§ 1.414(r)-2 Line of business.
(a) General rule. A line of business is a portion of an employer that is identified by the property or services it provides to customers of the employer. For this purpose, an employer is permitted to determine its lines of business by designating the property or services that each of its lines of business provides to customers of the employer. Paragraph (b) of this section explains how an employer determines its lines of business for a testing year. Paragraph (c) of this section provides examples illustrating the application of this section.
(b) Employer determination of its lines of business—(1) In general. An employer determines its lines of business for a testing year first by identifying all the property and services it provides to its customers during the testing year, and then by designating which portion of the property and services is provided by each of its lines of business.
(2) Property and services provided to customers—(i) In general. Property, whether real or personal, tangible or intangible, is provided by an employer to a customer if the employer provides the property to or on behalf of the customer for consideration. Similarly, services are provided by an employer to a customer if the employer renders the services to or on behalf of the customer for consideration. An individual item of property or service is taken into account under this paragraph (b)(2) only if the employer provides the item to a person other than the employer in the ordinary course of a trade or business conducted by the employer and the person to whom the employer provides the item is acting in the capacity of a customer of the employer. A type of tangible property is deemed to be provided to customers of the employer for purposes of this section if, with respect to a business that produces or manufactures that type of tangible property, the employer satisfies the special rule in § 1.414(r)-3(d)(2)(iii)(B) for vertically integrated businesses.
(ii) Timing of provision of property or services. Generally an employer determines its lines of business on the basis of the property and services it provides to its customers for consideration during the testing year. However, it is not necessary both that property or services actually be provided, and that consideration for the property or services actually be paid, during the current testing year. For an employer to be considered to provide property or services to customers for consideration during a testing year under this paragraph (b)(2), it is sufficient that the property or services actually be provided to customers during the testing year, the consideration actually be paid during the testing year, or the employer actually incur significant costs during the testing year associated with the provision of the property or services to a specified customer or specified customers.
(3) Employer designation—(i) In general. Once the employer has identified all the property and services it provides to its customers during the testing year under paragraph (b)(2) of this section, the employer determines its lines of business for the testing year by designating which portion of those property and services is provided by each of its lines of business. For this purpose, the employer must apportion all the property and services identified under paragraph (b)(2) of this section among its lines of business. An employer generally is not required to designate its lines of business for the testing year in the same manner as it designates its lines of business for any other testing year.
(ii) Ability to combine unrelated types of property or services in a single line of business. For purposes of this paragraph (b)(3), there is no requirement that a line of business provide only one type of property or service, or only related types of property or services. Nor is there any requirement that a line of business provide solely property or solely services. Thus, the employer is permitted to combine in a single line of business dissimilar types of property or services that are otherwise unrelated to one another.
(iii) Ability to separate related types of property or services into two or more lines of business. For purposes of this paragraph (b)(3), there is no requirement that all property or services of related types or the same type be provided by a single line of business. Thus, the employer is permitted to designate two or more lines of business that provide related types of property or services, or the same type of property or service. An employer might designate two or more lines of business that provide property or services of related types or the same type, for example, where the lines of business manufacture, prepare, or provide the property or services in different geographic areas ( e.g., in different regions of the country or the world), or at different levels in the chain of commercial distribution (e.g., wholesale versus retail), or in different types of transactions (e.g, sale versus lease), or for different types of customers (e. g., governmental versus private), or subject to different legal constraints (e. g., regulated versus unregulated), or if the lines of business have developed differently (e.g., one line of business was acquired while another line of business developed internally). Notwithstanding the foregoing, an employer is not permitted to designate two or more lines of business that provide property or services of related types or the same type, if the employer's designation is unreasonable. An employer's designation would be unreasonable, for example, if the designation separated two types of property or services in different lines of business, but the employer did not provide those types of property or services separately from one another to its customers. Similarly, an employer's designation would be unreasonable if it separated two types of property or services in different lines of business, but the provision of one type of property or service was merely ancillary or incidental to, or regularly associated with, the provision of the other type of property or service. See generally § 1.414(r)-1(d)(2) (requiring an employer's operation of qualified separate lines of business to be for bona fide business reasons).
