2007 -- S 0401

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LC01826

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STATE OF RHODE ISLAND

IN GENERAL ASSEMBLY

JANUARY SESSION, A.D. 2007

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A N A C T

RELATING TO TAXATION -- BUSINESS CORPORATION TAX

     Introduced By: Senators Alves, Ciccone, McBurney, and C Levesque

     Date Introduced: February 13, 2007

     Referred To: Senate Finance

It is enacted by the General Assembly as follows:

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     SECTION 1. Section 44-11-11 of the General Laws in Chapter 44-11 entitled "Business

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Corporation Tax" is hereby amended to read as follows:

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     44-11-11. "Net income" defined. -- (a) (1) "Net income" means for any taxable year and

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for any corporate taxpayer, the taxable income of the taxpayer for that taxable year under the laws

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of the United States, plus (i) any interest not included in the taxable income, (ii) any specific

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exemptions, and (iii) the tax imposed by this chapter, and (iv) any deductions required to be

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added back to net income under the provisions of paragraph (e) of this section, and minus (iv)(v)

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interest on obligations of the United States or its possessions, and other interest exempt from

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taxation by this state, and (v)(vi) the federal net operating loss deduction.

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      (2) All binding federal elections made by or on behalf of the taxpayer applicable either

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directly or indirectly to the determination of taxable income shall be binding on the taxpayer

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except where this chapter or its attendant regulations specifically modify or provide otherwise.

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However, Rhode Island taxable income shall not include the "grossup of dividends" required by

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the federal Internal Revenue Code to be taken into taxable income in connection with the

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taxpayer's election of the foreign tax credit.

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      (b) A net operating loss deduction shall be allowed which shall be the same as the net

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operating loss deduction allowed under 26 U.S.C. section 172, except that: (1) any net operating

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loss included in determining the deduction shall be adjusted to reflect the inclusions and

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exclusions from entire net income required by subsection (a) and section 44-11-11.1, (2) the

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deduction shall not include any net operating loss sustained during any taxable year in which the

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taxpayer was not subject to the tax imposed by this chapter, and (3) the deduction shall not

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exceed the deduction for the taxable year allowable under 26 U.S.C. section 172; provided, that

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the deduction for a taxable year may not be carried back to any other taxable year for Rhode

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Island purposes but shall only be allowable on a carry forward basis for the five (5) succeeding

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taxable years.

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      (c) Domestic international sales corporations, referred to as DISCs, for the purposes of

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this chapter, will be treated as they are under federal income tax law and shall not pay the amount

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of the tax computed under section 44-11-2(a). Any income to shareholders of DISCs is to be

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treated in the same manner as it is treated under federal income tax law as it exists on December

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31, 1984.

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      (d) A corporation which qualifies as a foreign sales corporation (FSC) under the

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provisions of subchapter N, 26 U.S.C. section 861 et seq., and which has in effect for the entire

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taxable year a valid election under federal law to be treated as a FSC, shall not pay the amount of

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the tax computed under section 44-11-2(a). Any income to shareholders of FSCs is to be treated

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in the same manner as it is treated under federal income tax law as it exists on January 1, 1985.

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     (e) As used in this section:

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     (1) “Affiliated group” has the same meaning as in section 1504 of the Internal Revenue

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Code.

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     (2) “Intangible expenses and costs” includes: (A) expenses, losses and costs for, related

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to, or in connection directly or indirectly with the direct or indirect acquisition, use, maintenance

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or management, ownership, sale, exchange, or any other disposition of intangible property to the

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extent such amounts are allowed as deductions or costs in determining taxable income before

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operating loss deduction and special deductions for the taxable year under the Internal Revenue

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Code; (B) losses related to or incurred in connection directly or indirectly with factoring

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transactions or discounting transactions; (C) royalty, patent, technical and copyright fees; (D)

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licensing fees; and (E) other similar expenses and costs.

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     (3) “Intangible property” means patents, patent applications, trade names, trademarks,

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service marks, copyrights and similar types of intangible assets.

