Throwback Rule Law and Legal Definition

Throwback rule is an Internal Revenue Service (IRS) rule applied in the taxation of trust property. The rule specifies that the amount distributed in any tax year which is in excess of that year’s distributable net income must be thrown back to the preceding year and the amount is treated as if it had been distributed. The throw back rule requires consideration of the trust income and its distribution for all of the years preceding the tax year.

The throwback rule is applied to corporations that produce and sell goods in multiple states, to pay state corporate income tax. By applying the rule, when a corporation with facilities in a state has income that is not taxed by any state, the income can be thrown back to the state where the company has facilities.

The throwback rule is designed to eliminate nowhere sales and assign them to the originating state, thereby reducing the possibility of income escaping taxation. [Great N. Nekoosa Corp. v. State Tax Assessor, 675 A.2d 963, 964 (Me. 1996)].