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D.C. Municipal Regulations (Last Updated: September 13, 2017) |
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Title 9. TAXATION AND ASSESSMENTS |
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Chapter 9-1. INCOME AND FRANCHISE TAXES |
Section 9-158. COMBINED REPORTING: DETERMINATION OF A UNITARY BUSINESS; COMMONLY CONTROLLED; AND UNITARY PRESUMPTIONS
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158.1Determination of unitary business. The term “unitary business” is defined in D.C. Official Code § 47-1801.04(55)(A) as a single economic enterprise that is made up either of separate parts of a single business entity or of a commonly owned or controlled group of business entities that are sufficiently interdependent, integrated, and interrelated through their activities so as to provide synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts. Under D.C. Official Code § 47-1801.04(55)(A), the definition of “unitary business” shall be construed to the broadest extent permitted by the U.S. Constitution.
158.2Commonly controlled. A unitary business may consist of a single entity or of a group of two (2) or more related entities. A group of related entities may satisfy the commonly controlled requirement of a unitary business if they are related in any of the following ways:
(a)The entities are related within the meaning of the provisions of I.R.C. § 267. By reference, this includes the rules in I.R.C. § 707(b), relating to partnerships;
(b)The entities are related under I.R.C. § 1563, which defines a "controlled group of corporations" for federal income tax purposes; and
(c)The entities in the same "commonly controlled group" for District purposes. "Commonly controlled group" has the stated meaning in 9 DCMR § 156.6(g) and includes any of the following:
(1) A parent corporation and any one (1) or more corporations or chains of corporations that are related to the parent corporation by direct or indirect ownership, if the parent corporation owns stock representing more than fifty percent (50%) of the voting power of at least one (1) of the related corporations or if the parent corporation or any of the related corporations owns stock that cumulatively represents more than fifty percent (50%) of the voting power of each of the related corporations;
(2) Any two or more corporations if a common owner, regardless of whether the owner is a corporate entity, directly or indirectly owns stock representing more than fifty percent (50%) of the voting power of the corporations or related corporations; or
(3)Any two or more entities including unincorporated businesses or partnerships if a common owner, regardless of whether the owner is a corporate entity, directly or indirectly owns more than fifty percent (50%) of interest in the entities.
158.3Stock attribution rules. A shareholder is considered to have indirect ownership
of stock or to indirectly own stock if the shareholder has constructive ownership of the stock within the meaning of I.R.C. § 318, except as provided in (a) and (b) below.
Example: Corporation A owns stock representing forty percent (40%) of the voting power of Corporation B and has a fifty percent (50%) interest in Partnership C. Partnership C owns stock representing thirty percent (30%) of the voting power of Corporation B. Pursuant to I.R.C. § 318, Corporation A constructively owns stock representing fifty-five percent (55%) (40% + (50% x 30%)) of the voting power of Corporation B.
(a)In applying I.R.C. § 318(a)(2), if a partnership, estate, trust, or corporation owns, directly or indirectly, more than fifty percent (50%) of an entity, it shall be considered to own all of the stock or other ownership or control interests owned by that entity.
Example: Corporation D owns stock representing ten percent (10%) of the voting power of Corporation E and has a seventy-five percent (75%) interest in Partnership F. Partnership F owns stock representing forty-five percent (45%) of the voting power of Corporation E. Corporation D is considered to constructively own stock representing fifty-five percent (55%) (10% + 45%) of the voting power of Corporation E. This is because Corporation D owns more than fifty percent (50%) of Partnership F and is therefore considered to own all of the Corporation E stock owned by Partnership F.
(b)If a person has an option to acquire stock or other ownership interests in an entity, the stock or ownership interests are not considered owned by the person unless the Chief Financial Officer determines it to be necessary to prevent tax avoidance.
158.4Voting power.
(a)A shareholder has ownership or control of stock representing more than fifty percent of the voting power of a corporation only if the shareholder has ownership or control of more than fifty percent (50%) of the total combined voting power of all classes of stock of the corporation entitled to vote.
(b)A group of two (2) or more corporations need not be commonly owned to be commonly controlled. A group of corporations may be a commonly controlled group if stock representing more than fifty percent (50%) of the voting power in each corporation are interests that cannot be separately transferred. If a group of two (2) or more corporations would be considered stapled entities under I.R.C. § 269B and the regulations applicable thereto, without regard to whether the corporations are foreign or domestic, the corporations shall be considered part of a commonly controlled group.
