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Rhode IslandTennesseeVirginiaWest VirginiaWisconsinDistrict ofColumbiaRecipient’s incomeis taxed by a foreigncountryInterest expense—Principalpurpose of transaction is nottax avoidance, amount is arm’slength, and income is taxedby a U.S. possession or foreigncountry at rate within 3 percentagepoints of RI rateRecipient is located in a foreigncountry with U.S. tax treatyIntangible expenses—Income istaxed by a foreign country withU.S. tax treatyTransaction has business purpose,amount is arm’s length,recipient is organized in aforeign country with U.S. taxtreaty, and is taxed by foreigncountry at rate equal to orgreater than WV rateIncome is taxed by a U.S. possessionor foreign country ataggregate effective tax rateequal to or greater than 80%of taxpayer’s aggregate effectivetax ratePrincipal purpose of transactionis not tax avoidance,amount is arm’s length, andincome is taxed by a U.S. possessionor foreign country withU.S. tax treaty at aggregate effectivetax rate of 4% or moreRecipient’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 RI rateIncome is taxed by a state,other than a state in whichmembers file a combinedreport and recipient’sincome offsets taxpayer’sexpenseIntangible expenses—Incomeis taxed by a stateIncome is taxed by a stateat rate equal to or greaterthan WV rateIncome is taxed by a stateat aggregate effective taxrate equal to or greaterthan 80% of taxpayer’saggregate effective taxrate, other than a statein which members filea combined report andrecipient’s income offsetstaxpayer’s expensePrincipal purpose of transactionis not tax avoidance,amount is arm’slength, and income istaxed by a state at aggregateeffective tax rate of4% or moreTransaction does not have taxavoidance as its significant purpose,and recipient pays expenses tounrelated third party in same yearRecipient pays expenses to unrelatedthird party in same yearIntangible expenses— Principalpurpose of transaction is not taxavoidance, and recipient paysexpenses to unrelated third partyin same yearIntangible expenses— Transactionhas business purpose, and recipientpays expenses to unrelatedthird party in same yearRecipient pays expenses to unrelatedthird party in same yearPrincipal purpose of transactionis not tax avoidance, amount isarm’s length, and recipient paysexpenses to unrelated third partyin same year• Adjustment is unreasonable• Taxpayer agrees to alternateadjustmentUpon application by taxpayer, IRSdetermines that principal purposeof expenses is not tax avoidance• Intangible expenses—Recipientderives at least one-third ofrevenues from licensing intangiblesto unrelated third partiesin comparable transactions• Interest expense—Recipient hassubstantial business operationsrelated to interest-generatingactivity, 5 full-time employees,interest is not related to intangibleproperty, business purposeother than tax avoidance,arm’s-length amount, and otherrequirements are met• Taxpayer agrees to alternateadjustment• Interest expense—Transactionhas business purpose andamount is arm’s length• Income is taxed by a U.S. possessionat rate equal to or greaterthan WV rate• Recipient is a bank holding companyor subsidiary thereof, withcertain exceptions• Primary motivation for transactionis a business purpose otherthan tax avoidance, transactionchanges economic position oftaxpayer in a meaningful wayapart from tax effects, andamount is arm’s lengthRecipient is allowed deduction onDC tax return to extent relatedpayer is denied a deductionSource: CCH IntelliConnect, Multistate Quick Answer Charts, Corporate Income Tax, Related Party Expense Addback Requirements; J. Healy and M.Schadewald, 2013 Multistate Corporate Tax Guide (Chicago: CCH, a Wolters Kluwer business, 2012), at 3217–51; and applicable state statutes (seeTable 1 for listing).45