The enacted bill is substantially the same as the draft discussed in June 9, 2011 post to this blog. The act is effective for tax years beginning on and after January 1, 2012. The act extends until June 30, 2012 the date for a DOR Final Determination on an appeal under the current forced combination section now pending.
The act reflects two overriding features of an apparent compromise between foreign corporations that lobbied heavily with respect to the bill and the DOR:
- The foreign corporations received: (a) a requirement that the DOR consider their proposed method of combination and also the possibility that the DOR would agree to combine less than all of the unitary group; (b) that the DOR must combine the unitary group unless the taxpayer agrees; (c) somewhat improved procedural guidelines for the DOR to follow in forcing combination; (d) safe harbors for cash management functions, intended tax benefits, and "material" activities and economic affects; (e) penalty protection; and (f) partial electivity for combination in that the taxpayer can initiate the combination process, rather than it occurring only by assessment.
- The DOR received: (a) continuing ambiguity in the DOR's ability to determine what is the proper amount of tax owing to the state and the proper combination; (b) a fee of up to $5,000 for entertaining combination requests; (c) statutory ability to use the flawed and ambiguous federal economic substance doctrine excuse for forced combination; (d) a low threshold for ALJ approval of the DOR's discretion on appeal.
It remains to be seen what impact the law change will have on corporate groups. On the one hand it is likely that the majority of the major multistate groups have entered into involuntary agreements with the DOR settling past audits, under the threat of heavy penalties. These agreements are secret, but apparently many groups are required to file indefinitely a combined return for less than their unitary groups. Whether they can renegotiate their agreements under this law is unclear.
For the perhaps minority of large corporate groups that have not yet been subject to a proposed assessment based on a forced combination, the removal of the threat of penalty makes their situations considerably more relaxed. Presumably they may be in the category that will seek tailor made combinations under the great flexibility offered by the act.
For those corporations still in process of "settling" their forced combination assessments, they have another year to wait for the DOR to reach final determination. The law literally does not apply to those cases.
For those corporations that want to ask a question of the DOR about possible combination, they will be forced into the DOR's fairly new Rulings Policy, which is being applied to preclude "blind" inquiries. That is, the DOR will no longer give generic advice that "if you do this we will do that." The DOR Division Directors are requiring a full fledged application for ruling, which subjects the taxpayer to unlimited questioning, before indicating answers to uncertain issues. This, plus the new fee of up to $5,000 does not seem to be a way to encourage ruling requests.