Title 15 . Revenue

Chapter 20 . (Repealed)

Section 300. Combination and apportionment

15 AAC 20.300. Combination and apportionment

(a) A taxpayer that is not part of a unitary business and that has income from business activity or other sources taxable both inside and outside the state shall allocate and apportion its worldwide net income as provided in AS 43.20.065 .

(b) A taxpayer that is part of a unitary business that has income from business activity or other sources both inside and outside the state shall use the worldwide combined method of reporting and apportionment as provided in AS 43.20.031 (i) and AS 43.20.065 , except as specified in AS 43.20.073 .

(c) A taxpayer that is engaged in a unitary business with another corporation that is subject to AS 43.20.072 is also subject to AS 43.20.072 and may not file a water's edge report or return under AS 43.20.073 .

(d) Federal taxable income subject to apportionment for a domestic corporation that is a taxpayer or is included in the taxpayer's combined report is taxable income before net operating loss determined under the Internal Revenue Code as excepted to or modified by AS 43.20.

(e) Except as provided in (f) of this section, federal taxable income subject to apportionment for a foreign corporation that is a taxpayer or is included in the taxpayer's combined report is taxable income before net operating loss determined under the Internal Revenue Code as excepted to or modified by AS 43.20 and this section as if the corporation were a domestic corporation. The taxpayer shall determine taxable income before net operating loss by adjusting financial statement income according to generally accepted accounting principles that are used in the United States to conform to the provisions of the Internal Revenue Code.

(f) A taxpayer may elect to report financial statement income, modified by AS 43.20 and this section, as federal taxable income under (e) of this section for foreign corporations included in its combined report. A taxpayer may elect to report earnings and profits required to be reported on the "Information Return of U.S. Person With Respect to Certain Foreign Corporations," as modified by AS 43.20 and this section, as federal taxable income under (e) of this section for all controlled foreign corporations included in its combined report. The basis of reporting income under (e) of this section, including the methods allowed under this subsection, is the taxpayer's overall method of reporting federal taxable income. The taxpayer shall make an election on a return filed under AS 43.20 and disclose the overall method of reporting federal taxable income of each group of foreign corporations.

(g) A taxpayer shall consistently apply a single overall method of reporting federal taxable income in its combined report for controlled foreign corporations and a single overall method of reporting federal taxable income for foreign corporations that are not controlled foreign corporations. The members of a consolidated group of Alaska taxpayers shall use the same overall methods of reporting federal taxable income for all controlled foreign corporations and for all foreign corporations that are not controlled foreign corporations included in the combined report. Taxpayers joining in the making of an Alaska consolidated return for the first time shall apply the method of reporting federal taxable income established by the parent taxpayer, if any. If there is no parent taxpayer, the consolidated group shall use the method of reporting federal taxable income in place for the taxpayer having the largest presence in this state during the initial year of consolidation, as measured by the property numerator. A taxpayer entering an existing Alaska consolidated group shall conform to the existing group's methods of reporting federal taxable income. A corporation that ceases to be subject to AS 43.20 and in a subsequent tax year again becomes subject to AS 43.20 shall apply the methods of reporting federal taxable income that applied during the last previous tax period in which it was subject to AS 43.20 unless it is required by this subsection to use other methods established by a pre-existing consolidated group of Alaska taxpayers.

(h) Notwithstanding the portion of (i) of this section barring a taxpayer from changing an overall method of reporting federal taxable income without the prior approval of the department, a taxpayer may change its overall method of reporting federal taxable income in its return for its first taxable year beginning on or after January 1, 1998, to conform to this section without the prior approval of the department. The taxpayer shall include in its return:

(1) a declaration that the taxpayer is changing its method of reporting federal taxable income to conform to this section;

(2) a disclosure of the taxpayer's new and old methods of reporting federal taxable income by group or by company if all members of the group did not apply the same method; and

(3) a calculation of the adjustment required under (i) of this section for each member of the combined group.

(i) A taxpayer may not change an overall method of reporting federal taxable income without the prior approval of the department except when a taxpayer is required to change an overall method of reporting federal taxable income upon consolidation under (g) of this section. If a taxpayer changes an overall method of reporting federal taxable income for any corporation included in its combined report, including a change under (h) or (k) of this section, it shall report and include in its income in the year of change and the four tax years thereafter an equal amount representing the cumulative effect of the change necessary to prevent amounts of income and deduction from being duplicated or omitted in the determination of apportionable income. The taxpayer shall apportion the adjustment using the higher of the taxpayer's apportionment factor for the tax year before the change in method or its apportionment factor for the tax year of change.

