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Multistate Tax Alert: Alaska Supreme Court Rules Foreign Corp Included in Water’s Edge Return is Taxable on World-Wide Income

Rejects conformity with IRC § 882



In Schlumberger Technology Corp. v. Alaska Department of Revenue, the Alaska Supreme Court recently held that Internal Revenue Code (IRC) § 882(a)(1), which “requires a foreign corporation to report only income ‘effectively connected with the conduct of a trade or business within the United States . . .’” (often referred to as effectively connected income or ECI), has not been adopted by reference because it is inconsistent with the formula provided by the Alaska Net Income Tax Act (ANITA).1 Instead, the court held that Alaska Stat. § 43.20.145 limits the types of corporations that may be included in a water’s edge group, but not the types of income to be included in apportionable income.  In particular, § 43.20.145(b)(1) requires a corporation filing as part of a water’s edge combined return (whether such corporation is foreign or domestic) to include 20% of dividends received from foreign corporations without regard to whether such dividends are ECI. 

In this Tax Alert we review the lower court rulings, summarize the Alaska Supreme Court decision, and provide taxpayer considerations.

Relevant law

Alaska adopts combined reporting on a water’s edge basis.  Alaska Stat. § 43.20.145(a) provides that all corporations that are part of a unitary business with the taxpayer and satisfy certain tests for domestic business activity should be included in the return.

Alaska adopts the Multistate Tax Compact formula for apportionment of the net business income of the unitary group and allows a taxpayer to exclude “80 percent of dividend income received from foreign corporations.”2   

Alaska also adopts by reference the provisions of the IRC relating to income tax.3 These provisions have, “full force and effect . . . unless excepted to or modified by other provisions” of ANITA.4

IRC § 882 requires a foreign taxpayer to report only income “effectively connected with the conduct of a trade or business within the United States.”5 Under this IRC sourcing provision, foreign source dividends would generally be completely excluded from the taxable income of a foreign taxpayer.6

The Lower Court rulings

The issue before the various courts was not whether the foreign parent corporation (Schlumberger Limited) was properly included in the water’s edge combined return of the taxpayer (Schlumberger Technology Corp.).  Rather, the issue was whether Schlumberger Limited’s dividends received from foreign corporations should be included in the taxpayer’s/unitary group’s apportionable income even though such dividend income was not effectively connected with the conduct of a trade or business within the United States.  The administrative law judge held that Alaska’s adoption of water’s edge combined reporting, “limited the types of corporations, other than oil and gas corporations, that were included in the unitary group for the purpose of determining the total apportionable income.”7 The judge stated further that the statute “did not geographically limit the types of income to be included in the total apportionable income from the corporations included within the unitary group.”8 Accordingly, the holding required the taxpayer to include 20% of all foreign source dividends in its apportionable income.

The superior court affirmed the administrative law judge’s decision.9

Alaska Supreme Court decision

The taxpayer contended that since ANITA did not provide an explicit exception for IRC § 882, then the sourcing rule was incorporated by reference.10 However, the Alaska Supreme Court upheld the decision of the lower court, finding that the state’s statutory apportionment formula was “simply inconsistent” with the sourcing rules for foreign taxpayers under IRC § 882.11  The court approved of the interpretation given the statute by the administrative law judge and stated the “water’s edge combined reporting method” language used by the legislature, “limits the corporations that must be joined in a return; it does not limit the types of income that must be reported.”12 The court also noted that the legislature had provided for the exclusion of only 80% of foreign source dividends, within the same section of ANITA in which it included the water’s edge amendment.  The court found, “[i]t thus seems unlikely that the legislature intended the water’s edge amendment to have the effect of excluding all dividend income received by a foreign corporation.”13

The Alaska Supreme Court did not reach any constitutional issues because the taxpayer was found to have voluntarily waived all such issues at the administrative level.14

Additional considerations

Taxpayers may wish to consider whether taxing authorities in other states that do not expressly adopt the sourcing rules of IRC § 882 or other limitations such as tax treaties may make similar arguments to those presented in this decision with respect to corporations that satisfy nexus requirements or otherwise meet the requirements for inclusion in a water’s edge group.


If you have questions regarding this Alaska Supreme Court decision or other Alaska tax matters, please contact any of the following Deloitte Tax LLP professionals. 

Susan E. Ryan
Tax Director
Deloitte Tax LLP, Seattle
+1 206 716 7157
David Vistica
Tax Director
Deloitte Tax LLP, Washington, DC
+1 202 370 2268
Andy Robinson
Tax Partner
Deloitte Tax LLP, Houston
+1 713 982 2960

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As used in this document, “Deloitte” means Deloitte Tax LLP, a subsidiary of Deloitte LLP. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

1 Schlumberger Tech. Corp. v. State, Dep’t of Revenue, 2014 Alas. LEXIS 142 at 21 (Alaska Jul. 18, 2014). 
2 Alaska Stat. §§ 43.19.010 and 43.20.145(b)(1). 
3 Sections 26 U.S.C. 1—1399, see Alaska Stat. § 43.20.021(a). 
4 Id
5 26 USC § 882(a). 
6 Schlumberger, 2014 Alas. LEXIS 142 at 12. 
7 See In re Schlumberger Tech. Corp., OAH No. 08-0577-TAX, page 3, (Dec. 30, 2009).  This ruling is available at:
8 Id
9 Schlumberger Tech. Corp. & Subsidiaries v. State, Dep’t of Revenue, Superior Court for the State of Alaska, 3rd Judicial District at Anchorage, No. 3AN 10-7367CI (Mar. 18, 2012). 
10 Schlumberger, 2014 Alas. LEXIS 142 at 8. 
11 Id. at 14.
12 Id. at 16. 
13 Id. at 16. 
Id. at 21. 

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