CASES - Illinois
      H. Illinois
           a. State ex rel. Beeler v. Ritz Camera, Illinois Appellate Court, First District, No. 1-05-
                1059, October 5, 2007.
                 i. The original complaint was a qui tam action filed under the Illinois Whistleblower
                    Reward and Protection Act by a private law firm alleging that numerous retailers
                    with out-of-state operations failed to collect and remit Illinois use tax on goods
                    sold to Illinois residents over the Internet and/or through catalogs. The Attorney
                    General later intervened and prosecuted the matter on the State's behalf.
                 b. A joint motion to dismiss filed by the defendant retailers was denied by the trial
                    court, the interlocutory appeal was denied by the Appellate Court, and the
                    Supreme Court directed the Appellate Court to answer the six certified questions
                    prior to proceeding:
                      i. If a remote retailer does not collect and remit use tax on sales to Illinois
                           customers, can it make a knowingly false record or statement, as required to
                           create liability under the Illinois Whistleblower Act?
                      ii. Does the Whistleblower Act require the existence of an actual record or
                           statement to support a claim or can the failure to keep a record be
                           actionable?
                      iii. Can documents memorializing a purchase (i.e. invoices or packing receipts)
                           that show that tax is "$0.0" or in some other way that tax is not being
                           collected be considered "false" under the Act where the retailer that created
                           those documents does not collect tax?
                      iv. Is it necessary that a false statement be submitted to or actually relied upon
                           by the State?

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IV.   RECENTLY DECIDED STATE TAX CASES - Illinois
                 v. Does the use of the Whistleblower Act to enforce the sales and use tax laws
                       improperly deprive taxpayers of the specific rights and privileges afforded
                       them under the Protest Monies Act, the Taxpayer's Bill of Rights, and/or the
                       statutory administrative procedures, such that the Act cannot be used to
                       enforce the collection of taxes due the State?
                 vi. Is the Illinois Department of Revenue the sole entity authorized by the Illinois
                       General Assembly to assess and collect use tax?
                 vii. Does the Illinois Whistleblower Act apply to alleged tax liabilities under the
                       Use Tax Act?
                 viii. (a) Does the Whistleblower Act violate the Attorney General clause of the
                       Illinois Constitution, Article V, Section 15, by improperly usurping the
                       exclusive authority of the Attorney General to initiate and conduct litigation
                       on behalf of the State? (b) Does the Illinois Whistleblower Act, as applied to
                       tax matters, violate either the Attorney General clause or the Executive
                       Compensation clause of the Illinois Constitution, Article V, Sections 15 and
                       21?




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IV.    RECENTLY DECIDED STATE TAX CASES - Indiana
      I. Indiana
          a. Letter of Findings No. 06-0377, Indiana Department of Revenue, December 26, 2007.
               i. Forcing the taxpayer to file a combined corporate adjusted gross income tax
                    return was justified based on the substantial artificial loss created by selling
                    accounts receivable at a discount, which distorted the taxpayer's Indiana income
                    and expenses.
               ii. Combination was permissible because the subsidiary did not qualify as a financial
                    institution inasmuch as 80% of the subsidiary's gross income did not arise from
                    the enumerated financial institution activities.
          b. Letter of Findings No. 04-0262, Indiana Department of Revenue, December 26, 2007.
               i. Income received by a rail transportation service provider from providing liability
                    coverage was held to be "revenue from Indiana transportation" services, properly
                    apportioned on the basis of mileage.
               ii. The allocation of all of the income to Indiana because the revenues were earned
                    from the taxpayer's corporate office located in Indiana and the employees who
                    performed the activities relating to the income were located in Indiana was
                    improper.
               iii. The exclusion of the taxpayer's parent corporation from the consolidated return in
                    was held to be permissible, even though the parent corporation had nexus,
                    because inclusion resulted in a 120% decrease in taxpayer's adjusted gross
                    income.

