Last year, the Montgomery Circuit Court (“trial court”) held that VFJ Ventures, Inc. (“VFJ”) was entitled to claim the reasonableness exception to Alabama’s add back statute with respect to royalty payments VFJ made to its affiliates.[1] The trial court’s decision concluded that VFJ was entitled to claim this exception because the add back statute would otherwise operate to deny VFJ a deduction

for necessary costs of doing business in Alabama, and thus tax income fairly attributable to other states.

The Alabama Court of Civil Appeals recently reversed the trial court’s decision in Surtees v. VFJ Ventures, Inc.[2] The Court of Civil Appeals concluded that although the trial court’s judgment included a finding that VFJ’s income would be distorted by the application of the add back statute, the trial court made this decision based upon its determination that the underlying transactions had a

valid business purpose and economic substance. The Court of Civil Appeals disagreed with this standard and held that VFJ did not qualify for any of Alabama’s exceptions to the add back rule and that the statute was constitutional. The Supreme Court of Alabama has granted VFJ’s petition for

writ of certiorari. (See article for more).