§ 44-11-11 - "Net income" defined.
SECTION 44-11-11
§ 44-11-11 "Net income" defined. –(a) "Net income" means, for any taxable year and for any corporate taxpayer,the taxable income of the taxpayer for that taxable year under the laws of theUnited States, plus:
(i) Any interest not included in the taxable income;
(ii) Any specific exemptions;
(iii) For a captive REIT, an amount equal to the amount ofthe dividends paid deduction allowed under the Internal Revenue Code for thetaxable year;
(iv) The tax imposed by this chapter;
(v) Any deductions required to be added back to net incomeunder the provisions of paragraph (f) of this section, and minus
(vi) Interest on obligations of the United States or itspossessions, and other interest exempt from taxation by this state; and
(vii) The federal net operating loss deduction.
(2) All binding federal elections made by or on behalf of thetaxpayer applicable either directly or indirectly to the determination oftaxable income shall be binding on the taxpayer except where this chapter orits attendant regulations specifically modify or provide otherwise. RhodeIsland taxable income shall not include the "gross-up of dividends" required bythe federal Internal Revenue Code to be taken into taxable income in connectionwith the taxpayer's election of the foreign tax credit.
(b) A net operating loss deduction shall be allowed whichshall be the same as the net operating loss deduction allowed under 26 U.S.C.§ 172, except that:
(1) Any net operating loss included in determining thededuction shall be adjusted to reflect the inclusions and exclusions fromentire net income required by subsection (a) of this section and §44-11-11.1;
(2) The deduction shall not include any net operating losssustained during any taxable year in which the taxpayer was not subject to thetax imposed by this chapter; and
(3) The deduction shall not exceed the deduction for thetaxable year allowable under 26 U.S.C. § 172; provided, that the deductionfor a taxable year may not be carried back to any other taxable year for RhodeIsland purposes but shall only be allowable on a carry forward basis for thefive (5) succeeding taxable years.
(c) "Domestic international sales corporations" (referred toas DISCs), for the purposes of this chapter, will be treated as they are underfederal income tax law and shall not pay the amount of the tax computed under§ 44-11-2(a). Any income to shareholders of DISCs is to be treated in thesame manner as it is treated under federal income tax law as it exists onDecember 31, 1984.
(d) A corporation which qualifies as a "foreign salescorporation" (FSC) under the provisions of subchapter N, 26 U.S.C. § 861et seq., and which has in effect for the entire taxable year a valid electionunder federal law to be treated as a FSC, shall not pay the amount of the taxcomputed under § 44-11-2(a). Any income to shareholders of FSCs is to betreated in the same manner as it is treated under federal income tax law as itexists on January 1, 1985.
(e) As used in this section:
(1) "Affiliated group" has the same meaning as in § 1504of the Internal Revenue Code.
(2) "Intangible expenses and costs" includes: (A) expenses,losses and costs for, related to, or in connection directly or indirectly withthe direct or indirect acquisition, use, maintenance or management, ownership,sale, exchange, or any other disposition of intangible property to the extentsuch amounts are allowed as deductions or costs in determining taxable incomebefore operating loss deduction and special deductions for the taxable yearunder the Internal Revenue Code; (B) losses related to or incurred inconnection directly or indirectly with factoring transactions or discountingtransactions; (C) royalty, patent, technical and copyright fees; (D) licensingfees; and (E) other similar expenses and costs.
(3) "Intangible property" means patents, patent applications,trade names, trademarks, service marks, copyrights and similar types ofintangible assets.
(4) "Interest expenses and costs" means amounts directly orindirectly allowed as deductions under § 163 of the Internal Revenue Codefor purposes of determining taxable income under the Internal Revenue Code tothe extent such expenses and costs are directly or indirectly for, related to,or in connection with the direct or indirect acquisition, maintenance,management, ownership, sale, exchange or disposition of intangible property.
(5) "Related member" means a person that, with respect to thetaxpayer during all or any portion of the taxable year, is a related entity, asdefined in this subsection, a component member as defined in § 1563(b) ofthe Internal Revenue Code, or is a person to or from whom there is attributionof stock ownership in accordance with § 1563(e) of the Internal RevenueCode.
