Or. Admin. Code § 150-317-0510 - Unitary Business
(1) This
rule is based partially on a model regulation adopted by the Multistate Tax
Commission to promote uniform treatment of the unitary business principle by
the states. Sections (3) through (10) of this rule apply to tax years beginning
on or after January 1, 2007. However, the principles outlined in those sections
may also be applied to years prior to 2007 to the extent that they reflect case
history and department policy.
(2)
The presence of all of the factors described in ORS
317.705(3) will
demonstrate that a unitary business exists, but the presence of one or two such
factors may also demonstrate the flow of value requisite for a unitary business
determination.
(3) The Concept of a
Unitary Business. A unitary business is a single economic enterprise that is
made up either of separate parts of a single business entity or of a commonly
controlled group of business entities that are 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. This flow of value
to a business entity located in Oregon that comes from being part of a unitary
business conducted both within and without Oregon is what provides the
constitutional due process "definite link and minimum connection" necessary for
Oregon to apportion apportionable income of the unitary business, even if that
income arises in part from activities conducted outside of Oregon. The
apportionable income of the unitary business is then apportioned to Oregon
using the apportionment formula set forth in ORS
314.650. This sharing or
exchange of value may also be described as requiring that the operation of one
part of the business be dependent upon, or contribute to, the operation of
another part of the business. Phrased in the disjunctive, the foregoing means
that if the activities of one business either contributes to the activities of
another business or are dependent upon the activities of another business,
those businesses are part of a unitary business.
(4) Constitutional Requirement for a Unitary
Business. The sharing or exchange of value described in section (3) that
defines the scope of a unitary business requires more than the mere flow of
funds arising out of a passive investment or from the financial strength
contributed by a distinct business undertaking that has no operational
relationship to the unitary business. In Oregon, the unitary business principle
will be applied to the fullest extent allowed by the U.S. Constitution. The
unitary business principle will not be applied where the result would not be
allowed by the U.S. Constitution.
(5) Separate Trades or Businesses Conducted
within a Single Entity. A single entity may have more than one unitary
business. In such cases it is necessary to determine the apportionable income
attributable to each separate unitary business as well as its nonapportionable
income, which is specifically allocated. The apportionable income of each
unitary business is then apportioned by a formula that takes into consideration
the in-state and the out-of-state factors that relate to the respective unitary
business whose income is being apportioned.
(6) Unitary Business Unaffected by Formal
Business Organization. A unitary business may exist within a single business
entity or among a commonly controlled group of business entities.
(7) Determination of a Unitary Business. A
unitary business is characterized by significant flows of value evidenced by
factors such as those described in Mobil Oil Corp. v. Vermont, 445 U.S. 425
(1980): centralization of management, economies of scale, and functional
integration. These factors provide evidence of whether the business activities
operate as an integrated whole or exhibit substantial mutual interdependence.
Facts suggesting the presence of the factors mentioned above should be analyzed
in combination for their cumulative effect and not in isolation. A particular
business operation may be suggestive of one or more of the factors mentioned
above.
(8) Description and
Illustration of Centralization of Management, Economies of Scale, and
Functional Integration.
(a) Centralization of
Management. Centralization of management exists when directors, officers,
and/or other management employees jointly participate in the management
decisions that affect the respective business activities and that may also
operate to the benefit of the entire economic enterprise. Centralization of
management can exist whether the centralization is effected from a parent
entity to a subsidiary entity, from a subsidiary entity to a parent entity,
from one subsidiary entity to another, from one division within a single
business entity to another division within a business entity, or from any
combination of the foregoing. Centralization of management may exist even when
day-to-day management responsibility and accountability has been decentralized,
so long as the management has an ongoing operational role with respect to the
business activities. An operational role can be effected through mandates,
consensus building, or an overall operational strategy of the business, or any
other mechanism that establishes joint management.
(A) Facts Providing Evidence of
Centralization of Management. Evidence of centralization of management is
provided when common officers participate in the decisions relating to the
business operations of the different segments. Centralization of management may
exist when management shares or applies knowledge and expertise among the parts
of the business. Existence of common officers and directors, while relevant to
a showing of centralization of management, does not alone provide evidence of
centralization of management. Common officers are more likely to provide
evidence of centralization of management than are common directors.
