2009 Rhode Island Code
Title 44 - Taxation
CHAPTER 44-11 - Business Corporation Tax
§ 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 the United 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 of the dividends paid deduction allowed under the Internal Revenue Code for the taxable year;

   (iv) The tax imposed by this chapter;

   (v) Any deductions required to be added back to net income under the provisions of paragraph (f) of this section, and minus

   (vi) Interest on obligations of the United States or its possessions, 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 the taxpayer applicable either directly or indirectly to the determination of taxable income shall be binding on the taxpayer except where this chapter or its attendant regulations specifically modify or provide otherwise. Rhode Island taxable income shall not include the "gross-up of dividends" required by the federal Internal Revenue Code to be taken into taxable income in connection with the taxpayer's election of the foreign tax credit.

   (b) A net operating loss deduction shall be allowed which shall 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 the deduction shall be adjusted to reflect the inclusions and exclusions from entire net income required by subsection (a) of this section and § 44-11-11.1;

   (2) The deduction shall not include any net operating loss sustained during any taxable year in which the taxpayer was not subject to the tax imposed by this chapter; and

   (3) The deduction shall not exceed the deduction for the taxable year allowable under 26 U.S.C. § 172; provided, that the deduction for a taxable year may not be carried back to any other taxable year for Rhode Island purposes but shall only be allowable on a carry forward basis for the five (5) succeeding taxable years.

   (c) "Domestic international sales corporations" (referred to as DISCs), for the purposes of this chapter, will be treated as they are under federal 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 the same manner as it is treated under federal income tax law as it exists on December 31, 1984.

   (d) A corporation which qualifies as a "foreign sales corporation" (FSC) under the provisions of subchapter N, 26 U.S.C. § 861 et seq., and which has in effect for the entire taxable year a valid election under federal law to be treated as a FSC, shall not pay the amount of the tax computed under § 44-11-2(a). Any income to shareholders of FSCs is to be treated in the same manner as it is treated under federal income tax law as it exists on January 1, 1985.

   (e) As used in this section:

   (1) "Affiliated group" has the same meaning as in § 1504 of the Internal Revenue Code.

   (2) "Intangible expenses and costs" includes: (A) expenses, losses and costs for, related to, or in connection directly or indirectly with the direct or indirect acquisition, use, maintenance or management, ownership, sale, exchange, or any other disposition of intangible property to the extent such amounts are allowed as deductions or costs in determining taxable income before operating loss deduction and special deductions for the taxable year under the Internal Revenue Code; (B) losses related to or incurred in connection directly or indirectly with factoring transactions or discounting transactions; (C) royalty, patent, technical and copyright fees; (D) licensing fees; and (E) other similar expenses and costs.

   (3) "Intangible property" means patents, patent applications, trade names, trademarks, service marks, copyrights and similar types of intangible assets.

   (4) "Interest expenses and costs" means amounts directly or indirectly allowed as deductions under § 163 of the Internal Revenue Code for purposes of determining taxable income under the Internal Revenue Code to the 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 the taxpayer during all or any portion of the taxable year, is a related entity, as defined in this subsection, a component member as defined in § 1563(b) of the Internal Revenue Code, or is a person to or from whom there is attribution of stock ownership in accordance with § 1563(e) of the Internal Revenue Code.

   (6) "Related entity" means: (A) a stockholder who is an individual, or a member of the stockholder's family enumerated in § 318 of the Internal Revenue Code, if the stockholder and the members of the stockholder's family own directly, indirectly, beneficially or constructively, in the aggregate, at least fifty percent (50%) of the value of the taxpayer's outstanding stock; (B) a stockholder, or a stockholder's partnership, limited liability company, estate, trust or corporation, if the stockholder and the stockholder's partnership, limited liability companies, estates, trusts and corporations own directly, indirectly, beneficially or constructively, in the aggregate, at least fifty percent (50%) of the value of the taxpayer's outstanding stock; or (C) a corporation, or a party related to the corporation in a manner that would require an attribution of stock from the corporation to the party or from the party to the corporation under the attribution rules of section 318 of the Internal Revenue Code, if the taxpayer owns, directly, indirectly, beneficially or constructively, at least fifty percent (50%) of the value of the corporation's outstanding stock. The attribution rules on § 318 of the Internal Revenue Code shall apply for purposes of determining whether the ownership requirements of this subdivision have been met.

   (f) For purposes of computing its net income under this section, a corporation 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.

   (1) The adjustments required in subsection (f) of this section shall not apply if the corporation establishes by clear and convincing evidence that the adjustments are unreasonable, as determined by the tax administrator or the corporation and the tax administrator agree in writing to the application or use of an alternative method of apportionment under § 44-11-15. Nothing in this subsection shall be construed to the limit or negate the tax administrator's authority to otherwise enter into agreements and compromises otherwise allowed by law.

   (2) The adjustments required in subsection (f) of this section shall not apply to such portion of interest expenses and costs and intangible expenses and costs that the corporation can establish by the preponderance of the evidence meets both of the following: (A) the related member during the same income year directly or indirectly paid, accrued or incurred such portion to a person who is not a related member; and (B) the transaction giving rise to the interest expenses and costs or the intangible expenses and costs between the corporation and the related member did not have as a significant purpose the avoidance of any portion of the tax due under chapter 44-11.

   (3) The adjustments required in subsection (f) shall not apply if the corporation establishes by clear and convincing evidence, as determined by the tax administrator, that: (i) a principal purpose of the transaction giving rise to the payment of interest was not to avoid payment of taxes due under this chapter; (ii) the interest is paid pursuant to a contract that reflects an arm's length rate of interest and terms; and (iii) (A) the related member was subject to tax on its net income in this state or another state or possession of the United States or a foreign nation; (B) a measure of said tax included the interest received from the taxpayer; and (C) the effective rate of tax applied to the interest received by the related member is no less than the effective rate of tax applied to the taxpayer under this chapter minus 3 percentage points.

   (4) Partial Adjustments. The add back required in subsection (f) shall not be required in part if a portion of the add back would be unreasonable. A portion of the add back will be considered unreasonable to the extent that the taxpayer establishes to the tax administrator by clear and convincing evidence that interest or intangible expense was paid, accrued or incurred to a related member that is taxed on the corresponding income by a state, U.S. possession or foreign jurisdiction. An adjustment to the add back will be allowed based on a factor determined by the apportioned tax rate of the related member in the other jurisdiction compared to the apportioned tax rate of the taxpayer in this state. A taxpayer that seeks to claim this adjustment must file a schedule that sets forth the information required by the tax administrator.

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

   (h) Any taxpayer required to make an adjustment required in subsection (f) for tax years beginning on or after January 1, 2008, is additionally required to report to the tax administrator, on forms required by him, the amount of any adjustments that would have been required if the law applied to tax years beginning on or after January 1, 2007.

   (i) Nothing in this section shall be construed to limit or negate the tax administrator authority to make adjustments under § 44-11-15.