[Code of Federal Regulations]
[Title 48, Volume 7]
[Revised as of October 1, 2007]
From the U.S. Government Printing Office via GPO Access
[CITE: 48CFR9904.403-61]

[Page 339-340]
 
            TITLE 48--FEDERAL ACQUISITION REGULATIONS SYSTEM
 
     CHAPTER 99--COST ACCOUNTING STANDARDS BOARD, OFFICE OF FEDERAL 
           PROCUREMENT POLICY, OFFICE OF MANAGEMENT AND BUDGET
 
Sec. 9904.403-61  Interpretation.

    (a) Questions have arisen as to the requirements of 9904.403, Cost 
Accounting Standard, Allocation of Home Office Expenses to Segments, for 
the purpose of allocating State and local income taxes and franchise 
taxes based

[[Page 340]]

on income (hereinafter collectively referred to as income taxes) from a 
home office of an organization to its segments.
    (b) By means of an illustrative allocation base in 9904.403-60, the 
Standard provides that income taxes are to be allocated by ``any base or 
method which results in an allocation that equals or approximates a 
segment's proportionate share of the tax imposed by the jurisdiction in 
which the segment does business, as measured by the same factors used to 
determine taxable income for that jurisdiction.'' This provision 
contains two essential criteria for the allocation of income taxes from 
a home office to segments. First, the taxes of any particular 
jurisdiction are to be allocated only to those segments that do business 
in the taxing jurisdiction. Second, where there is more than one segment 
in a taxing jurisdiction, the taxes are to be allocated among those 
segments on the basis of ``the same factors used to determine the 
taxable income for that jurisdiction.'' The questions that have arisen 
relate primarily to whether segment book income or loss is a ``factor'' 
for this purpose.
    (c) Most States tax a fraction of total organization income, rather 
than the book income of segments that do business within the State. The 
fraction is calculated pursuant to a formula prescribed by State 
statute. In these situations the book income or loss of individual 
segments is not a factor used to determine taxable income for that 
jurisdiction. Accordingly, in States that tax a fraction of total 
organization income, rather than the book income of segments within the 
State, such book income is irrelevant for tax allocation purposes. 
Therefore, segment book income is to be used as a factor in allocating 
income tax expense from a home office to segments only where this amount 
is expressly used by the taxing jurisdiction in computing the income 
tax.