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Georgia Proposes to Shift Rules on Combining Income

On October 28, 2010, the Georgia Department of Revenue proposed to amend its regulation entitled “Shifting of Income” (Ga. Comp. R. & Regs. 560-7-8-.07). This proposed amendment is intende

November 12, 2010

On October 28, 2010, the Georgia Department of Revenue proposed to amend its regulation entitled “Shifting of Income” (Ga. Comp. R. & Regs. 560-7-8-.07). This proposed amendment is intended to be a “clarification” of the Department’s current authorities to adjust the income between related parties and require combined reporting if other methods will result in distortion of separately reported income under O.C.G.A. § 48-7-58. However, the proposed amendment’s language states that the “Commissioner may combine the income of any affiliates in order to compute the net income properly attributable to this state” and appears to significantly expand the Commissioner’s authority beyond the limits contemplated by Georgia statutes and case law.

On October 28, 2010, the Georgia Department of Revenue proposed to amend its regulation entitled “Shifting of Income” (Ga. Comp. R. & Regs. 560-7-8-.07). This proposed amendment is intended to be a “clarification” of the Department’s current authorities to adjust the income between related parties and require combined reporting if other methods will result in distortion of separately reported income under O.C.G.A. § 48-7-58. However, the proposed amendment’s language states that the “Commissioner may combine the income of any affiliates in order to compute the net income properly attributable to this state” and appears to significantly expand the Commissioner’s authority beyond the limits contemplated by Georgia statutes and case law.

When any taxpayer conducts its business in a manner that distorts the income properly attributable to Georgia, O.C.G.A. § 47-7-58 authorizes the Commissioner to consider the fair profit that would normally arise in the conduct of a trade or business. O.C.G.A. § 48-7-31(e) further grants the Commissioner the authority to equitably determine the net income of related corporations “by reasonable rules of apportionment of the combined income of the subsidiary, its parent, and affiliates, or any combination [thereof].” However, the Georgia Court of Appeals expressly held that such “forced combination” is available only when payments “in excess of fair value” have occurred between the related entities and only if the Commissioner is unable to adjust the intercompany payments to reflect “fair value.” Blackmon v. Campbell Sales Co., 189 S.E.2d 474 (Ga. Ct. App. 1972). The Court further held that the predecessor to O.C.G.A. § 48-7-58 contained no independent authority for combining the income of related corporations. Id. at 477.

While the current Georgia regulation appropriately states that “if it is found that affiliates are in fact dealing at arm’s length…and otherwise dealing with each other as if they were not affiliated, consolidation would not apply,” the proposed amendment attempts to provide the Commissioner with carte blanche discretion to “combine the income of any affiliates to compute the net income properly attributable to this state.” In so doing, the proposed amendment would inappropriately expand the scope of the Commissioner’s authority to require combined reporting. That doesn’t sound like a mere clarification!

The Department is accepting comments on the proposed amendment until 10:00 a.m. on December 2, 2010. Written comments must be sent to: Commissioner, Georgia Department of Revenue, 1800 Century Blvd. N.E., Suite 15300, Atlanta, GA 30345-3205. Electronic comments must be sent to regcomments@dor.ga.gov and reference “Notice Number IT-2010-8.”

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