Addback: It’s Payback Time - barnwellco.com

addback : It s Payback Timeby Charles F. Barnwell, 2000, 18 states have enacted addback rulesto curb perceived taxpayer abuses based on the useof interest and intangible-related expenses betweenrelated parties. Generally, those antiabuse statutesrequire the payer of related-party interest, royalties,license fees, and similar charges to add back thoseexpenses. Every state has some exceptions to therequired addback , and those exceptions are dis-cussed in detail in this , the states failed to act uniformlyand the rules have significant differences. Thosedifferences are often subtle and can result in confu-sion and conflicts from state to state. The addbackrules seem to have the following in common: most require the operating company to addback intercompany interest and expenses re-garding intangibles paid to a related party; most states define a related party by referenceto the Internal Revenue Code (discussed indetail below); all states have exceptions to the addback rule,and in most cases the exceptions exist to mini-mize the likelihood of multiple taxation; most states provide an exception to addbackbased on the recipient s tax position (the subject-to exceptions); most states have a conduit exception (that is,interest or royalty is ultimately paid to a thirdparty); and most states tax both direct and indirect interestand intangible items amo

to intangibles; that is, the commission sought to di-rectly tax an intangible holding company located in Delaware.6 In contrast, Georgia sought to disallow Aaron’s royalty payments to its wholly owned sub-

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