(B) Stewardship Distinguished. Centralized
efforts to fulfill stewardship oversight are not evidence of centralization of
management. Stewardship oversight consists of those activities that any owner
would take to review the performance of or safeguard an investment. Stewardship
oversight is distinguished from those activities that an owner may take to
enhance value by integrating one or more significant operating aspects of one
business activity with the other business activities of the owner. For example,
implementing reporting requirements or mere approval of capital expenditures
may evidence only stewardship oversight.
(b) Economies of Scale. Economies of scale
refers to a relation among and between business activities resulting in a
significant decrease in the average per unit cost of operational or
administrative functions due to the increase in operational size. Economies of
scale may exist from the inherent cost savings that arise from the presence of
functional integration or centralization of management. The following are
examples of business operations that can support the finding of economies of
scale. The order of the list does not establish a hierarchy of importance.
(A) Centralized Purchasing. Centralized
purchasing designed to achieve savings due to the volume of purchases, the
timing of purchases, or the interchangeability of purchased items among the
parts of the business engaging in the purchasing provides evidence of economies
of scale.
(B) Centralized
Administrative Functions. The performance of traditional corporate
administrative functions, such as legal services, payroll services, pension and
other employee benefit administration, in common among the parts of the
business may result in some degree of economies of scale. A business entity
that secures savings in the performance of corporate administrative services
due to its affiliation with other business entities that it would not otherwise
reasonably be able to secure on its own because of its size, financial
resources, or available market, provides evidence of economies of
scale.
(c) Functional
integration: Functional integration refers to transfers between, or pooling
among, business activities that significantly affect the operation of the
business activities. Functional integration includes, but is not limited to,
transfers or pooling with respect to the unitary business's products or
services, technical information, marketing information, distribution systems,
purchasing, and intangibles such as patents, trademarks, service marks,
copyrights, trade secrets, know-how, formulas, and processes. There is no
specific type of functional integration that must be present. The following is
a list of examples of business operations that can support the finding of
functional integration. The order of the list does not establish a hierarchy of
importance.
(A) Sales, exchanges, or transfers
(collectively "sales") of products, services, and/or intangibles between
business activities provide evidence of functional integration. The
significance of the intercompany sales to the finding of functional integration
will be affected by the character of what is sold and/or the percentage of
total sales or purchases represented by the intercompany sales. For example,
sales among business entities that are part of a vertically integrated unitary
business are indicative of functional integration. Functional integration is
not negated by the use of a readily determinable market price to affect the
intercompany sales, because such sales can represent an assured market for the
seller or an assured source of supply for the purchaser.
(B) Common Marketing. The sharing of common
marketing features among business entities is an indication of functional
integration when such marketing results in significant mutual advantage. Common
marketing exists when a substantial portion of the business entities' products,
services, or intangibles are distributed or sold to a common customer, when the
business entities use a common trade name or other common identification, or
when the business entities seek to identify themselves to their customers as a
member of the same enterprise. The use of a common advertising agency or a
commonly owned or controlled in-house advertising office does not by itself
establish common marketing that is suggestive of functional integration. Such
activity, however, is relevant to determining the existence of economies of
scale and/or centralization of management.
(C) Transfer or Pooling of Technical
Information or Intellectual Property. Transfers or pooling of technical
information or intellectual property, such as patents, copyrights, trademarks
and service marks, trade secrets, processes or formulas, know-how, research, or
development, provide evidence of functional integration when the matter
transferred is significant to the businesses' operations.
(D) Common Distribution System. Use of a
common distribution system by the business entities, under which inventory
control and accounting, storage, trafficking, and/or transportation are
controlled through a common network provides evidence of functional
integration.
(E) Common Purchasing.
Common purchasing of substantial quantities of products, services, or
intangibles from the same source by the business entities, particularly where
the purchasing results in significant cost savings or where the products,
services or intangibles are not readily available from other sources and are
significant to each entity's operations or sales, provides evidence of
functional integration.
