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Income Taxes: Consolidated Returns and Combined Reporting (Portfolio 1130)

Be a trusted advisor to your clients with Bloomberg BNA Tax Portfolios. In this Portfolio, our expert authors compare state combined reports and state consolidated returns in detail and discusses the mechanics and implications of filing combined reports and the different types of state consolidated returns.

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DESCRIPTION

The Income Taxes: Consolidated Returns and Combined Reporting Portfolio addresses the state tax implications of federal consolidated returns and the federal consolidated return regulations. Issues discussed include those arising when a group files a consolidated federal income tax return, but one or more members file in a taxing state using the separate return method.

 

The Portfolio also discusses issues that may arise in filing state combined reports and contrasts how these issues have been handled at the state level with the treatment of these issues under the federal consolidated return regulations.


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AUTHORS

WILLIAM L. GOLDMAN, ESQ.

William L. Goldman is a partner in the Tax Department of McDermott, Will & Emery's Washington, D.C. office, where he practices in federal and state tax controversy matters, including both administrative representation and litigation. He was chairman of the Committee on Affiliated and Related Corporations of the American Bar Association's Tax Section and has lectured and written articles on a wide variety of tax topics. This portfolio is based, in part, on a presentation to Georgetown University Law Center's 1990 Institute on State and Local Taxation. After serving in the United States Army, William was an attorney in the Appellate Section, Tax Division, of the U.S. Department of Justice (1968–1972). He then went into private practice in Washington, D.C., with the law firm of Lee, Toomey & Kent (which merged with McDermott, Will & Emery in 1994).

 

Credentials / William received his bachelor's degree from Cornell University in 1962, and graduated, cum laude, from Harvard Law School in 1965. He was admitted to the Bar of the State of New York in 1965 and the District of Columbia Bar in 1972.


KENNETH C. BROWN, CPA

Kenneth C. Brown is a tax partner with Ernst & Young, where he is the West Region Director of State and Local Tax Services and a member of the National State Tax Committee. He is a member of the California Society of CPA's Tax Committee and the Tax Committee of the California Chamber of Commerce; on the Board of Directors of Cal–Tax; and a Director of the Advisory Boards of both the San Jose State University Masters of Tax program and the University of Southern California's School of Public Administration. He is the author of a quarterly column on state taxation published by the California Society of CPA's.


Credentials / Kenneth received his B.S. and M.B.A. (Taxation), with honors, from the University of Southern California.


LAURA L. FARRELL-LEGRAND, CPA

Laura L. Farrell-Legrand, CPA is a senior manager with Ernst & Young. She is a Practice Leader for the firm's California SALT Group and serves as the firm's California State Tax Coordinator.

 

Credentials / Laura received her B.S. from Boston University, Summa cum laude, and M.S. (Taxation) from Bentley College.


