As discussed more fully below, we believe that the Proposed Rule is deficient because:

  • It is inconsistent with Georgia law;
  • It does not comport with minimum constitutional requirements; and
  • It unfairly affords the Department the sole authority to determine if and when any taxpayer may report Georgia taxable income using the combined method.


As you know, the Proposed Rule is intended to provide taxpayers with guidance regarding the interpretation of O.C.G.A. § 48-7-58. That statute provides the Department the authority to determine a taxpayer’s proper taxable income if the Department determines that the taxpayer is conducting its business so as to distort its Georgia income. The Proposed Rule includes three subsections, and the first two subsections recite the exact language of the statute but for the addition of six factors used to determine the presence of “fair profit” in the conduct of a business. With the exception of paragraph (c) of subsection (1), which is addressed in comment number 6 below, we offer no comments at this time regarding the first two subsections of the Proposed Rule.

Subsection (3) of the Proposed Rule, however, adds a provision that appears nowhere in O.C.G.A. § 48-7-58 (or elsewhere in the Georgia Code), stating: “The Commissioner may combine the income of any affiliates in order to compute the net income properly attributable to this state. The tax imposed by Title 48 shall apply to the correct apportioned income of the affiliates as combined.” We do not believe that this portion of the Proposed Rule (hereinafter, “Subsection 3” or “the proposed forced combination rule”) is authorized by O.C.G.A. § 48-7-58; moreover, we believe that it is specifically prohibited by the holding in Blackmon v. Campbell Sales Co., 125 Ga. App. 859 (1972). Additionally, we believe that passage of such a rule, with no standards explaining when the Department might apply the rule, and with no explicit requirement that the Department find a unitary relationship, falls short of constitutional standards set forth in Mobil Oil Corp. v. Commissioner of Taxes of Vermont, 445 U.S. 245 (1980) and its progeny.


Our comments to the Proposed Rule are as follows:

1. First and foremost, we object to the promulgation of the proposed forced combination rule because it contravenes the settled limitations on the Department’s authority to combine taxpayers’ incomes set forth in Blackmon v. Campbell Sales Co., 125 Ga. App. 859 (1972). In that case, a New Jersey parent corporation had subsidiaries doing business in Georgia. Those subsidiaries filed separate returns and paid corporate income tax to Georgia. Because the parent performed a number of management and other operational services for the subsidiaries, the Department assessed additional taxes to the subsidiary based on a combination of the income of the subsidiaries with the parent.

The Georgia Court of Appeals interpreted the language of former Georgia Code Section 92-3113(6), which was essentially identical to the current O.C.G.A. § 48-7-31(e) and which stated:

The net income of a domestic or foreign corporation which is a subsidiary of another corporation or closely affiliated therewith by stock ownership shall be determined by eliminating all payments to the parent corporation or affiliated corporation in excess of fair value, and by including fair compensation to such domestic business corporation for its commodities sold to or services performed for the parent corporation or affiliated corporation. For the purposes of determining such net income the Commissioner may equitably determine such net income by reasonable rules of apportionment of the combined income of the subsidiary, its parent and affiliates or any thereof.

The Court noted that the first sentence (“The net income of a domestic or foreign corporation . . . shall be determined by eliminating all payments to the parent corporation . . .”) imposes a “mandatory obligation” on the taxpayer and the Department in determining the taxpayer’s net income. Id. at 861. Thus, if the Department determines that it is necessary to adjust a taxpayer’s reported income, the Department is first required to follow the procedure outlined in that first sentence of O.C.G.A. § 48-7-31(e) (which was Section 92-3113(6) at the time of the decision).

The second sentence of O.C.G.A. § 48-7-31(e) (then Section 92-3113(6)), on the other hand, provides the Department a discretionary authority to equitably determine the net income of certain related corporations, including, if appropriate, the use of combined reporting. Id. at 862-63. Yet the Court of Appeals emphasized that the statute does not give the Department “unbridled discretion” to determine a taxpayer’s income using combined reporting; rather, the Court held, “in order to exercise the discretion under the second rule the Commissioner must find that the income of the taxpayer cannot be adjusted in the manner first prescribed.” Id. at 862 (emphasis added). Thus, the Georgia Court of Appeals in Campbell Sales highlighted a statutory limitation on the Department’s authority to use the combined income method under O.C.G.A. § 48-7-31(e): the Commissioner must first show that it is unable to determine the taxpayer’s income using the “mandatory” method prescribed in the statute’s first sentence.

More importantly, the Georgia Court of Appeals specifically held in Campbell Sales that Code Section 92-3209—the essentially-identical predecessor to O.C.G.A. § 48-7-58—“contains no authority for combining the income of related corporations.” Id. at 863 (emphasis added). Thus, the proposed forced combination rule is directly contrary to long-standing precedent; the Georgia Court of Appeals has already ruled on the matter in Campbell Sales, and it held that the Department lacks the authority under O.C.G.A. § 48-7-58 to combine related taxpayers’ incomes.

