First Circuit Finds Puerto Rico’s Corporate AMT Unconstitutional

Affirming a federal district court, the First Circuit Court of Appeals has struck down parts of Puerto Rico’s corporate alternative minimum tax (AMT). The court was not persuaded that the AMT did not discriminate against interstate commerce.

The First Circuit Court of Appeals, affirming a U.S. district court decision, has found that parts of Puerto Rico’s corporate alternative minimum tax (AMT) violated the U.S. Constitution. The district court had held that it had jurisdiction and enjoined the enforcement of the AMT.

The First Circuit addressed three threshold matters relating to jurisdiction. The court found that (1) the taxpayer had standing to bring the suit, and that the case was sufficiently ripe; (2) the district court had jurisdiction in the case; and (3) the principle of comity did not compel the federal court to abstain from exercising jurisdiction.

The First Circuit agreed with the district court that the amended AMT was facially discriminatory. The dormant Commerce Clause precludes a state from taxing a transaction or incident more heavily when it crosses state lines than when it occurs entirely within the state. For the measure to pass muster under the dormant Commerce Clause, Puerto Rico needed to show that there were “no other means to advance [the] legitimate local purpose.” According to the First Circuit, the amended AMT was a blunt and unnecessarily over inclusive approach to combatting profit-shifting abuse. It essentially established an irrebuttable presumption that all intercorporate transfers to a Puerto Rico branch from related mainland entities were fraudulently priced to evade taxes, the court concluded.

Background. Puerto Rico revised its corporate AMT and the top rate increased more than 300 percent. The taxpayer argued that the AMT violated the dormant Commerce Clause. The district court ruled in favor of the taxpayer.

Court’s analysis. The First Circuit agreed with the district court that the AMT was discriminatory. The dormant Commerce Clause precludes a state from taxing a transaction or incident more heavily when it crosses state lines than when it occurs entirely within the state. According to the First Circuit, the AMT was an unnecessarily over-inclusive approach to combatting profit-shifting abuse.