(c)The mere ownership of stock entitled to vote does not by itself mean that the shareholder owning the stock has the voting power of the stock. If there is any agreement, whether express or implied, that any shareholder will not vote its stock or will vote it only in a specified manner, or that shareholders owning stock having fifty percent (50%) or less of the total combined voting power will exercise voting power normally possessed by a majority of stockholders, the Chief Financial Officer may presume that the nominal ownership of the voting power is not determinative of which shareholders actually hold the voting power and may disregard the nominal ownership. This presumption may be rebutted by the taxpayer.
(d)If a shareholder owns shares of stock of a corporation which has another class of stock outstanding, the voting power of that other class of stock will be deemed owned by any person or persons on whose behalf it is exercised if the facts indicate that the shareholders of that other class of stock do not exercise their voting rights independently or fail to exercise their voting rights. If the voting power in that other class of stock is not exercised and the percentage of voting power of that class of stock is substantially greater than its proportionate share of the corporate earnings, the Chief Financial Officer may presume that the principal purpose of the arrangement was to avoid the inclusion of the corporation in the commonly controlled group and may disregard the voting power.
158.5Common owner or owners. The common owner or owners need not be combined group members, and the common owner or owners may be persons other than corporations.
158.6Multiple unitary businesses. A commonly controlled group may be engaged in one or more unitary businesses. Therefore, a commonly controlled group may contain more than one combined group.
158.7Sufficiently interdependent, integrated, and interrelated.
(a)In general, the segments in a commonly owned or controlled economic enterprise are considered a unitary business if their activities generate synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts. For example, the segments in a commonly controlled economic enterprise may be considered a unitary business when the operations of the segments contribute to or depend upon each other in such a way as to result in functional integration between the segments; and
(b)“Functional integration” refers to, but is not limited to, transfers between or pooling among business segments of such items as products or services, technical information, marketing information, distribution systems, purchasing, and intangibles (such as patents, copyrights, formulas, processes, trade secrets, and the like) in a manner which substantially affects the segments' business operations related to such activities as development, manufacture, production, extraction, distribution, or sale of its products or services.
158.8Sharing, exchange, and flow of value. Segments in a commonly controlled economic enterprise have sharing or exchange of value among them and a significant flow of value to the separate parts, and thus are a unitary business, if any of the following are true:
(a) The segments in the enterprise contribute or are expected to contribute in a nontrivial way to each other’s profitability;
(b)Each segment in the enterprise is either dependent on, or is relied upon by, one (1) or more other segments in the enterprise for achieving one (1) or more nontrivial business objectives;
(c)The enterprise offers one (1) or more segments, some economies of scale, or economies of scope that benefit the enterprise; or
(d) The prices charged on transactions between segments in the enterprise are inconsistent with the arms-length principle. However, if these prices are consistent with the arms-length principle, that fact does not negate, in any way, the existence of a unitary business.
158.9Examples of flow of value. Activities between segments that constitute a flow of value between them include any of the following:
(a)Assisting in acquisition of assets;
(b)Assisting with filling personnel needs;
(c)Lending funds, guaranteeing loans, or pledging assets;
(d)Interplay in the area of corporate expansion, including but not limited to common future planning or development of the enterprise;
(e)Providing technical assistance, general operational guidance, or overall operational strategic advice;
(f)Supervising or common management;
(g)Common offices, manufacturing facilities, or distribution systems (including but not limited to transportation facilities, warehousing facilities, or order fulfillment systems, inventory control systems or other distribution systems or subsystems);
(h)Centralized purchasing, marketing, advertising, accounting, or research and development;
(i)Intercorporate sales or leases, including equipment and real estate;
(j)Intercorporate services, including administrative, data management, computer support, employee benefits, human resources, such as training and recruiting programs and hiring and personnel policies, insurance, tax compliance, legal, financial, and cash management services;
(k)Intercorporate use of proprietary materials, including trade names, trademarks, service marks, patents, copyrights, trade secrets or other intellectual property;
(l)Centralized executive force; and
(m)Common employees, including sales force;
158.10 Evidence of unitary business factors. The determination of whether or not the operations of business segments are a unitary business will turn on the facts and circumstances of the case. Several factors may evidence that the operations of business segments are a unitary business. Generally, several functionally integrating factors will exist in a unitary business, although a unitary business may exist as a result of few factors or even one (1) factor, if the factor or factors involved are particularly significant. In determining whether a unitary business exists, factors should not be examined in isolation. Instead, it should be determined whether the factors which are present, in combination, result in a functionally integrated business. The presence or absence of any one (1) factor or any particular factors is not necessarily determinative as to whether a unitary business exists, although absence of all of the factors will generally result in a finding that a unitary business does not exist.