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IV.   RECENTLY DECIDED STATE TAX CASES - Indiana
         3. Letter of Findings No. 06-0511, Indiana Department of Revenue, January 30, 2008.
             i. Royalty fees paid to an out-of-state related entity were properly deducted from
                  gross income in computing its Indiana adjusted gross income tax.
             ii. The royalty fees were paid in exchange for the right to employ certain trademarks
                  and logos and deducted those fees on its Indiana tax returns and there was no
                  evidence that the royalty payments constituted an abusive tax avoidance scheme.
             iii. There was no loan of the royalties back to the taxpayer or other return of the
                  royalties in the form of dividends.




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IV.   RECENTLY DECIDED STATE TAX CASES - Kansas
      J. Kansas
          a. Opinion No. 2007-38, Kansas Attorney General, November 30, 2007.
              i. Proposed Kansas property tax legislation providing for different rates of taxation
                  based on whether the real property is owned by a private resident or a
                  commercial home builder.
              ii. The proposed legislation was held to violate the uniform and equal provisions of
                  the Kansas Constitution since property of the same type must be valued using the
                  same method and not be based on who owns the property.




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IV.   RECENTLY DECIDED STATE TAX CASES - Kentucky
      K. Kentucky
          a. Kentucky v. Autozone Development Corp., Kentucky Court of Appeals, No. 2006-CA-
              002175-MR, October 12, 2007.
               i. A captive REIT doing business in Kentucky was allowed to claim a deduction for
                    dividends paid.
               ii. The Kentucky Department of Revenue argued that deductions from gross income
                    are strictly limited to those taken for federal income tax purposes.
               iii. Effective January 1, 2007, no deduction is allowed for dividends paid by a captive
                    REIT.
          b. AT&T Corp. v. Kentucky Finance and Administration Cabinet, Kentucky Board of Tax
              Appeals, File No. K01-R-18 (Order No. K-19978), January 4, 2008.
               i. A New York company doing business in Kentucky was required to include all
                    members of its affiliated group in the return, not just subsidiaries with Kentucky
                    nexus.
               ii. A Kentucky consolidated return must include all members of the affiliated group
                    included in the federal consolidated return, unless members are specifically
                    exempt from taxation.
               iii. The consolidated return election treats all of the members of the affiliated group
                    as a single corporation for income tax purposes.

2008 OFII Tax Conference                                                          La Quinta, CA
                                                                                                28
IV.   RECENTLY DECIDED STATE TAX CASES - Kentucky
         3. Kentucky Revenue Cabinet v. Asworth Corp., Franklin Circuit Court, Kentucky, No. 06-
            CI-00288, December 4, 2007.
             i. An out-of-state corporation was held to have sufficient nexus with Kentucky for
                  corporation income tax purposes even though the corporation had no physical
                  presence in Kentucky.
             ii. The derivation of income from the ownership of partnership interests in
                  partnerships doing business in Kentucky satisfied the substantial nexus
                  requirement of the Commerce Clause.
             iii. A definite link or minimum connection as is required by the Due Process Clause
                  was satisfied by the corporation's interest in partnerships doing business in
                  Kentucky that resulted in a substantial amount of distributive income from in-state
                  activities.




2008 OFII Tax Conference                                                         La Quinta, CA
                                                                                               29
IV.   RECENTLY DECIDED STATE TAX CASES - Louisiana
      L. Louisiana
          a. Firestone Polymers v. Calcasieu Parish School System, Louisiana Appellate Court,
              Third Circuit, No. 07-0501, October 31, 2007.
               i. The lease tax paid under protest on shipping containers leased out-of-state was
                    held to have been properly imposed.
               ii. The fact that the containers were delivered to the parish created the requisite
                    taxable moment to justify the imposition
          b. Bridges v. Geoffrey, Inc., Louisiana Appellate Court, First Circuit, No. 2007 CA 1063,
              February 8, 2008.
               i. Substantial nexus in Louisiana was created for a Delaware intangible holding
                    company based on the receipt of royalty income from an affiliated entity for the
                    license of trademarks and trade names used in activities in Louisiana.
               ii. The company was subject to the corporate income and franchise taxes even
                    though it had no physical presence in Louisiana.
               iii. Good faith to abate the penalties was lacking since the company declined to pay
                    any corporate income or franchise tax based on the knowledge of the South
                    Carolina Geoffrey decision.




