Tax News

CCH (cch.taxgroup.com) reports:

  Florida's limitation of corporate income tax net operating loss (NOL) carryovers to federal net losses under IRC §172 does not facially discriminate against foreign corporate dividends and thus, is constitutional under the Foreign Commerce Clause. Under federal law, a corporation may either deduct taxes paid on foreign dividends or claim the foreign tax credit. If the corporation chooses the foreign tax credit, no deduction may be claimed and any net operating loss would not include such a deduction. Although Florida allows the same treatment regarding the deduction of taxes paid on foreign dividends, it does not recognize the foreign tax credit. Therefore, if a taxpayer chooses to take the foreign tax credit, the Florida net operating loss would be higher than the federal net operating loss and yet Florida limits its NOL to the federal NOL.

  The taxpayer asserted that, because losses created by domestic dividend deductions can always be carried over while the foreign tax credit, calculated through the payment of foreign dividends, cannot be carried over, for Florida corporate income tax purposes, discrimination resulted between domestic and foreign dividends. However, if the taxpayer had chosen to deduct the foreign taxes, rather than taking a credit based on the dividends paid and income of its foreign subsidiaries, and that deduction resulted in an NOL carryover, then that carryover would have been included in Florida's federal taxable income starting point and no difference in the NOL carryover would have resulted.

  Florida's deduction based on the taxes assessed against foreign and domestic subsidiaries goes above and beyond treating foreign and domestic subsidiaries in a similar manner; as required under the Foreign Commerce Clause, i.e., all foreign dividends are subtracted from the corporation's income calculation while only some domestic dividends are deducted. Additionally, Florida allows a deduction of the dividend "gross-up" required federally when the foreign tax credit is claimed. Florida's failure to adopt the exact same credit carryover option as the federal government offers does not make the state's tax scheme violative of the Foreign Commerce Clause. The corporation could have considered Florida's prohibition on foreign tax credit carryovers when it chose to claim the foreign tax credit instead of taking a deduction for foreign taxes paid.

Colgate-Palmolive Company v. Florida Department of Revenue , Florida Court of Appeal, First District, No. 1D07-1051 , June 2, 2008, ¶205-197

  Other References:

  Explanations at ¶10-805

  Explanations at ¶10-810