158.11Presumptions. Presence of a unitary business will be presumptively shown by the presence of the following:
(a)Same type of business. Business activities that are in the same general line of business generally constitute a single unitary business, as, for example in the case of multiple entities that comprise a multistate grocery chain;
(b) Steps in a vertical process. Business activities that comprise different steps in a vertically structured business almost always constitute a single unitary business. For example, a business engaged in the exploration, development, extraction, and processing of a natural resource and the subsequent sale of a product based upon the extracted natural resource, is engaged in a single unitary business, regardless of the fact that the various steps in the process are operated substantially independently of each other with only general supervision from the business's executive offices; and
(c)Strong centralized management. Business activities which might otherwise be considered as part of more than one (1) unitary business may constitute one (1) unitary business when there is a strong central management, coupled with the existence of centralized departments for such functions as financing, advertising, research, or purchasing. Strong centralized management exists when a central manager or group of managers makes substantially all of the operational decisions of the business. For example, some businesses conducting diverse lines of business may properly be considered as engaged in only one (1) unitary business when the central executive officers are actively involved in the operations of the various business activities and there are centralized offices which perform for the business activities the normal matters which a truly independent business would perform for itself, such as personnel, purchasing, advertising, financing, or research and development.
(d)Newly formed entities. When an entity that is a member of a unitary group forms another entity, a presumption of unity arises between the two (2) entities as of the date of formation. Any party may rebut the presumption by proving that the entities are not unitary or became unitary at a later date. For purposes of this rule, a newly formed entity includes but is not limited to:
(1)A corporation that is formed through a corporate reorganization, a corporate divestiture, split-up, or split-off;
(2)One (1) or more new subsidiaries is acquired and substantially all of the assets and operations of an existing division or operation are placed into or under the administrative or operational responsibility of the acquired corporation;
(3)A partnership or unincorporated business is created or formed; or
(4)An existing corporation changes its form of doing business from one (1) organizational structure to a new organizational structure or merges into an existing or newly formed entity.
(e)Newly acquired entities.
(1)When an entity acquires another entity so that the acquired entity is a member of a commonly controlled group for the first time, it shall be presumed that the acquiring and acquired entities are not engaged in a unitary business for the purchaser’s taxable year that includes the acquisition. If the purchaser is already a combined group member, the taxable year that includes the acquisition is the taxable year of the combined group.
(2)The presumption may be rebutted by proving that the entities are unitary. If the presumption is rebutted, then the entities shall be considered unitary as of the date of acquisition, unless the evidence shows that unity was established as of another date.
(3) In the succeeding reporting period after the first reporting period subsequent to an acquisition whereby an entity that is a member of a unitary group acquires another entity, and for all reporting periods thereafter, a presumption of a unitary relationship exists. The presumption may be rebutted by proving that the entities are not unitary.
(f)Pre-existing relationship. The presumption against unity shall not apply if, immediately preceding the acquisition, the acquiring and acquired entities were engaged in a unitary business apart from being in the same commonly controlled group.
(g)Refusal to provide information. In all cases, the Chief Financial Officer’s determination of whether an entity is engaged in a unitary business is presumed to be correct if the taxpayer unreasonably refuses to provide information pertinent to the determination of a unitary business.
(h)Noncontrolling factors. Where evidence of a unitary business relationship exists as between two (2) or more entities such evidence is not negated by:
(1)The use of arms-length pricing for sales, exchanges, or transfers between entities; or
(2)The fact that a business uses a separate accounting system, including separate accounting division, by entity, by geographical area, by business function, or by business segment.