 2008 OFII Tax Conference                                                          La Quinta, CA
                                                                                                 30
 IV.   RECENTLY DECIDED STATE TAX CASES - Massachusetts
       M. Massachusetts
           a. Fleet Funding Inc. et al v. Commissioner of Revenue, Massachusetts Appellate Tax
              Board, Feb. 21, 2007.
               i. The dividends paid deductions allowable under the Massachusetts corporation
                    excise tax was denied for dividends paid among two Massachusetts REITs and
                    two Rhode Island passive investment companies on the basis that they lacked
                    business purpose and economic substance.
               ii. The transactions were characterized as designed to convert interest earned from
                    real estate loans into tax-free dividends from the Rhode Island passive
                    investment companies.
           b. The TJX Companies, Inc. v. Commissioner of Revenue, Massachusetts Appellate Tax
              Board, Nos. C262229-31, August 15, 2007.
               i. The formation of subsidiaries to hold trademarks to create deductions for royalties
                    paid to the subsidiaries under a transfer-and-license-back was characterized as a
                    sham and the taxpayer was denied a deduction for the royalties paid.
               ii. The transactions were held to lack economic substance and have no purpose
                    other than the creation of tax benefits.
                     i. The subsidiaries had no control over the intangibles they purported to own.
                     ii. The subsidiaries did not negotiate the terms of the license agreements.
                     iii. The business operations did not change as a result of the transfer and
                          license-back.

2008 OFII Tax Conference                                                         La Quinta, CA
                                                                                              31
IV.   RECENTLY DECIDED STATE TAX CASES - Michigan
      N. Michigan
          a. Dickow v. Michigan Department of Treasury, Michigan Tax Tribunal, No. 0329530,
              November 27, 2007.
               i. A corporate president was found to be liable for Michigan sales, use, and
                   withholding taxes because he had corporate responsibility for making tax returns
                   and payments.
               ii. The president signed returns and checks in payment of taxes, demonstrating that
                   he had tax-related responsibility.
          b. NSK Corp. v. Department of Treasury, Michigan Court of Appeals, No. 274633,
              January 29, 2008.
               i. The Michigan DOR audited the taxpayer and determined that taxes had been
                   overpaid, but denied that interest was due on the overpayment identified since no
                   "claim" for refund was submitted.
               ii. The court held that the term "claim" should not be strictly construed and that a
                   claim is made on the date the DOR is made aware of the taxpayer's claim to a
                   refund, which is the date of the audit determination letter since the letter
                   functioned as the "claim."




2008 OFII Tax Conference                                                         La Quinta, CA
                                                                                              32
IV.   RECENTLY DECIDED STATE TAX CASES – New Jersey
      O. New Jersey
          a. McKesson Water Products Company v. Division of Taxation, New Jersey Tax Court,
             No. 000156-2004, August 13, 2007.
              i. Gain from the sale of a subsidiary's stock was held to be nonoperational income
                  and therefore not subject to the New Jersey corporation business tax.
              ii. The taxpayer made an election under IRC section 338(h)(10), which is respected
                  by New Jersey and required the state to respect all aspects of the deemed sale of
                  assets and liquidation.