2. Moreover, even if the proposed forced combination rule were not clearly invalid under Campbell Sales, it would nevertheless be invalid because it does not require the Department to meet the minimum standards set forth by the Court of Appeals for combination under O.C.G.A. § 48-7-31. As that Court held, the Department may resort to the combined method only under O.C.G.A. § 48-7-31 (not O.C.G.A. § 48-7-58) and then only after “find[ing] that the income of a taxpayer cannot be adjusted in the manner first prescribed” by the first sentence of Section 48-7-31(e).

By this comment we do not suggest that the Department could promulgate a similar forced combination rule under O.C.G.A. § 48-7-31 (it could not); rather, we offer these comments to emphasize that the current Proposed Rule directly contravenes the Campbell Sales court’s decision that O.C.G.A. § 48-7-58 does not authorize the forced combination rule that the Department is proposing.

3. Our last comment related to this point is that O.C.G.A. § 48-7-31(e) permits the Department to determine net income of a corporation using combined income only “by reasonable rules of apportionment,” which seems rather plainly to require that any forced combination regulation must include reasonable rules—i.e., fair and understandable standards—upon which taxpayers can rely. In contravention of that requirement, this Proposed Rule provides the Department with the very “unbridled discretion” to combine taxpayers’ incomes that the Campbell Sales court rejected. Indeed, under this proposed forced combination rule, the Department could combine taxpayers’ income whenever, and in whatever manner, he so chooses. For this additional reason, Subsection (3) of the Proposed Rule is contravened by Georgia law and should not be promulgated in its current form.

4. Additionally, we believe that a forced combination rule, with no standards governing when the Department could combine the incomes of affiliated entities and no requirement of a unitary relationship as a prerequisite to such combinations, violates minimum constitutional requirements set forth in Mobil Oil Corp. v. Commissioner of Taxes of Vermont, 445 U.S. 425 (1980) and affirmed in a long line of cases explaining the constitutional dimensions of the unitary business principle. See, e.g., Mobil Oil, 445 U.S. at 439 (“[T]he linchpin of apportionability in the field of state income taxation is the unitary-business principle.”); Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159, 169 (1983) (“Having determined that a certain set of activities constitute a ‘unitary business,’ a State must then apply a formula apportioning the income of that business within and without the State. Such an apportionment formula must, under both the Due Process and Commerce Clauses, be fair.”); Allied-Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768, 773 (1992) (“A State may not tax a nondomiciliary corporation’s income, however, if it is derived from unrelated business activity which constitutes a discrete business enterprise.”) (citation and punctuation omitted).

As currently drafted, Subsection 3 of the Proposed Rule is woefully short of meeting constitutional requirements, as it includes none of the details regarding how the Department might determine, inter alia: (a) whether a Georgia taxpayer is involved in a unitary business relationship with another related taxpayer; (b) how such a unitary business’s income might be apportioned to Georgia under the proposed forced combination rule; and/or (c) the standards for determining when a taxpayer’s income comes from a discrete business enterprise unrelated to a unitary business operating in Georgia.

5. Furthermore, as properly emphasized by Georgia Chamber president Chris Clark in a separate letter, the proposed forced combination rule is too one-sided to represent fair tax policy. In its current form, the Proposed Rule would create a one-way street in which the Department could force the combination of taxpayers’ incomes under any circumstances, while at the same time admitting no circumstances under which taxpayers could elect to report their income using the combined method. Such an unlevel procedural playing field is neither just nor equitable. Indeed, it stands in contradiction to the basic principles of fairness memorialized in the Due Process Clause of the U.S. Constitution or the Constitution of the State of Georgia.

6. Finally, we believe that paragraph (c) of subsection (1) should be eliminated as unnecessary and confusing. There is no reason that intercompany transactions cannot legitimately involve fixed or guaranteed pricing, profits, fees, expenses, or costs as long as such terms represent fair value – a principle that is adequately expressed in paragraphs (a) and (b). Whether fixed or guaranteed profits, etc. represent fair value can only be evaluated on a case-by-case basis. Indeed, for example, cost plus pricing is common among uncontrolled transactions involving unrelated parties which are by definition non-distortive. For this reason, U.S. Treasury Regulations place cost plus pricing on a level of parity with other transfer pricing methodologies, and the extent to which the transfer prices of related taxpayers are at arm’s length (i.e., represent fair value) is determined by comparing the terms to uncontrolled (i.e., non-related party) transactions. See Treas. Reg. § 1.482-3(d).

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For all of the above reasons, we believe that the Proposed Rule should not be promulgated in its current form, and we request that it be withdrawn or amended to address the deficiencies discussed above.