(iv) Affiliated service groups. An employer is not permitted to designate its lines of business in a manner that results in separating employees of an affiliated service group (within the meaning of section 414(m)) from other employees of the employer. See section 414(r)(8).
(c) Examples—(1) In general. Paragraphs (c)(2) and (c)(3) of this section provide examples that illustrate the application of this section.
(2) Examples illustrating employer designation. The following examples illustrate the application of paragraph (b)(3) of this section relating to an employer's designation of the property or services provided to customers by each of its lines of business.
Example 1.
Employer A is a domestic conglomerate engaged in
the manufacture and
sale of
consumer food and
beverage products and
the provision of data
processing services to private industry.
Employer A provides no
other property or services to its
customers. Pursuant to
paragraph (b)(3) of this section,
Employer A apportions all
the property and
services it provides to its
customers among three
lines of business, one providing all its
consumer food products, a second providing all its
consumer beverage products, and a third providing all its data
processing services.
Employer A has three
lines of business for purposes of this section.
Example 2.
The facts are
the same as in
Example 1, except that
Employer A determines that neither
the consumer food products line of
business nor
the consumer beverage products line of
business would satisfy
the separateness criteria of
§ 1.414(r)-3 for recognition as a separate line of
business. Accordingly, pursuant to
paragraph (b)(3) of this section,
Employer A apportions all
the property and
services it provides to its
customers between only
two lines of business, one providing all its
consumer food and
beverage products, and a second providing all its data
processing services.
Employer A has
two lines of business for purposes of this section.
Example 3.
The facts are
the same as in
Example 2, except that
Employer A also owns and operates a regional commuter airline, a professional basketball team, a pharmaceutical
manufacturer, and a leather tanning company. Pursuant to
paragraph (b)(3) of this section,
Employer A apportions all
the property and
services it provides to its
customers among three
lines of business, one providing all its
consumer food and
beverage products, a second providing all its data
processing services, and a third providing all
the other property and
services provided to
customers through
Employer A's regional commuter airline, professional basketball team, pharmaceutical
manufacturer, and leather tanning company. Even though
the third line of
business includes dissimilar types of
property and
services that are otherwise unrelated to one another,
paragraph (b)(3)(ii) of this section permits
Employer A to combine these
property and
services in a single line of
business.
Employer A has three
lines of business for purposes of this section.
Example 4.
The facts are
the same as in
Example 2, except that
Employer A has recently acquired
Corporation L, whose only
product is a well-known brand of gourmet ice cream. Although
Employer A manufactures and sells
other ice cream
products, it does not manufacture or market
the newly acquired brand of gourmet ice cream except through
Corporation L. Pursuant to
paragraph (b)(3) of this section,
Employer A apportions all
the property and
services it provides to its
customers among three
lines of business, one providing only
the newly acquired brand of gourmet ice cream, a second providing all its
other consumer food and
beverage products (including
the other ice cream
products manufactured and sold by
Employer A) and a third providing all its data
processing services. Even though
the gourmet ice cream line of
business provides
the same type of
property as
the consumer food and
beverage line of
business (
i.e., ice cream),
paragraph (b)(3)(iii) of this section permits
Employer A to separate its ice cream
products between
two different
lines of business.
Employer A has three
lines of business for purposes of this section.
Example 5.
The facts are
the same as in
Example 2, except that
Employer A operates
the data
processing services portion of its
business in
two separate
subsidiaries, one serving
customers in
the eastern half of
the United States and
the other serving
customers in
the western half of
the United States. Pursuant to
paragraph (b)(3) of this section,
Employer A apportions all
the property and
services it provides to its
customers among three
lines of business, one providing all its
consumer food and
beverage products, a second providing data
processing services to
customers in
the eastern half of
the United States, and a third providing data
processing services to
customers in
the western half of
the United States. Even though
the second and third
lines of business provide
the same type of
service (
i.e., data
processing services),
paragraph (b)(3)(iii) of this section permits
Employer A to separate its data
processing services into
two lines of business.
