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Anatomy of a Domestic Tax Shelter

Tax Analysts published an article by MTC Senior Counsel Bruce Fort in its May 17, 2021 publications Tax Notes State, Tax Notes Federal and Tax Notes International entitled, “Anatomy of a Domestic Tax Shelter” regarding the use of so-called 80/20 companies as a means to artificially shift profits to non-taxed entities. The article describes the genesis of the domestic 80/20 company exclusion from the states’ water’s edge combined reporting regimes in the 1980’s, when states moved away from world-wide combined reporting in response to threatened federal preemption. Currently 16 states exclude U.S. companies with predominately foreign property and payroll factors from their combined reports.

The 80/20 exclusion is problematic, Fort explains, because the federal tax code (which forms the starting point for state tax calculations) encourages tax-free transfers of assets among commonly controlled domestic corporations. Taxpayers can take advantage of this policy to transfer income-producing intangible property to these 80/20 companies, artificially reducing the reported income of the combined reporting group. Similar transfers to true foreign subsidiaries under the would trigger the recognition of a deemed royalty amount for federal tax purposes.
 
Click here , to read the article, originally published in the May 17, 2021 edition of State Tax Notes, by Bruce Fort.

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