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United States Supreme
Court Cases May Affect
Israeli Businesses

On March 1, 2006, the United States Supreme Court heard oral argument in cases involving the constitutionality of tax incentives offered to businesses that relocate or expand into a state. The cases are important in Israel, as it is common practice for Israeli businesses to negotiate for packages of subsidies, tax credits and other incentives when they choose a location for their United States operations.

The legal issue before the Court is whether state investment tax credits are an unconstitutional barrier to interstate commerce. Specifically, if Ohio tax credits entice a business to locate or expand in Ohio instead of in any other state, has Ohio acted unconstitutionally? Unfortunately, the Court’s prior decisions in this area are contradictory, leading one prominent authority to testify before the United States Congress that the area is a “mess”.


While the legal principles may be a mess, the potential effect on businesses is more clear cut. If the Supreme Court upholds the lower court’s decision, investment tax credits provided by any state to businesses that expand their in-state operations may be unconstitutional. And, while the treatment of businesses that received unconstitutional credits for prior years will need to be separately addressed, one possibility is that the states will issue assessments to businesses that received such credits in earlier periods.

Whatever the remedy for credits received in back periods, businesses that counted on such credits to make their United States operations profitable may need to reevaluate their operations or approach their host municipalities for new incentives.

Significantly, there is another possibility for the cases. The Court could determine that the litigants who objected to the tax credits do not have a sufficient interest in the issues to permit them to bring the federal lawsuit. If that occurs, the Court will dismiss the cases, leaving all parties in the position they were in before the lawsuit. Many observers consider this to be the most likely outcome for the cases, so that the lawsuits may need to be refiled in state court. (Similar cases are pending in at least three states.)

The Supreme Court typically takes several months to issue a decision. (We will issue an update reporting on the resolution of the case.) At least until the decision is issued, businesses will continue to use the available credits.

(Daimler Chrysler Corp. v. Charlotte Cuno, et al. (S. Ct. docket number 04-1704) consolidated with Wilkins, et al . v. Cuno, et al. (S. Ct. docket number 04-1724), hearing appeal of 386 F.3d 738 (6th Cir. 2004).)


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*David A. Fruchtman is an attorney in the United States. He is not admitted to the Israeli Bar. He is Of Counsel to Horwood Marcus & Berk Chartered, located at 180 N. LaSalle Street, Suite 3700, Chicago, Illinois 60601. He is a Harvard Law School graduate and is chairman of the American Bar Association’s Income and Franchise Taxes subcommittee. He has been named by his peers as one of Chicago’s Leading Tax Lawyers. Horwood Marcus & Berk Chartered has one of the largest state and local tax law practices in the United States. The firm provides tax planning advice to clients of all sizes and has successfully represented clients before courts and administrative tribunals throughout the country, including at the United States Supreme Court.
  This Alert is for discussion purposes only and does not constitute tax advice; consequently, it is not subject to the attorney-client privilege and does not constitute attorney work product. This Alert may be disclosed to any and all persons, without limitation of any kind, including any potential tax treatment or tax structure of any transaction described hereon. This Alert does not provide federal tax advice and was not prepared in a form to comply with the requirements of an opinion upon which a taxpayer can rely to avoid certain penalties under the Internal Revenue Code of 1986, as amended. No fee was received in connection with producing this Alert. © 2006 David A. Fruchtman