(6) "Related entity" means: (A) a stockholder who is anindividual, or a member of the stockholder's family enumerated in § 318 ofthe Internal Revenue Code, if the stockholder and the members of thestockholder's family own directly, indirectly, beneficially or constructively,in the aggregate, at least fifty percent (50%) of the value of the taxpayer'soutstanding stock; (B) a stockholder, or a stockholder's partnership, limitedliability company, estate, trust or corporation, if the stockholder and thestockholder's partnership, limited liability companies, estates, trusts andcorporations own directly, indirectly, beneficially or constructively, in theaggregate, at least fifty percent (50%) of the value of the taxpayer'soutstanding stock; or (C) a corporation, or a party related to the corporationin a manner that would require an attribution of stock from the corporation tothe party or from the party to the corporation under the attribution rules ofsection 318 of the Internal Revenue Code, if the taxpayer owns, directly,indirectly, beneficially or constructively, at least fifty percent (50%) of thevalue of the corporation's outstanding stock. The attribution rules on §318 of the Internal Revenue Code shall apply for purposes of determiningwhether the ownership requirements of this subdivision have been met.
(f) For purposes of computing its net income under thissection, a corporation shall add back otherwise deductible interest expensesand costs and intangible expenses and costs directly or indirectly paid,accrued or incurred to, or in connection directly or indirectly with one ormore direct or indirect transactions with, one or more related members.
(1) The adjustments required in subsection (f) of thissection shall not apply if the corporation establishes by clear and convincingevidence that the adjustments are unreasonable, as determined by the taxadministrator or the corporation and the tax administrator agree in writing tothe application or use of an alternative method of apportionment under §44-11-15. Nothing in this subsection shall be construed to the limit or negatethe tax administrator's authority to otherwise enter into agreements andcompromises otherwise allowed by law.
(2) The adjustments required in subsection (f) of thissection shall not apply to such portion of interest expenses and costs andintangible expenses and costs that the corporation can establish by thepreponderance of the evidence meets both of the following: (A) the relatedmember during the same income year directly or indirectly paid, accrued orincurred such portion to a person who is not a related member; and (B) thetransaction giving rise to the interest expenses and costs or the intangibleexpenses and costs between the corporation and the related member did not haveas a significant purpose the avoidance of any portion of the tax due underchapter 44-11.
(3) The adjustments required in subsection (f) shall notapply if the corporation establishes by clear and convincing evidence, asdetermined by the tax administrator, that: (i) a principal purpose of thetransaction giving rise to the payment of interest was not to avoid payment oftaxes due under this chapter; (ii) the interest is paid pursuant to a contractthat reflects an arm's length rate of interest and terms; and (iii) (A) therelated member was subject to tax on its net income in this state or anotherstate or possession of the United States or a foreign nation; (B) a measure ofsaid tax included the interest received from the taxpayer; and (C) theeffective rate of tax applied to the interest received by the related member isno less than the effective rate of tax applied to the taxpayer under thischapter minus 3 percentage points.
(4) Partial Adjustments. The add back required insubsection (f) shall not be required in part if a portion of the add back wouldbe unreasonable. A portion of the add back will be considered unreasonable tothe extent that the taxpayer establishes to the tax administrator by clear andconvincing evidence that interest or intangible expense was paid, accrued orincurred to a related member that is taxed on the corresponding income by astate, U.S. possession or foreign jurisdiction. An adjustment to the add backwill be allowed based on a factor determined by the apportioned tax rate of therelated member in the other jurisdiction compared to the apportioned tax rateof the taxpayer in this state. A taxpayer that seeks to claim this adjustmentmust file a schedule that sets forth the information required by the taxadministrator.
(g) Nothing in this section shall require a corporation toadd to its net income more than once any amount of interest expenses and costsor intangible expenses and costs that the corporation pays, accrues or incursto a related member described in subsection (b) of this section.
(h) Any taxpayer required to make an adjustment required insubsection (f) for tax years beginning on or after January 1, 2008, isadditionally required to report to the tax administrator, on forms required byhim, the amount of any adjustments that would have been required if the lawapplied to tax years beginning on or after January 1, 2007.
(i) Nothing in this section shall be construed to limit ornegate the tax administrator authority to make adjustments under §44-11-15.