Unitary combined reporting for state income tax purposes - new developments.

• Author: Dennen, Sylvia
• Position: California, New York

Unitary combined reporting is not new; it has been in effect for many years in California and in other states. Very briefly, it involves determining if a group of corporations under common ownership operates as a single entity (i.e., a unit), and if so, including the income or loss of each group member in arriving at the income subject to state modifications and apportionment. During the past year, the major changes in combined reporting have mainly affected California and New York.

California was in the forefront on the issue of requiring worldwide combined reporting and applied its methodology both to groups with a domestic (U.S.) parent and to those with a foreign parent. Much controversy surrounded the issue of combining groups with foreign parents, but on June 20, 1994, the Supreme Court, in the combined appeals of Barclays Bank PLC and Colgate-Palmolive Co., 114 Sup. Ct. 2268 (1994), held worldwide combined reporting to be constitutional as applied to unitary groups whether the parent corporation was domestic or foreign.

In response to pressure from large multinational corporations and foreign trading partners in the mid-1980s, California instituted an election for worldwide unitary groups to file either on a worldwide or water's-edge basis. The election requirements caused additional controversy, particularly the provisions involving the payment of election fees and the necessity to file a complex domestic disclosure spreadsheet. Prior to the Court's decision, and in an attempt to forestall retaliatory legislation by foreign nations which could affect that decision, California enacted sweeping changes to the water's-edge election, effective for the 1994 income tax year. The major changes included elimination of the election fee, substitution of an information return for the domestic disclosure spreadsheet, an increase in the period for which the election is in effect (from five years to seven years) and the elimination of provisions allowing the state to disregard the election. Further, the California Franchise Tax Board, which administers the election, announced in March 1995 that it will support legislation to eliminate Canadian and Mexican affiliates from the water's-edge group.

As a result of the Barclays/Colgate-Palmolive decision...