D.C. Proposes Rules to Implement New Combined Reporting Requirement

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The District of Columbia Office of Tax and Revenue proposed regulations to implement D.C. Code Ann. § 47-1805.02a, which requires combined reporting by a unitary business for taxable years beginning after Dec. 31, 2010. [D.C. Office of Tax and Rev., Prop. Regs. § § 156 to 172, 1/20/12 D.C. Reg.]

The proposed regulations include an extensive discussion of factors that would lead to the determination that there is a unitary business, including but not limited to, the following regarding a group of entities or business segments:
the entities would be considered related under I.R.C. § § 267, 318, 707(b), or 1563;

there is a pooling of intellectual property rights among entities or segments; and

the segments “generate synergy and a mutual benefit that produces a sharing or exchange of value among them and significant flow of value to the separate parts.”

Under the proposed regulations, there would be a rebuttable presumption that there is a unitary business if business activities of multiple corporations:

  • are in the same general line of business;
  • comprise different steps in a vertically structured business; or
  • are under a strong central management coupled with centralized departments for such functions as finance, advertising, research, or purchasing.

The proposed regulations also would establish a rebuttable presumption that a corporation newly formed or acquired by a member of the unitary group becomes unitary with the group on the date of formation or acquisition.

In addition, evidence of a unitary business relationship would not be negated by use of:

  • arms-length pricing for sales, exchanges, or transfers between entities; or
  • separate accounting systems, including by entity, geography, function, or segment.

Intangibles Holding Companies Deemed Unitary

Passive holding companies for intangibles would be deemed part of a unitary business, according to the proposed regulations.

Unitary groups would be required to report on a water's edge basis unless the group makes a worldwide election, according to the proposed rules. A worldwide election would be effective and irrevocable for 10 taxable years.

The proposed rules provide that net operating losses and credits may be used or carried forward only by the entity generating the loss or credit.

The combined group must designate an agent entity for the group, and the designated agent would be responsible for all filings, including, but not limited to, extensions, worldwide elections, and refund claims.

The designated agent also would be responsible for making estimated payments, but minimum tax under D.C. Code Ann. § 47-1807.02(c) would still apply to each taxable member of the group, the proposed regulations also provide.

The D.C. Office of Tax and Revenue may adopt the regulations at any time on or after Feb. 19.

Full text of the proposed regulations is available at http://www.dcregs.dc.gov/Gateway/NoticeHome.aspx?noticeid=1887346.

By Erin McManus

For More Information

For a discussion of combined reporting in the District of Columbia, see 1130-2nd T.M., Income Taxes: Consolidated Returns and Combined Reporting, at 1130.04.B.9.b.