(F) Common
or Intercompany Financing. Significant common or intercompany financing,
including the guarantee by or the pledging of the credit of, one or more
business entities for the benefit of another business entity or entities
provides evidence of functional integration, if the financing activity serves
an operational purpose of both borrower and lender. Lending which serves an
investment purpose of the lender does not necessarily provide evidence of
functional integration. See subsection (8)(a) for discussion of centralization
of management.
(9) Indicators of a Unitary Business.
(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, a multistate grocery chain.
(b) Steps in a Vertical Process. Business
activities that are part of 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.
(c) Strong
Centralized Management. Business activities which might otherwise be considered
as part of more than one unitary business may constitute one 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 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, or
financing.
(10) Commonly
Controlled Group of Business Entities. Separate corporations can be part of a
unitary business only if they are members of a commonly controlled group.
(a) A "commonly controlled group" means any
of the following:
(A) A parent corporation and
any one or more corporations or chains of corporations, connected through stock
ownership (or constructive ownership) with the parent, but only if:
(i) The parent owns stock possessing more
than 50 percent of the voting power of at least one corporation, and, if
applicable,
(ii) Stock cumulatively
possessing more than 50 percent of the voting power of each of the
corporations, except the parent, is owned by the parent, one or more
corporations described in subparagraph (i), or one or more other corporations
that satisfy the conditions of this subparagraph.
(B) Any two or more corporations, if stock
possessing more than 50 percent of the voting power of the corporations is
owned, or constructively owned, by the same person.
(C) Any two or more corporations that
constitute stapled entities.
(i) For purposes
of this paragraph, "stapled entities" means any group of two or more
corporations if more than 50 percent of the ownership or beneficial ownership
of the stock possessing voting power in each corporation consists of stapled
interests.
(ii) Two or more
interests are stapled interests if, by reason of form of ownership,
restrictions on transfer, or other terms or conditions, in connection with the
transfer of one of the interests the other interest or interests are also
transferred or required to be transferred.
(D) Any two or more corporations, if stock
possessing more than 50 percent of the voting power of the corporations is
cumulatively owned (without regard to the constructive ownership rules of
paragraph (A) of subsection (10)(d)) by, or for the benefit of, members of the
same family. Members of the same family are limited to an individual, his or
her spouse, parents, brothers or sisters, grandparents, children and
grandchildren and their respective spouses.
(b)
(A) If,
in the application of subsection (a) of this section, a corporation is a member
of more than one commonly controlled group of corporations, the corporation
must elect to be treated as a member of only the commonly controlled group (or
part thereof) with respect to which it has a unitary business relationship. If
the corporation has a unitary business relationship with more than one of those
groups, it must elect to be treated as a member of only one of the commonly
controlled groups with respect to which it has a unitary business relationship.
This election must remain in effect until the unitary business relationship
between the corporation and the rest of the members of its elected commonly
controlled group is discontinued, or unless revoked with the approval of the
department.
(B) Membership in a
commonly controlled group must be treated as terminated in any year, or
fraction thereof, in which the conditions of subsection (a) of this section are
not met, except as follows:
(i) When stock of
a corporation is sold, exchanged, or otherwise disposed of, the membership of a
corporation in a commonly controlled group cannot be terminated, if the
requirements of subsection (a) of this section are again met immediately after
the sale, exchange, or disposition.
(ii) The department may treat the commonly
controlled group as remaining in place if the conditions of subsection (a) of
this section are again met within a period not to exceed two years.
(c) A taxpayer may
exclude some or all corporations included in a "commonly controlled group" by
reason of paragraph (a)(D) of this section by showing that those members of the
group are not controlled directly or indirectly by the same interests, within
the meaning of the same phrase in IRC section 482. For purposes of this
subsection, the term "controlled" includes any kind of control, direct or
indirect, whether legally enforceable, and however exercisable or
exercised.
(d) Except as otherwise
provided, stock is "owned" when title to the stock is directly held or if the
stock is constructively owned.
(A) An
individual constructively owns stock that is owned by any of the following:
(i) His or her spouse.
(ii) Children, including adopted children, of
that individual or the individual's spouse, who have not attained the age of 21
years.
(iii) An estate or trust, of
which the individual is an executor, trustee, or grantor, to the extent that
the estate or trust is for the benefit of that individual's spouse or
children.