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     (4) “Interest expenses and costs” means amounts directly or indirectly allowed as

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deductions under section 163 of the Internal Revenue Code for purposes of determining taxable

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income under the Internal Revenue Code to the extent such expenses and costs are directly or

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indirectly for, related to, or in connection with the direct or indirect acquisition, maintenance,

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management, ownership, sale, exchange or disposition of intangible property.

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     (5) “Related member” means a person that, with respect to the taxpayer during all or any

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portion of the taxable year, is a related entity, as defined in this subsection, a component member

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as defined in section 1563(b) of the Internal Revenue Code, or is a person to or from whom there

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is attribution of stock ownership in accordance with section 1563(e) of the Internal Revenue

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Code.

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     (6) “Related entity” means: (A) a stockholder who is an individual, or a member of the

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stockholder’s family enumerated in section 318 of the Internal Revenue Code, if the stockholder

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and the members of the stockholder’s family own directly, indirectly, beneficially or

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constructively, in the aggregate, at least fifty percent (50%) of the value of the taxpayer’s

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outstanding stock; (B) a stockholder, or a stockholder’s partnership, limited liability company,

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estate, trust or corporation, if the stockholder and the stockholder’s partnership, limited liability

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companies, estates, trusts and corporations own directly, indirectly, beneficially or constructively,

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in the aggregate, at least fifty percent (50%) of the value of the taxpayer’s outstanding stock; or

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(C) a corporation, or a party related to the corporation in a manner that would require an

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attribution of stock from the corporation to the party or from the party to the corporation under

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the attribution rules of section 318 of the Internal Revenue Code, if the taxpayer owns, directly,

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indirectly, beneficially or constructively, at least fifty percent (50%) of the value of the

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corporation’s outstanding stock. The attribution rules on section 318 of the Internal Revenue

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Code shall apply for purposes of determining whether the ownership requirements of this

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subdivision have been met.

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     (f) For purposes of computing its net income under this section, a corporation shall add

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back otherwise deductible interest expenses and costs and intangible expenses and costs directly

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or indirectly paid, accrued or incurred to, or in connection directly or indirectly with one or more

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direct or indirect transactions with, one or more related members.

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     (1) The adjustments required in subsection (b) of this section shall not apply if the

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corporation establishes by clear and convincing evidence that the adjustments are unreasonable,

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as determined by the tax administrator or the corporation and the tax administrator agree in

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writing to the application or use of an alternative method of apportionment under section 44-11-

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15. Nothing in this subsection shall be construed to the limit or negate the tax administrator’s

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authority to otherwise enter into agreements and compromises otherwise allowed by law.

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     (2) The adjustments required in subsection (b) of this section shall not apply to such

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portion of interest expenses and costs and intangible expenses and costs that the corporation can

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establish by the preponderance of the evidence meets both of the following: (A) the related

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member during the same income year directly or indirectly paid, accrued or incurred such portion

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to a person who is not a related member; and (B) the transaction giving rise to the interest

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expenses and costs or the intangible expenses and costs between the corporation and the related

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member did not have as a significant purpose the avoidance of any portion of the tax due under

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chapter 44-11.

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     (g) Nothing in this section shall require a corporation to add to its net income more than

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once any amount of interest expenses and costs or intangible expenses and costs that the

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corporation pays, accrues or incurs to a related member described in subsection (b) of this

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section.

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     (h) Nothing in this section shall be construed to limit or negate the commissioner’s

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authority to make adjustments under section 44-11-15.

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     SECTION 2. This act shall take effect upon passage.

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LC01826

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EXPLANATION

BY THE LEGISLATIVE COUNCIL

OF

A N A C T

RELATING TO TAXATION -- BUSINESS CORPORATION TAX

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     This act would change the definition of net income for any taxable year for any corporate

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taxpayer to include any deductions required to be added back to net income. The act would also

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further set forth definitions as used in the section.

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     This act would take effect upon passage.

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LC01826

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