2008 OFII Tax Conference                                                        La Quinta, CA
                                                                                             33
IV.   RECENTLY DECIDED STATE TAX CASES – New York
      P. New York
          a. In re Brown, New York Division of Tax Appeals, Administrative Law Judge Unit, DTA
             Nos. 821005 and 821012, December 13, 2007.
              i. The controller and the general manager of a corporation were held not to be
                   personally liable for sales and use taxes due, despite the fact that they both pled
                   guilty to various criminal charges arising from violations of the Tax Law.
              ii. Neither the controller nor the general manager was an officer or a director of the
                   corporation and neither had authority to sign checks.
              iii. New York State argued that the corporate veil should have been pierced and that
                   the individuals should have been collaterally estopped from contesting their status
                   as responsible officers.
          b. In re Bausch & Lomb, Inc., New York Division of Tax Appeals, Tax Appeals Tribunal,
             DTA No. 819883, December 20, 2007.
              i. The taxpayer was allowed a corporate franchise tax refund claim that was based
                   on a loss incurred in 1996 from the sale of a subsidiary included in the taxpayer's
                   combined group.
              ii. The add-back of losses from subsidiary capital provided for in Tax Law §208.9(a)
                   does not apply to the loss incurred by the taxpayer on its sale of stock.



2008 OFII Tax Conference                                                          La Quinta, CA
                                                                                               34
IV.   RECENTLY DECIDED STATE TAX CASES – New York
         3. Univisa, Inc., New York Division of Tax Appeals, Tax Appeals Tribunal, DTA No.
            820289, September 20, 2007.
             i. Corporations filing separate New York returns must compute their NOL
                  deductions as if they had filed their federal returns on a separate basis.
             ii. NOLs should stay with the subsidiary as they would have if the subsidiary had
                  filed separate federal income tax returns.
             iii. To place the taxpayer in the same position as if it did not file consolidated federal
                  income tax returns, the use of NOLs of its subsidiary should be denied.
         4. Niagara Mohawk Power Corp. v. Town of Moreau Assessor, New York Supreme Court,
            Appellate Division, Third Judicial Department, No. 501920, December 20, 2007.
             i. The taxpayer's challenge to local property tax assessments were upheld despite
                  the fact that the presumption of validity of the assessments was rebutted.
             ii. The taxpayers failed to meet their burden of demonstrating overvaluation by a
                  preponderance of the evidence.




2008 OFII Tax Conference                                                           La Quinta, CA
                                                                                                35
IV.   RECENTLY DECIDED STATE TAX CASES – North Carolina
      Q. North Carolina
          a. Blinson v. State of North Carolina, North Carolina Court of Appeals, NO. COA06-1258,
              October 16, 2007.
               i. A challenge to the constitutionality of corporate income, corporate franchise,
                    sales and use, and property tax benefits and other economic incentives and
                    subsidies granted to Dell, Inc. was dismissed for failure to state a claim for relief
                    and because the plaintiffs lacked standing under the state Uniformity of Taxation
                    Clauses and the federal Dormant Commerce Clause.
               ii. The North Carolina Supreme Court had previously held that economic incentives
                    offered by governmental entities to a private business for the purposes of job
                    creation and economic development fulfilled a public purpose.
               iii. Economic development incentives do not constitute a prohibited exclusive
                    emolument.
          2. Wal-Mart Stores East, Inc. v. Hinton, North Carolina Superior Court, No. 06-CVS-3928,
              December 31, 2007.
               i. The Department of Revenue was empowered to require a consolidated return and
                    use combined reporting to determine a multistate unitary business's net income
                    subject to North Carolina corporation franchise tax to correct the distortion
                    created by a reorganization undertaken to insert a captive REIT structure.
               ii. The reorganization was undertaken to reduce the net income subject to North
                    Carolina corporation franchise tax by providing a rent deduction for rent paid to
                    the REIT and a dividends received deduction for dividends paid to the taxpayer
                    by the out-of-state subsidiary property company from the rental income distributed
                    to it by the REIT.