Employer A has three
lines of business for purposes of this section.
Example 6.
Employer B is a diversified engineering firm offering civil, chemical, and aeronautical
engineering services to
government and private industry.
Employer B provides no
other property or services to its
customers.
Employer B operates
the aeronautical
engineering services portion of its
business as
two separate divisions, one serving federal
government customers and
the other serving
customers in private industry. Pursuant to
paragraph (b)(3) of this section,
Employer B apportions all
the property and
services it provides to its
customers among four
lines of business, one providing all its civil
engineering services, a second providing all its chemical
engineering services, a third providing aeronautical
engineering services to federal
government customers, and a fourth providing aeronautical
engineering services to
customers in private industry. Even though
the third and fourth
lines of business include
the same type of
service (
i.e., aeronautical
engineering services),
paragraph (b)(3)(iii) of this section permits
Employer B to separate its aeronautical
engineering services into
two lines of business.
Employer B has four
lines of business for purposes of this section.
Example 7.
Among its
other business activities,
Employer C
manufacturers industrial diesel generators. At no additional cost to its
buyers,
Employer C warrants
the proper functioning of its diesel generators for a one-year period
following sale. Pursuant to its warranty,
Employer C provides labor and parts to repair or replace any
components that malfunction within
the one-year warranty period. Because
Employer C does not provide
the industrial diesel generators, on
the one hand, and
the warranty repair
services and replacement parts, on
the other hand, separately from one another to its
customers, under
paragraph (b)(3)(iii) of this section it would be unreasonable for
Employer C to separate these
property and
services in different
lines of business.
Example 8.
Among its
other business activities,
Employer D
leases office photocopying equipment.
Employer D also provides photo-copying supplies and repair services to its lessees for a separate charge.
Employer D generally does not provide such supplies and repair services to persons
other than its lessees. Lessees of
Employer D's equipment are permitted to use photo-copying supplies and repair
services from
suppliers other than
Employer D. Because
the provision of
the photo-copying supplies and repair
services are merely ancillary or incidental to
the provision of
the leased photo-copiers, under
paragraph (b)(3)(iii) of this section it would be unreasonable for
Employer D to separate these
property and
services in different
lines of business.
Example 9.
Employer E operates a medical clinic.
The employees of
the clinic include physicians, nurses, and laboratory technicians, all of whom participate in providing medical and
related services to patients of
the clinic. Under
paragraph (b)(3)(iii) of this section, it would be unreasonable for
Employer E to separate
the services of
the physicians, nurses, and laboratory technicians in different
lines of business.
Example 10.
Employer F is a law firm.
The employees of
the firm include lawyers, paralegals, and
secretaries, all of whom participate in rendering legal and
related services to
clients of
the firm. Under
paragraph (b)(3)(iii) of this section, it would be unreasonable for
Employer F to separate
the services of
the lawyers, paralegals, and
secretaries in different
lines of business.
Example 11.
Employer G is a management consulting firm.
The employees of
the firm include management consultants,
secretaries, and
other support staff personnel, all of whom participate in rendering management consulting and
related services to
clients of
the firm. Under
paragraph (b)(3)(iii) of this section, it would be unreasonable for
Employer G to separate
the services of
the management consultants,
secretaries, and
other support staff personnel in different
lines of business.
(3) Examples illustrating property and services provided to customers. The following examples illustrate the application of paragraph (b)(2) of this section relating to property and services provided to customers of the employer.
Example 1.
Employer H operates several dairy farms and dairy
product processing plants.
The dairy farms provide part of their output of milk and milk by-products to
Employer H's dairy
product processing plants and also sell part to retail
distributors unrelated to
Employer H.
The dairy farms' provision of milk and milk by-products to
Employer H's dairy
product processing plants does not constitute
the provision of
property or services to
customers of
Employer H because
the milk and milk by-products are not provided to a person
other than
employer H. However,
the dairy farms' provision of milk and milk by-products to independent retail
distributors does constitute
the provision of
property or services to
customers of
Employer H under
paragraph (b)(2) of this section.
