The recent growth of mandatory unitary combined reporting.

• Author: Fairbanks, Greg A.

The use of mandatory unitary combined reporting has become increasingly popular among states in recent years. West Virginia, Massachusetts, and Wisconsin each unveiled combined reporting regimes for tax years beginning on or after January 1, 2009, and more states are likely to follow in the near future. The increased acceptance of mandatory unitary combined reporting has been driven by state budgetary shortfalls and the perceived distortion of taxable income by multistate corporations filing separate company reports.

Unitary Business Group

A characteristic permeating each state's reporting methodology is a broadly defined concept of the unitary business group. West Virginia defines a unitary business as a single economic enterprise made up of separate parts of a single business entity or of a commonly controlled group of business entities. They must be "sufficiently interdependent, integrated and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts" (WV Code [section]11-24-3a(43)). A proposed regulation measures common ownership as more than 50% of the voting control of one or more corporations directly or indirectly owned by one or more common owners, whether corporate or noncorporate (WV Code St. Prop. R. [section]110-24-3.2.3). Insurance companies are excluded from the combined group, while regulated investment companies (RICs) and real estate investment trusts (REITs) are included (WV Code [section][section]11-24-13a(j), 11-24-4b(a), (c)). While a partnership itself is not subject to corporate income tax, it can be viewed as a conduit for corporations to be included in a unitary group (WV Code [section]11-24-3a(31)).

Similar to West Virginia, a Massachusetts unitary business is defined to include the activities of a commonly owned group that are "sufficiently interdependent, integrated or interrelated through their activities so as to provide mutual benefit and produce a significant sharing or exchange of value among them or a significant flow of value between the separate parts" (MA Gen. Laws ch. 63, [section]32B(b)(l)). The concept will be construed to the broadest extent permitted under the U.S. Constitution. "Common ownership" is broadly defined as more than 50% control of voting power of each member, through direct or indirect ownership by a common owner(s), whether such ownership is through corporate or noncorporate entities and regardless of whether such owner(s) are members of the combined group (MA Gen. Laws ch. 63, [section]32B(b)(2)). Foreign corporations, financial institutions, utility companies, and certain life insurance companies, as well as federally qualified RICs and REITs, are subject to combination (MA Gen. Laws ch. 63, [section]32B(c)(1)).

A Wisconsin unitary business can consist of separate parts of a single business entity, multiple business entities that are related under Secs. 267 or 1563, or a commonly controlled (more than 50%) group of business entities. In addition to using the flow of value test and the three unities test, a variety of unitary business tests used in other combined reporting states are referred to, but the statute reserves the right to broadly construe the concept to the extent permitted by the U.S. Constitution (WI Stat. [section]71.255(l)(n)).

Water's Edge and Other Filing Elections

A West Virginia combined group is required to file on a water's-edge basis, unless the group elects to file on a worldwide combined basis (WV Code [section] [section] 11-24-13f(a), (b)). The worldwide election must be made on a timely filed, original return by every member of the unitary business subject to tax (WV Code [section]11-24-13f(b) (1)). The election is binding and irrevocable for 10 years. Withdrawal must be made in writing within one year of the expiration of the election period, and such determination is likewise binding for 10 years. If no withdrawal is made, a new 10 years of worldwide combined reporting will begin (WV Code [section]11-24-13f(b)(5)).

A Massachusetts combined group may elect to file on a worldwide basis...