Alabama Appeals Court Limits Subject-to-Tax Exception for Related-Party Interest Deduction

The Alabama Court of Civil Appeals held that the subject-to-tax exception to Alabama's related-party interest expense addback applies only if the ultimate recipient of an indirect payment is subject to tax. Affirming the Department of Revenue's disallowance of a corporate interest deduction, the court concluded that an interest payment made by the taxpayer to an Irish affiliate ultimately flowed through to Luxembourg affiliates where it was treated as non-taxable dividend income. The court rejected the taxpayer's argument that taxation of the intermediary pass-through entity satisfied the statutory exception, holding instead that the ultimate recipient of the indirect payment must be ...