TABLE OF CONTENTS

Detailed Analysis

1130.01. INTRODUCTION

A. Methods of Computing Taxable Income

1. Federal Income Tax Returns

a. Separate Return Method

b. Consolidated Return Method

2. State Income Tax Returns

a. Separate Return Method

b. Combined Report Method

c. Consolidated Return Method

(1) Separate Company Method

(2) Federal Consolidated Return Method

B. Patterns of Filing State Returns

1130.02. COMPARISON OF COMBINED REPORTS AND STATE CONSOLIDATED RETURNS

Introductory Material

A. Function

B. Group Members Included in Return

1. Definition of a Unitary Business

2. Instant Unity

3. Water's-Edge Elections

4. Tax Havens

5. Missed Elections

6. Risk of Unitary Determination and Foreign Subsidiaries

7. Potential Impact of Change in Foreign Entity Classification

8. Inclusion in Consolidated Returns

C. Discretion of State Taxing Authority to Require Combination or Consolidation

1. In General

2. Combination Required to Avoid Distortion

3. Required Consolidation

D. Entitlement of Taxpayer to File a Combined Report or Consolidated Return Where No Statutory Authority Exists

E. Income Apportioned to Taxing State

1. Combination

2. Consolidation

F. Sales Factor

1. Background

2. Combined Report States

3. Consolidated Return States

G. Dividends From Unitary Subsidiaries

1. Combined Reports

2. Consolidated Returns

H. Tax Sharing Agreements

1130.03. THE IMPLICATIONS OF FEDERAL CONSOLIDATED RETURNS ON STATE TAXATION OF MULTI-CORPORATE GROUPS

A. Introduction

B. Common Parent as Agent for Group

1. Federal Rules

2. State Issues

a. Combined Reports

b. Consolidated Returns

C. Taxable Years of Members and Income to Be Included in Return

1. Federal Rules

a. General Rule

b. Apportioning Income Between Taxable Years

2. State Issues

a. Separate Returns

b. Combined Reports

(1) General Rule

(2) Apportioning Income Between Taxable Years

D. Due Dates of Returns for Members Entering or Leaving a Group

1. Federal Rules

2. State Combined Report

E. Intercompany Transactions

1. General Rules

a. Federal Rules

b. State Issues

(1) Separate State Returns

(2) Combined Reports or Consolidated State Returns

(3) Inventories

(4) Fixed Assets and Capitalized Items

(5) Water's–Edge Elections

2. Nondeferred Transactions

a. Federal Rules

b. State Issues

(1) Separate State Returns

(2) Combined Reports and State Consolidated Returns

3. Intercompany Sales of Stock of a Controlled Corporation

a. Federal Rules

b. State Issues

F. Stock Aggregation Rules

1. Federal Rules

2. State Issues

G. Distributions With Respect to Stock

1. Dividends

a. Federal Rules

(1) Separate Returns

(2) Consolidated Returns

b. State Issues

(1) Separate State Returns

(2) Combined Reports and State Consolidated Returns

2. Nondividend Distributions

a. Federal Rules

(1) Separate Returns

(2) Consolidated Returns

b. State Issues

(1) Separate Returns

(2) Combined Reports and State Consolidated Returns

3. Distributions of Loss Property

a. Federal Rules

b. State Issues

4. Distributions of Appreciated Property

a. Federal Rules

b. State Issues

5. Taxable Year for Inclusion of Distribution in Income

a. Federal Rules

b. State Issues

H. Use of Net Operating Losses

1. Federal Rules

a. Separate Returns

b. Consolidated Returns

2. State Issues

a. Separate Returns

b. Combined Reports and State Consolidated Returns

I. Dispositions of Stock of Members

1. Investment Adjustments

a. Federal Rules

b. State Issues

(1) Separate Returns

(2) Combined Reports

2. Loss on Disposition of Subsidiary

a. Federal Rules

b. State Issues

(1) Separate Returns

(2) Combined Reports

3. Stock Dispositions Treated as Asset Sales Followed by Liquidations

a. Federal Rules

b. State Issues

(1) Separate Returns

(2) Combined Reports and State Consolidated Returns

(3) Planning Possibility

1130.04. STATE-BY-STATE ANALYSIS

A. Overview

B. Specific States

1. Alabama

a. Consolidated Returns

b. Combined Reporting

2. Alaska

a. Consolidated Returns

b. Combined Reporting

3. Arizona

a. Consolidated Returns

b. Combined Reporting

4. Arkansas

a. Consolidated Returns

b. Combined Reporting

5. California

a. Consolidated Returns

b. Combined Reporting

6. Colorado

a. Consolidated Returns

b. Combined Reporting

7. Connecticut

a. Consolidated Returns

b. Combined Reporting

8. Delaware

a. Consolidated Returns

b. Combined Reporting

9. District of Columbia

a. Consolidated Returns

b. Combined Reporting

10. Florida

a. Consolidated Returns

b. Combined Reporting

11. Georgia

a. Consolidated Returns

b. Combined Reporting

12. Hawaii

a. Consolidated Returns

b. Combined Reporting

13. Idaho

a. Consolidated Returns

b. Combined Reporting

14. Illinois

a. Consolidated Returns

b. Combined Reporting

15. Indiana

a. Consolidated Returns

b. Combined Reporting

16. Iowa

a. Consolidated Returns

b. Combined Reporting

17. Kansas

a. Consolidated Returns

b. Combined Reporting

18. Kentucky

a. Consolidated Returns

b. Combined Reporting

19. Louisiana

a. Consolidated Returns

b. Combined Reporting

20. Maine

a. Consolidated Returns

b. Combined Reporting

21. Maryland

a. Consolidated Returns

b. Combined Reporting

22. Massachusetts

a. Consolidated Returns

b. Combined Reporting

23. Michigan

a. Consolidated Returns

b. Combined Reporting

24. Minnesota

a. Consolidated Returns

b. Combined Reporting

25. Mississippi

a. Consolidated Returns

b. Combined Reporting

26. Missouri

a. Consolidated Returns

b. Combined Reporting

27. Montana

a. Consolidated Returns

b. Combined Reporting

28. Nebraska

a. Consolidated Returns

b. Combined Reporting

29. Nevada

30. New Hampshire

a. Consolidated Returns

b. Combined Reporting

31. New Jersey

a. Consolidated Returns

b. Combined Reporting

32. New Mexico

a. Consolidated Returns

b. Combined Reporting

33. New York

a. Consolidated Returns

b. Combined Reporting

34. North Carolina

a. Consolidated Returns

b. Combined Reporting

35. North Dakota

a. Consolidated Returns

b. Combined Reporting

36. Ohio

a. Consolidated Returns

b. Combined Reporting

37. Oklahoma

a. Consolidated Returns

b. Combined Reporting

38. Oregon

a. Consolidated Returns

b. Combined Reporting

39. Pennsylvania

a. Consolidated Returns

b. Combined Reporting

40. Rhode Island

a. Consolidated Returns

b. Combined Reporting

41. South Carolina

a. Consolidated Returns

b. Combined Reporting

42. South Dakota

43. Tennessee

a. Consolidated Returns

b. Combined Reporting

44. Texas

a. Consolidated Returns

b. Combined Reporting

45. Utah

a. Consolidated Returns

b. Combined Reporting

46. Vermont

a. Consolidated Returns

b. Combined Reporting

47. Virginia

a. Consolidated Returns

b. Combined Reporting

48. Washington

49. West Virginia

a. Consolidated Returns

b. Combined Reporting

50. Wisconsin

a. Consolidated Returns

b. Combined Reporting

51. Wyoming


WORKING PAPERS

Working Papers

Item Description Sheet

Worksheet 1 New York Regs. § 6-2.1 -2.7

Worksheet 2 IRC § 482 and Intercompany Transfer Pricing: It's Not Just for the IRS Anymore

Bibliography

BIBLIOGRAPHY