(B) Stock
owned by a corporation, or a member of a controlled group of which the
corporation is the parent corporation, is constructively owned by any
shareholder owning stock that represents more than 50 percent of the voting
power of the corporation.
(C) In
the application of paragraph (a)(D) of this section (dealing with stock
possessing voting power held by members of the same family), if more than 50
percent of the stock possessing voting power of a corporation is, in the
aggregate, owned by or for the benefit of members of the same family, stock
owned by that corporation must be treated as constructively owned by members of
that family in the same ratio as the proportion of their respective ownership
of stock possessing voting power in that corporation to all of such stock of
that corporation.
(D) Except as
otherwise provided, stock owned by a partnership is constructively owned by any
partner, other than a limited partner, in proportion to the partner's capital
interest in the partnership. For this purpose, a partnership is treated as
owning proportionately the stock owned by any other partnership in which it has
a tiered interest, other than as a limited partner.
(E) In any case where a member of a commonly
controlled group, or shareholders, officers, directors, or employees of a
member of a commonly controlled group, is a general partner in a limited
partnership, stock held by the limited partnership is constructively owned by a
limited partner to the extent of its capital interest in the limited
partnership.
(F) In the application
of paragraph (a)(D) of this section (dealing with stock possessing voting power
held by members of the same family), stock held by a limited partnership is
constructively owned by a limited partner to the extent of the limited
partner's capital interest in the limited partnership.
(e) For purposes of the definition of a
commonly controlled group, each of the following must apply:
(A) "Corporation" means a subchapter S
corporation, any other incorporated entity, or any entity defined or treated as
a corporation (including but not limited to a limited liability
company).
(B) "Person" means an
individual, a trust, an estate, a qualified employee benefit plan, a limited
partnership, or a corporation.
(C)
"Voting power" means the power of all classes of stock entitled to vote that
possess the power to elect the membership of the board of directors of the
corporation.
(D) "More than 50
percent of the voting power" means voting power sufficient to elect a majority
of the membership of the board of directors of the corporation.
(E) "Stock possessing voting power" includes
stock where ownership is retained but the actual voting power is transferred in
either of the following manners:
(i) For one
year or less.
(ii) By proxy, voting
trust, written shareholder agreement, or by similar device, where the transfer
is revocable by the transferor.
(F) In the case of an entity treated as a
corporation under paragraph (e)(A) of this section (e), "stock possessing
voting power" refers to an instrument, contract, or similar document
demonstrating an ownership interest in that entity that confers power in the
owner to cast a vote in the selection of the management of that
entity.
(G) In the general
application of this section, if an entity may elect to be treated as a
partnership or as a corporation under the laws of this state (or under IRC
section 7701), and elects to be treated as a partnership, that entity must be
treated as a general partnership. If, however, contractual agreements, member
agreements, or other restrictions limit the power of some or all of the members
to participate in the vote of stock possessing voting power owned by that
entity (similar to the restrictions of limited partners in a limited
partnership), the department may permit or require that entity to be treated as
a limited partnership.
(f) The department may prescribe any
regulations as may be necessary or appropriate to carry out the purposes of
this section, including, but not limited to, regulations that do the following:
(A) Prescribe terms and conditions relating
to the election described by subsection (b), and the revocation
thereof.
(B) Disregard transfers of
voting power not described by paragraph (E) of subsection (e).
(C) Treat entities not described by paragraph
(B) of subsection (e) as a person.
(D) Treat warrants, obligations convertible
into stock, options to acquire or sell stock, and similar instruments as
stock.
(E) Treat holders of a
beneficial interest in, or executor or trustee powers over, stock held by an
estate or trust as constructively owned by the holder.
(F) Prescribe rules relating to the treatment
of partnership agreements which authorize a particular partner or partners to
exercise voting power of stock held by the partnership.
(G) Treat limited partners as constructive
owners of stock possessing voting power held by the limited partnership, in
proportion to their interest in the partnership.
Notes
Publications: Contact the Oregon Department of Revenue to learn how to obtain a copy of the publication referred to or incorporated by reference in this rule pursuant to ORS 183.360(2) and 183.355(1)(b).
Statutory/Other Authority: ORS 305.100
Statutes/Other Implemented: ORS 317.705
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