2008 OFII Tax Conference                                                            La Quinta, CA
                                                                                                  36
IV.   RECENTLY DECIDED STATE TAX CASES – North Carolina
             c. The court found that the reorganization lacked any economic substance based on
                the following:
                 i. The real property mortgages were never transferred to the REIT.
                 ii. The property transfers to the REIT were never recorded.
                 iii. The taxes on the properties paid by the taxpayer's parent company.
                 iv. Neither the REIT nor the property company had any employees and the
                      management of the affairs of the new entities were undertaken by the former
                      owner of the property.
                 v. Transactions were accomplished almost exclusively through bank account
                      transfers or accounting entries on the parent company's ledgers.




2008 OFII Tax Conference                                                      La Quinta, CA
                                                                                           37
IV.   RECENTLY DECIDED STATE TAX CASES – Oklahoma
      R. Oklahoma
          a. In re De-Annexation of Certain Real Property From the City of Seminole, Oklahoma
              Supreme Court, No. 102524, December 11, 2007.
               i. An Oklahoma trial court ruled that it lacked the authority to rule on a municipal
                   sales tax refund claim because the merchants failed to exhaust administrative
                   remedies by first filing the claim with the Oklahoma Tax Commission.
               ii. The merchants had sought the refund of sales tax as a part of their challenge to
                   the annexation of their property (the court invalidated the annexation).




2008 OFII Tax Conference                                                         La Quinta, CA
                                                                                               38
 IV.   RECENTLY DECIDED STATE TAX CASES – Oregon
       S. Oregon
           a. U-Haul Co. of Oregon v. Department of Revenue, Oregon Tax Court, No. TC-MD
              030994B, August 29, 2007.
               i. Indemnity payments made by the common parent of an affiliated group of
                    companies were held to be expenses attributable to business income, and
                    therefore apportionable, for Oregon corporation excise tax purposes.
               ii. The indemnity payments were made for breach of the directors fiduciary duty to
                    family members who collectively held a minority interest in the common parent.
               iii. The indemnity payments satisfied the UDIPTA transactional test for business
                    income, inasmuch as they were made in the regular course of the taxpayer's
                    business.




2008 OFII Tax Conference                                                        La Quinta, CA
                                                                                             39
IV.   RECENTLY DECIDED STATE TAX CASES – Pennsylvania
      T. Pennsylvania
          a. Legal Letter Ruling No. RTT-07-004, Pennsylvania Department of Revenue, June 7,
             2007.
              i. The transfer of record of ownership of two real property parcels, from owners of a
                  Pennsylvania general partnership to the partnership itself, is not a corrective deed
                  and is subject to the realty transfer tax.
              ii. The deed from the owners to the partnership resulted in an actual transfer of title
                  to, and ownership of, the land and was not an exempt a corrective deed.
          b. FedEx Ground Package System, Inc. v. Pennsylvania, Pennsylvania Commonwealth
             Court, Nos. 302 F.R. 2003 and 303 F.R. 2003, April 27, 2007, aff'd per curiam Nos. 55
             MAP 2007 and 56 MAP 2007, December 27, 2007.
              i. To compute Pennsylvania corporate net income tax of a trucking company, the
                  numerator of apportionment fraction must be limited to Pennsylvania activity,
                  using average receipts per mile for transporting property in the state multiplied by
                  the total number of miles that the property is transported in the state.
              ii. The method of apportionment utilized by the Pennsylvania Department of
                  Revenue, computing the numerator by multiplying average receipts everywhere
                  by Pennsylvania miles, was rejected.



2008 OFII Tax Conference                                                          La Quinta, CA
                                                                                               40
IV.   RECENTLY DECIDED STATE TAX CASES – Pennsylvania
         3. Dechert LLP v. Pennsylvania, Pennsylvania Commonwealth Court, No. 885 F.R. 2004,
            January 23, 2008.
             i. Canned software license renewals were held to be subject to Pennsylvania sales
                 tax.
             ii. Canned software is tangible personal property, and the definition of "sale at retail"
                 specifically includes the grant of a license to use or consume tangible personal
                 property, regardless of the means of delivery.




