In Alenia N. America, Inc. v. District of Columbia Office of Tax and Revenue, an Office of Administrative Hearings (OAH) Judge ruled definitively regarding the statutory formula to be used when calculating the apportionment factors of a corporation who includes the income of a related flow-through entity when filing a D.C. Franchise Tax return on a separate basis in the District of Columbia. The Judges ruling clears the way for similarly situated Taxpayers to file refund claims with the District’s Office of Taxation and Revenue.
The Judge’s reasoning in this taxpayer favorable ruling was consistent with the initial positions put forth in SC&H Group’s original protest of Alenia’s D.C. assessment. When relief was not obtained through audit conference procedures, SC&H Group enlisted the assistance of Steve Kranz of McDermott Will & Emery to appeal the assessment in the District of Columbia Office of Administrative Hearings (OAH). Mr. Kranz supported and built upon our original arguments and secured the taxpayer victory.
The Taxpayer, (Alenia) was a C corporation that filed its 2010 D.C. Corporate Franchise Tax Return on a separate return basis. Alenia owned an interest in a Joint Venture (JV), and properly included its share of the JV income in its D.C. Corporate Franchise Tax Return. Based on an existing regulation, Alenia also included its share of the JV’s apportionment factors in the total apportionment factors for calculating its D.C. tax. But based on an unwritten internal policy, the District’s Office of Taxation and Revenue (OTR) disallowed the inclusion of the JV’s apportionment factors and assessed Alenia for additional taxes, penalties, and interest — saying that their regulation applied only to combined return filers and not separate returns.
The D.C. statute is silent as to flow through apportionment for separate returns. In granting relief to Alenia, the Judge noted that D.C.’s apportionment statute, by its own terms, sought to promote uniformity. Therefore, OTR’s application of the statute and regulation to combined filers but not separate filers, in the absence of such statutory language, defeated the statutory requirement of uniformity. Based on this reasoning, flow through factor representation should continue to apply in D.C. for both combined and separate filers.
For more information about this ruling, and if the outcome could apply to your firm, please contact:
SC&H Group Transaction Tax Practice
SC&H Group State and Local Tax