Example 2.
The facts are the same as in Example 1, except that the dairy farms provide their entire output of milk and milk by-products to Employer H's dairy product processing plants. The dairy farms' provision of milk and milk by-products to the dairy product processing plants generally does not constitute the provision of property or services to customers of Employer H because the milk and milk by-products are not provided to a person other than Employer H. However, paragraph (b)(2)(i) of this section provides a special rule for vertically integrated businesses that satisfy § 1.414(r)-3(d)(2)(iii)(B). If § 1.414(r)-3(d)(2)(iii)(B) is satisfied, then, under the special rule of paragraph (b)(2)(i) of this section, the milk and milk by-products are deemed to be provided to customers of Employer H.
Example 3.
Among its
other business activities,
Employer J manufactures automobiles.
Employer J operates a cafeteria at one of its automobile
manufacturing facilities.
The cafeteria is intended
primarily for use by
employees of
Employer J, but nonemployees are not prohibited from using
the cafeteria.
The cafeteria charges
the same prices to
employees and non-employees. Under
paragraph (b)(2) of this section,
the provision of cafeteria services to
employees of
Employer J does not constitute
the provision of
property or services to
customers of
Employer J, because
the cafeteria
services are provided to
the employees in their capacity as
employees of
Employer J and not as
customers of
Employer J.
Example 4.
Employer K sells
books and periodicals to
members of the public and provides telecommunications services to private industry.
Employer K periodically acquires and disposes of
businesses in both asset and
stock transactions. In
addition, for its own
investment purposes,
Employer K acquires and disposes of corporate and
other securities. Under
paragraph (b)(2) of this section,
the sale by
Employer K of
businesses and
investment securities does not constitute
the provision of
property or services to
customers of
Employer K, because
the sales are not made in
the ordinary course of a
trade or business conducted by
Employer K. However,
the sale of published materials and
the provision of telecommunications services to persons unrelated to
Employer K does constitute
the provision of
property or services to
customers of
Employer K.
Example 5.
Employer L is active in
the financial services industry.
Subsidiary 1 of
Employer L is a brokerage firm that is regulated as a broker-dealer under applicable federal and state law. In its capacity as a
dealer,
Subsidiary 1 holds in its own
inventory securities of
unrelated corporations and regularly sells these securities to
unrelated persons. Under
paragraph (b)(2) of this section,
the sale by
Subsidiary 1 of
the securities to
unrelated persons constitutes
the provision of
property or services to
customers of
Employer L, because
the sales are made in
the ordinary course of
Subsidiary 1's
trade or business as a broker-dealer.
Example 6.
The facts are
the same as in
Example 5. Subsidiary 2 of
Employer L is an
insurance company that is regulated under applicable
state insurance laws. In managing its
investments,
Subsidiary 2 regularly makes use of
the brokerage services of
Subsidiary 1 (which
Subsidiary 1 regularly provides to
unrelated persons as well). Under
paragraph (b)(2) of this section,
Subsidiary 1's provision of brokerage services to
Subsidiary 2 does not constitute
the provision of
property or services to
customers of
Employer L, because
the brokerage services are not provided to a person
other than
Employer L. However,
Subsidiary 1's provision of brokerage services to
unrelated persons does constitute
the provision of
property or services to
customers of
Employer L.
Example 7.
Employer M is a shipbuilder. In a
testing year,
Employer M enters into a
contract with a customer to construct a new cargo ship for delivery
two years later.
Employer M incurs significant
costs designing and planning for
the production of
the new ship during
the testing year, but receives no
payments from
the customer during that
year. Under
paragraph (b)(2) of this section,
Employer M is treated as providing
the cargo ship to
the customer during
the testing year.
Example 8.
The facts are
the same as in
Example 7, except that, pursuant to a request from
the customer,
Employer M also incurred significant
costs developing a prototype and submitting a bid on
the new cargo ship in
the prior
testing year, and that these
costs were not reimbursed by
the customer. Under
paragraph (b)(2) of this section,
Employer M is also treated as providing
the cargo ship to
the customer in
the prior
testing year.
