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Recipient’s incomeis taxed by a foreigncountryMassachusetts • Interest expense—Principal Interest expense—Principalpurpose of transac-purpose of transaction is nottax avoidance, amount is tion is not tax avoidance,arm’s length, and income is amount is arm’s length,taxed by a foreign country and income is taxed by aat rate within 3 percentage state at rate within 3 percentagepoints of MA ratepoints of MA rate• Interest and intangible expenses—Principalpurpose of transactionis not tax avoidance,and recipient is a resident of aforeign country with U.S. taxtreaty but is not a controlledforeign corporationMichigan Transaction has business purposeother than tax avoidance,is conducted at arm’s length,and recipient is organized inforeign country with U.S. taxtreatyMississippiNew Jersey• Interest expense—Principalpurpose of transaction is nottax avoidance, amount isarm’s length, and income istaxed by a U.S. possession orforeign country at rate within3 percentage points of NJ rate• Interest expense—Recipientis located in foreign countrywith U.S. tax treatyRecipient’s incomeis taxed by a U.S.state Conduit payment OtherInterest expense—Principalpurpose of transactionis not tax avoidance,amount is arm’s length,and income is taxed by astate at rate within 3 percentagepoints of NJ ratePrincipal purpose of transaction isnot tax avoidance, and recipientpays expenses to unrelated thirdparty in same yearTransaction has business purposeother than tax avoidance, isconducted at arm’s length, andis a pass through of comparabletransaction between recipientand unrelated third partyRecipient pays expenses to unrelatedthird party in same yearPrincipal purpose of transaction isnot tax avoidance, and recipientpays expenses to unrelated thirdparty in same year• Adjustment is unreasonable• Taxpayer agrees to alternateadjustment• Transaction has business purposeother than tax avoidance, isconducted at arm’s length, andadjustment is unreasonable• Transaction has business purposeother than tax avoidance, is conductedat arm’s length, and addbackresults in double taxation• Taxpayer and recipient includedin MI combined returnTransaction has business purposeother than tax avoidance, andrecipient is not primarily engagedin activities involving intangibles• Adjustment is unreasonable• Taxpayer agrees to alternateadjustment• Interest paid to an independentlender and taxpayer guaranteesdebtNew York Recipient is organized inforeign country with U.S. taxtreaty and is taxed by foreigncountry at rate equal to orgreater than NY rateNorth Carolina Recipient is organized inforeign country with U.S. taxtreaty, and is taxed by foreigncountry at rate equal to orgreater than NC rateOregonTransaction has business purpose,amount is arm’s length, and recipientpays expenses to unrelatedthird party in same yearRecipient pays expenses to unrelatedthird party in same yearTaxpayer and recipient included inNY combined returnIn same year, recipient includesthe amount as income in NC taxreturn and does not deduct theamount• Owner and user of intangible areincluded in same OR consolidatedtax return• Separation of ownership and useof intangible does not result inevasi on of tax or distortion ofinco me44