Who can file combined state income tax returns?

• Author: Farris, Lee

State filing requirements for a multicorporate group vary, depending on circumstances and law. Some states require taxable income to be computed on a separate-return basis, while others permit or require the filing of a combined report or consolidated return.

In order for a group of corporations to be included in a combined report, the corporations must be unitary. Unfortunately, there is no realistic definition of a unitary business. In Butler Bros. v. McColgan, 17 Cal. 2d 664 (1942), the California Supreme Court set forth the three unities test: (1) unity of ownership; (2) unity of operation, as evidenced by central purchasing, advertising, accounting and management divisions; and (3) unity of use in its centralized executive force and general system of operation. Later, in Edison California Stores, Inc. v. McColgan, 30 Cal. 2d 472 (1947), the same court added the contribution-dependency test, which is based on the extent one segment of a business contributes to or depends on another segment.

In ASARCO, Inc. v. Idaho State Tax Commission, 458 US 307 (1982), and F.W. Woolworth v. Taxation [4] Revenue Dept., 458 US 354 (1982), the Supreme Court emphasized three criteria: functional integration, centralization of management and economies of scale. An additional "flow of value" test was added by the Court in Container Corp. of America v. Franchise Tax Board, 463 US 159 (1983), which held that a unitary relationship exists if there is some sharing or exchange of value not capable of precise identification or measurement.

If a taxpayer wants to be unitary with its affiliates, it should try to establish or demonstrate as many of these ties as possible. The most straightforward unitary requirement to meet is the ownership requirement. This is usually dictated by statute and generally is a percentage of the corporation's voting stock (a 50% ownership of the voting stock of another corporation is a common ownership requirement). The lower percentage of ownership may allow a combined return to be filed when a Federal consolidated return is not. The other unitary ties...