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Income Taxes: Definition of a Unitary Business (Portfolio 1110)

Be a trusted advisor to your clients with Bloomberg BNA Tax Portfolios. In this Portfolio, our expert authors consider the problems that arise when defining a unitary business.

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DESCRIPTION

Formulary apportionment is tied to the unitary business concept because a state must ascertain the taxable income of a multistate corporation, or affiliated group of corporations, and a determination must be made that the branches of the corporation or the members of the controlled corporate group constitute one unitary business before a formula can be applied.

 

The Income Taxes: Definition of a Unitary Business Portfolio addresses this and other problems which have evolved from the unitary issue, i.e., the requirement by some states of a combined report from a unitary group of controlled corporations, the rules which permit (or require) controlled groups, whether unitary or not, to file consolidated returns. Other related problems, such as taxation of intercompany dividends, are reviewed.


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AUTHORS

FRANKLIN C. LATCHAM, ESQ.

The late Frank Latcham taught at Case–Western Reserve University Law School from 1948 to 1954. He became an associate of the firm of Morrison & Foerster in 1954, a partner in 1961, and Senior of Counsel in 1986. Frank was a past chairman of the Committee on State and Local Taxes of the ABA Section of Taxation and of the Committee on Standards of Tax Practice. He has written extensively in the field of state and local taxation and co–authored (with Prentiss Willson, Jr.) “Franchise and Corporation Income Taxes,” in California Taxes (California Continuing Education of the Bar, 1987). He lectured regularly and has spoken at the University of Southern California Tax Institute, the Georgetown University Institute on State and Local Taxation, and the New York University Institute on State and Local Taxation. He was Chairman of the Advisory Board for the Tax Management Multistate Tax Portfolio Series and was Adjunct Director, Institute of Governmental Affairs, University of California, Davis, California. Frank has also been in charge of state and local tax cases in all California administrative agencies and in all California courts, federal courts, administrative agencies, courts in other states, and before the United States Supreme Court.

 

Credentials / Frank was a graduate of the University of Washington (1943) and received his legal education at the University of Washington (LL.B. 1944) and Yale University (J.S.D. 1951). 


TABLE OF CONTENTS

Detailed Analysis

1110.01. INTRODUCTION

1110.02. OVERVIEW OF RULES DEFINING A UNITARY BUSINESS

A. General Statement of Rules

B. Unity Determined by Applying Rules to Facts

1110.03. CONSTITUTIONAL LIMITATIONS ON THE UNITARY BUSINESS CONCEPT

Introductory Material

A. Early Application of Concept in Capital Stock and Property Tax Cases

B. Earlier State Income Tax Cases

C. Later State Income Tax Cases

1. Mobil and Exxon Provide the Background

2. ASARCO and Woolworth Appear to Limit Unitary Business Doctrine

3. The Woolworth Decision

4. The Dissent in ASARCO and Woolworth

5. The Container Decision

1110.04. AMBIGUITIES CREATED BY CONTAINER

1110.05. ALLIED–SIGNAL CONFIRMS THE UNITARY PRINCIPLE

1110.06. STATE STANDARDS IN DEFINING A UNITARY BUSINESS

A. Traditional Standards Giving Way to Liberal Standards

1. Multistate Tax Commission Regulations

2. Criticism of MTC Regulations

3. Checklists of Unitary Factors Are Misleading

B. The Traditional Approach: Economic Interrelationship Between Members of a Group at Operational Level

C. Application of Fact Situations to the Traditional Approach

1. Segments Involved in the Manufacture and Sale of Products (Vertical Integration)

2. Segments Involved in Central Purchase and Multistate Sale of Inventory (Horizontal Integration)

3. Segments Involved in Similar Operations; Central Management, Central Transfer of Technical Information, and Similar Services

a. Nonintegrated Oil and Gas Operations

b. General Contractors and Service Operations

4. Segments Involved in Similar Operations; Limited Central Management and Services

a. ASARCO, Woolworth, and Container Cases

b. Department Store Chain May or May Not Be Unitary

c. Defining Same Line of Business

5. Involved in Diverse Operations; Central Management and Services (Conglomerates and Other Diverse Businesses)

a. Massachusetts, Alaska, Montana, Nebraska, and Minnesota Courts Apply a Liberal Standard

b. Maryland, Michigan, and Pennsylvania Courts Apply a Conservative Standard

c. New York Situation Clarified

d. California Situation Clarified

1110.07. COMBINED REPORTS AND OTHER MATTERS RELATED TO CORPORATE GROUPS

Introductory Material

A. COMBINED REPORTS

1. Authority for Combined Reports

2. Form for Combined Reports

3. Stock Ownership Requirements

4. Combining Corporations and Partnerships

5. Combining General Corporations and Corporations Using Special Formulas

B. UNITARY RELATIONSHIP WITH PASSIVE HOLDING COMPANY

1. In General

2. California

a. Prior Case Law

b. Appeal of PBS Building Systems, Inc.

3. Other States

C. CONSOLIDATED RETURNS

1. Methods of Apportioning Income

2. States May Require Consolidated Returns

D. TAXATION OF DIVIDENDS

1. Factor Representation

1110.08. FINAL COMMENT

1110.09. STATE-BY-STATE ANALYSIS OF THE UNITARY PRINCIPLE

A. In General

B. States

1. Alabama

2. Alaska

3. Arizona

4. Arkansas

5. California

6. Colorado

7. Connecticut

8. Delaware

9. District of Columbia

10. Florida

11. Georgia

12. Hawaii

13. Idaho

14. Illinois

15. Indiana

16. Iowa

17. Kansas

18. Kentucky

19. Louisiana

20. Maine

21. Maryland

22. Massachusetts

23. Michigan

24. Minnesota

25. Mississippi

26. Missouri

27. Montana

28. Nebraska

29. Nevada

30. New Hampshire

31. New Jersey

32. New Mexico

33. New York

34. North Carolina

35. North Dakota

36. Ohio

37. Oklahoma

38. Oregon

39. Pennsylvania

40. Rhode Island

41. South Carolina

42. South Dakota

43. Tennessee

44. Texas

45. Utah

46. Vermont

47. Virginia

48. Washington

49. West Virginia

50. Wisconsin

51. Wyoming


WORKING PAPERS

Working Papers

Item Description Sheet

Worksheet 1 Multistate Tax Commission Corporate Tax Handbook – Excerpt

Worksheet 2 California Regs. § 25120.

Worksheet 3 New York Regs. § 6-2.1 - 6-6.3.

Worksheet 4 CONTAINER CORPORATION OF AMERICA v. FRANCHISE TAX BOARD, 463 U.S. 159 (1983)

Opinion

Bibliography