2008 OFII Tax Conference                                                           La Quinta, CA
                                                                                                41
IV.   RECENTLY DECIDED STATE TAX CASES – South Carolina
      U. South Carolina
          a. City of Charleston v. Hotels.Com, LP, United States District Court, District of South
              Carolina, Charleston Division, Nos. 2:06-CV-1646-PMD and 2:06-CV-2087-PMD,
              November 5, 2007.
               i. A federal district court has denied a motion to dismiss a lawsuit brought by two
                   South Carolina municipalities against online sellers and/or resellers of hotel
                   rooms (defendants) for failing to remit the full amount of local accommodations
                   taxes due and owing to the municipalities.
               ii. The municipalities assert that this practice violates their Municipal
                   Accommodations Fee Ordinances, constitutes conversion, and is an unfair or
                   deceptive trade practice in violation of the South Carolina Unfair Trade Practices
                   Act.




2008 OFII Tax Conference                                                           La Quinta, CA
                                                                                                 42
IV.   RECENTLY DECIDED STATE TAX CASES – Texas
      V. Texas
          a. Arnett v. Combs, U.S. Court Texas Court of Appeals, Fifth Circuit, No. 06-51103,
             November 30, 2007
               i. The retention by the Comptroller of surrendered unclaimed property was held not
                    to be unconstitutional.
               ii. A suit was brought in federal district court alleging that the retention of unclaimed
                    property constituted a taking without just compensation in violation of the Fifth
                    and Fourteenth Amendments to the United States Constitution.
               iii. The district court dismissed the claims for monetary relief on the basis of (i)
                    Eleventh Amendment immunity and (ii) lack of standing.




2008 OFII Tax Conference                                                             La Quinta, CA
                                                                                                   43
 IV.   RECENTLY DECIDED STATE TAX CASES – Virginia
       W. Virginia
           a. Ruling of Commissioner, P.D. 07-181, Virginia Department of Taxation, November 21,
                2007.
                 i. The location of an employee in the state to promote and sell the taxpayer's
                      services to Virginia based organizations was held to not create sufficient nexus
                      with Virginia to impose corporate income tax or a sales and use tax collection
                      obligation.
                 ii. The taxpayer was an energy services company that facilitated the sale of unused
                      electricity back to the energy grid.
                 iii. The taxpayer had one salesperson working in Virginia, which alone is not an
                      adequate basis to create corporate income tax nexus.
                 iv. The taxpayer was held not to be a dealer for sales and use tax purposes because
                      it did not sell any tangible personal property at retail.
           b. Ruling of Commissioner, P.D. 07-164, Virginia Department of Taxation, October 10,
                2007.
                 i. Two trusts were held not to have nexus with Virginia and not subject to Virginia
                      personal income tax following the relocation of the trust assets and the situs of
                      trust administration outside of Virginia.
                 ii. The fact that one trustee was a Virginia resident did not make the trusts resident
                      trusts for Virginia income tax purposes, so long as the committee of trustees did
                      not operate in Virginia and was not controlled in Virginia.

2008 OFII Tax Conference                                                          La Quinta, CA
                                                                                                44
IV.   RECENTLY DECIDED STATE TAX CASES – Virginia
      W. Virginia
          3. Ruling of Commissioner, P.D. 07-174, Virginia Department of Taxation, November 14,
               2007
                i. A taxpayer's request for an abatement of an assessment of Virginia corporate
                    income tax based on the denial of deductions attributable to an intangible holding
                    company was denied despite the additional documentation and financial
                    statements the taxpayer submitted.
                ii. The Virginia Department of Taxation reiterated its previous holdings in this case
                    and determined that the additional information offered by the taxpayer did not
                    establish that the out-of-state subsidiary intangible holding company conducted
                    its own activities or made loan transactions with the taxpayer at arm's length.
          4. Ruling of Commissioner, P.D. 07-197, Virginia Department of Taxation, November 30,
               2007.
                i. Interest and capital gains passed through from an investment partnership to a
                    corporate taxpayer were properly allocated because the income in question was
                    generated through a passive investment with non-unitary payers.




