The Multistate Tax Commission’s (MTC) Combined Filing Model Working Group has drafted a model “Finnigan Method” Combined Reporting Statute.
The group will present the draft to the Uniformity Committee on Thursday, April 25 at the MTC’s spring meetings.
Existing Model Combined Reporting Statute Adopts Joyce
The MTC adopted a Model Combined Reporting Statute for separate-entity states contemplating moving to combined filing in 2006. The 2006 model adopted the “Joyce” methodology of income apportionment.
Under the “Joyce” methodology, each corporate member of the reporting group is treated as a separate taxable entity for income apportionment purposes. The “Joyce” methodology was the most commonly used approach in 2006.
“Finnigan” v. “Joyce” Method
The difference between the “Joyce” and “Finnigan” methods is receipts factor calculation. Taxpayers using the “Finnigan” method, calculate the apportionment factors of the members of the combined report as if the members constitute a single taxable entity.
Under “Joyce,” the receipts factor numerator of each member is calculated on its own. Under the “Finnigan” method, the numerator of the combined group is calculated as though the members of the combined group are a single entity. If one member of the combined group has nexus and activities that exceed P.L. 86-272 protections, the receipts factor numerator includes all receipts from all members of the combined report sourced to the state.
Draft Statute Reflects Utah Approach
When beginning the drafting process, the group examined “Finnigan” method used in:
The draft statute preserves most of the 2006 model statute. Minor changes were made to sections covering:
- the requirement to file a combined report; and
- the water’s edge election.
Most of the changes were made to the section addressing determination of taxable income or loss on a combined report. The changes reflect a movement toward the Utah approach of treating the filing group as a unitary whole.
The draft model allows for some sharing of tax attributes among the members and permits some sharing of loss carryforwards. Further, there is net operating loss sharing with some limitations to prevent abusive practices.
Group Sharing of Net Operating Losses
The drafting group believed it was necessary to track net operating losses on a separate company basis. Tracking is necessary so that there are appropriate limits on the net operating losses that companies bring into or leave a group with.
Losses apportioned or allocated to the state must be attributed to members of the group as follows:
- an apportionable loss, a portion of the group loss determined by multiplying the loss by a fraction, the numerator is the member’s loss, and the denominator is the total loss of all the members; plus
- a non-apportionable loss allocated to the state, but only to the extent that the loss contributed to the total combined group loss reported to the state that year.
Members cannot be attributed total losses more than the loss reported to the state by the combined group.
The net operating loss carryover available to the combined group is:
- the total net operating losses of the combined group previously allocated or apportioned to the state that have not been used or are not limited by state law; plus
- net operating losses of a member of the group created before joining the group, but only if the losses are not subject to federal limitations for members joining a federal consolidated filing group, were properly allocated or apportioned to the state, were properly attributed to the member if the member was part of a different combined group when the losses were created, have not been used to offset income of any taxpayer, and are not limited by state law; minus
- the net operating losses of a member that leaves the combined group that were attributed to that member or brought into the group.
Text of the Statute
The text of the model statute can be read on the MTC website.
The working group will make further changes to the proposed statute in response to any feedback from the full Uniformity Committee.
Andrew Soubel, J.D.