(j) For purposes of illustrating the adjustment required to prevent the duplication or omission of income or deduction resulting from a change in the method of reporting federal taxable income under (i) of this section, the following example is offered:

EXAMPLE

Taxpayer A, in accordance with (h) of this section, is changing its method of reporting the federal taxable income of Corporation C in its combined report from the financial statement income method to income based upon the application of the Internal Revenue Code as modified or excepted to by AS 43.20. Taxpayer A's apportionment factors for the year prior to the change and the year of change are 10 percent and 9 percent respectively. Corporation C's historical balance sheet under Taxpayer A's old and new method of reporting at the beginning of the year of change are:

Financial Statement IRC Account Method Method Difference

Accounts receivable 100 100 0 Allowance for Doubtful Accounts (10) 0 10 Investments 90 100 10 Accrued Liabilities (100) (20) 80 Deferred Income Tax 10 0 (10) Equity (90) (180) (90)

Because income taxes are not deductible under any method of reporting income, timing differences with respect to income taxes between the new and old methods do not represent amounts that would be duplicated or omitted as a result of the change in method. Thus, the ($10) cumulative difference attributable to deferred income taxes is not included in the adjustment calculation. The adjustment required to prevent the duplication or omission of income or deductions resulting from the change in the overall method of reporting income of Corporation C is an increase in income of $100. This is the sum of the cumulative differences for the items that affect apportionable income: $10 for the allowance for doubtful accounts, $10 for financial statement write down of investments, and $80 of reserves expensed for financial statement purposes but not yet deductible under the Internal Revenue Code. Taxpayer A's annual adjustment is one-fifth of the $100 total adjustment multiplied by its apportionment factor during the year prior to the change. Taxpayer C must include $2 (10 percent X $100/5) in its taxable income in the year of change and in each of the following four tax years.

(k) If the department finds that a taxpayer has made a material error in reporting the federal taxable income of foreign corporations included in its combined report under (e) of this section, or failed to maintain adequate records with respect to the measure of federal taxable income for those corporations, the department will, in its discretion, require the taxpayer to report the income of foreign corporations under this section on the basis of financial statement income or earnings and profits under (f) of this section. A material error is a misstatement of apportionable income calculated by combining the absolute value of all errors resulting from the application of, or failure to apply, the Internal Revenue Code that exceeds $40,000,000 or exceeds the greater of 25 percent of the reported apportionable income or one percent of the reported gross receipts of the foreign corporations that are not reported under (f) of this section. Records are inadequate if they fail to demonstrate the application of the Internal Revenue Code for any item or account with a nominal value that exceeds $5,000,000 or if the taxpayer fails to provide the records within 60 days after a request by the department, unless the department agrees to an extension of time to produce the records requested. Adequate records include the following:

(1) income statement and balance sheet maintained on the basis of the Internal Revenue Code as excepted to or modified by AS 43.20, on a historical basis; and

(2) records sufficient to determine, by account, the amount and period of the origination and reversal of current and cumulative timing differences, and permanent differences generated from the conversion from financial statement income to historical federal taxable income reported under (e) of this section.

(l) For purposes of determining federal taxable income of a domestic corporation under (d) of this section:

(1) a taxpayer shall apply accounting methods and tax elections in place for federal tax purposes unless this chapter provides for, and the taxpayer makes, a separate election; and

(2) the federal tax attributes of an entity at the time the entity becomes an Alaska taxpayer or part of the unitary business of an Alaska taxpayer are the entity's Alaska tax attributes, including basis, accounting methods, and history for purposes of applying the tax benefit rule, except that investment adjustments under 26 C.F.R. 1.1502-32 are disregarded.

(m) In making a combined report, a taxpayer shall account for intercompany transactions between corporations included in a consolidated federal return by the method of accounting applied in the consolidated federal return. In accounting for all other intercompany transactions in a combined report, a taxpayer shall:

(1) eliminate intercompany profits from beginning and ending inventory;

(2) defer gain or loss on intercompany sales or exchanges of assets and on capitalized intercompany charges or expenditures until the time immediately preceding disposition outside the combined group or when either corporation ceases to be a member of the combined group;

(3) reduce gain deferred under (2) of this subsection by an amount of depreciation, amortization, or depletion attributable to the property under the purchaser's method of accounting calculated by multiplying the deferred gain by a fraction, the numerator of which is the depreciation, amortization, or depletion allowable under the purchaser's method of accounting and the denominator of which is the basis of the property immediately after the intercompany transaction; and

(4) reduce the deduction for depreciation, amortization, or depletion otherwise allowable under the purchaser's method of accounting by an amount equal to the reduction of deferred gain under (3) of this subsection.

(n) Federal taxable income subject to apportionment does not include:

(1) dividends received from corporations included in the combined report;

(2) amounts treated as dividends under Internal Revenue Code section 78 (26 U.S.C. 78) ("foreign dividend gross-up"); and

(3) income or loss allocated under AS 43.19.

(o) For purposes of this section, a gain that is included in gross income as a dividend under Internal Revenue Code section 1248 (26 U.S.C. 1248) may not be treated as a dividend and shall be treated as a gain.

History: Eff. 1/12/64, Register 12; am 4/14/82, Register 82; am 3/17/85, Register 93; am 7/9/93, Register 127; am 3/6/98, Register 145

Authority: AS 43.05.080

AS 43.19.010 ,

Art. IV, § 18

AS 43.20.031

AS 43.20.040

AS 43.20.065

AS 43.20.073

Editor's note: Effective April 14, 1982, 15 AAC 20.050 was relocated to 15 AAC 20.300. The history note for 15 AAC 20.300 includes the history of 15 AAC 20.050.