2008 OFII Tax Conference                                                            La Quinta, CA
                                                                                                 45
IV.   RECENTLY DECIDED STATE TAX CASES – Virginia
         5. Ruling of Commissioner, P.D. 08-02, Virginia Department of Taxation, January 7, 2008.
             i. A telecommunications reseller's service transactions were not taxable by Virginia
                 for corporate or sales and use tax purposes because no taxable nexus was
                 created with Virginia.
             ii. The taxpayer used a third-party supplier of telecommunications services and
                 facilities, and, thus, had no property, payroll, or sales in Virginia or its own to
                 create Virginia numerators or a taxable nexus.




2008 OFII Tax Conference                                                         La Quinta, CA
                                                                                              46
IV.   RECENTLY DECIDED STATE TAX CASES – Washington
      X. Washington
         a. Olson v. Sprint Spectrum L.P. d/b/a Sprint PCS, U.S. District Court, Western District of
             Washington, No. C06-0592-JCC, February 20, 2008.
              i. A federal district court held that a settlement agreement approved by a Kansas
                  state court in a separate class action precluded a class action against a wireless
                  telephone company for impermissibly billing Washington business and occupation
                  (B&O) tax to its Washington customers.
              ii. The court found that the plaintiffs were members of one of the settlement classes
                  created in the prior settlement agreement, had received notice of the prior
                  settlement, and failed to opt out of the prior settlement class.




2008 OFII Tax Conference                                                        La Quinta, CA
                                                                                             47
IV.   RECENTLY DECIDED STATE TAX CASES – West Virginia
      Y. West Virginia
         a. Decision No. 07-100 P, West Virginia Office of Tax Appeals, June 29, 2007.
              i. An unexpected substantial increase in taxable income did not constitute the type
                   of "unusual circumstance" authorizing the waiver of a taxpayer's penalty for the
                   underpayment of West Virginia estimated personal income tax.
              ii. The taxpayer failed to (i) make estimated payments equal to 100% of the tax
                   liability shown on the prior year's annual return or (ii) file the return and remitting
                   the balance of tax due by January 31 of the following year.




2008 OFII Tax Conference                                                              La Quinta, CA
                                                                                                     48
 IV.   RECENTLY DECIDED STATE TAX CASES – Wisconsin
       Z. Wisconsin
          a. Louis Dreyfus Petroleum Products Corp. v. Wisconsin Department of Revenue,
              Wisconsin Tax Appeals Commission, No. 03-I-132, January 2, 2008.
               i. Capital gain income from the sale of an interest in a partnership was held to be
                    apportionable to Wisconsin.
                     i. The sale of the partnership interest constituted the sale of rights to specific
                         partnership property, which was used in the production of business income,
                         and was therefore apportionable income.
                     ii. Because its ownership interest in the partnership was the corporation's only
                         business activity, and the partnership was a general partnership, they (i)
                         were functionally integrated, (ii) had centralized management, (iii) were in
                         the same line of business, and (iv) enjoyed economies of scale.
               ii. Interest income from a loan to the taxpayer's parent company was not
                    apportionable to Wisconsin, even though the loan was made with the proceeds
                    from the sale of the partnership interest.
                     i. As a result of selling the partnership interest, the corporation no longer had
                         a unitary or operational connection with the partnership, and the corporation
                         ceased to have any contacts with Wisconsin.
                     ii. When the corporation made the loan to the parent company, the interest
                         income from that loan was not apportionable to Wisconsin because the
                         Wisconsin taxable nexus was terminated.

2008 OFII Tax Conference                                                           La Quinta, CA
                                                                                                49

				
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