Section 40-18-24


Published: 2015

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Section 40-18-24

Section 40-18-24Taxation of subchapter K entity.

(a) The amount of income, deduction, gain, loss, or credit includable or deductible by an owner of an interest in a subchapter K entity shall be determined in accordance with subchapter K of the Internal Revenue Code, 26 U.S.C. §§ 701-761.



(b) For purposes of computing its net income, a subchapter K entity shall add back otherwise deductible interest expenses and costs and intangible expenses and costs directly or indirectly paid, accrued or incurred to, or in connection directly or indirectly with, one or more direct or indirect transactions, with one or more related members, except to the extent the subchapter K entity shows, upon request by the commissioner, that the corresponding item of income was in the same taxable year:



(1) subject to a tax based on or measured by the related member's net income in Alabama or any other state of the United States, or



(2) subject to a tax based on or measured by the related member's net income by a foreign nation which has in force an income tax treaty with the United States, if the recipient was a "resident" (as defined in the income tax treaty) of the foreign nation.



(c) For purposes of subsection (b), "subject to a tax based on or measured by the related member's net income" means that the receipt of the payment by the recipient related member is reported and included in income for purposes of a tax on net income, and not offset or eliminated in a combined or consolidated return which includes the payor.



(d) The subchapter K entity shall make the adjustments required in subsection (b) of this section unless the subchapter K entity establishes that the adjustments are unreasonable, or the subchapter K entity and the Commissioner of Revenue agree in writing to the application or use of alternative adjustments and computations. Nothing in this section shall be construed to limit or negate the commissioner's authority to otherwise enter into agreements and compromises otherwise allowed by law.



(e) The adjustments required in subsection (b) shall not apply to that portion of interest expenses and costs and intangible expenses and costs if the subchapter K entity can establish that the transaction giving rise to the interest expenses and costs or the intangible expenses and costs between the subchapter K entity and the related member did not have as a principal purpose the avoidance of any Alabama tax and the related member is not primarily engaged in the acquisition, use, licensing, maintenance, management, ownership, sale, exchange, or any other disposition of intangible property, or in the financing of related entities. If the transaction giving rise to the interest expenses and costs or intangible expenses and costs, as the case may be, has a substantial business purpose and economic substance and contains terms and conditions comparable to a similar arm's length transaction between unrelated parties, the transaction will be presumed to not have as its principal purpose tax avoidance, subject to rebuttal by the Commissioner of the Department of Revenue.



(f) Nothing in this section shall require a subchapter K entity to add to its net income more than once any amount of interest expenses and costs or intangible expenses and costs that the subchapter K entity pays, accrues, or incurs to a related member described in subsection (b).



(g) Nothing in this section shall be construed to limit or negate the commissioner's authority to make adjustments under this chapter.



(h) Subsection (b) shall not limit the deduction of the interest portion of rent paid under lease agreements described in Section 40-18-35(a)(9).



(i) Except with regard to payments described in Sections 40-18-35(a)(4)b and 40-18-35(a)(9), nothing in this section shall be construed to allow any item to be deducted more than once or to allow a deduction for any item that is excluded from income or to allow any item to be included in the Alabama taxable income of more than one taxpayer.

(Acts 1935, No. 194, p. 256; Code 1940, T. 51, §391; Acts 1997, No. 97-625, p. 1048, §3; Act 2001-1088, 4th Sp. Sess., p. 1095, §1.)

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