96-032
Response
February 13 1996
Request
Dear
Mr. Oveson:
Request
for Ruling Regarding Inclusion of XXXXX
XXXXX
(XXXXX) respectfully requests a ruling from the Utah State Tax Commission
regarding their treatment for tax purposes of the following transaction:
1. XXXXX (XXXXX) is a subsidiary of XXXXX. XXXXX has created a separate subsidiary,
XXXXX (XXXXX). Certain assets (office
building, etc.) will be transferred to XXXXX from XXXXX. XXXXX owns all of the stock of XXXXX.
2. XXXXX will own the XXXXX office building in
Salt Lake City and pay all maintenance and operating costs of the
facility. XXXXX will lease space in the
building to other members of the XXXXX group as needed.
3. XXXXX is and will continue to be considered
a member of the XXXXX unitary group from its inception.
4. For Utah state income tax reporting purposes
the following will apply:
a)
As a member of the XXXXX unitary group, XXXXX' s income to the extent derived from
unitary XXXXX companies, will be eliminated as intercompany transactions.
b)
XXXXX's gross receipts from such transactions will be eliminated from the sales
factor as intercompany transactions.
c)
Dividends paid by XXXXX to XXXXX will be eliminated as intercompany dividends.
5. Any income derived by XXXXX from the leasing
of property or the providing of services to unrelated third-parties will be
classified as business income subject to apportionment for Utah tax purposes.
Summary
of the parties and the Transaction
XXXXX
is the Utah parent corporation of a number of subsidiaries that produce styrene
monomer, polystyrene, as well as a number of other products in the
petrochemicals industry and packaging industry.
XXXXX's
address, federal identification number and Utah charter number are as follows:
XXXXX
One
of XXXXX's subsidiaries, XXXXX, owns an office building in Salt Lake City. The office building was newly constructed
and completed during XXXXX. Each of the
XXXXX group of companies occupy space in the office building.
For
a variety of business reasons XXXXX management deems it prudent to hold the
office building in a separate corporation.
These business reasons include:
1)
reduction of liability risk created by the facility to all other operating,
management, finance, and other companies affiliated with XXXXX through
isolation of that risk in one corporation;
2)
more effective management and utilization of the office building; and
3)
reduction of office administration costs.
To
facilitate the above, XXXXX management plans to transfer the office building
from XXXXX to XXXXX via an IRC Section 351 transfer. Space in the building will be leased to other members of the
XXXXX group. Lease payments will be
based upon the square footage of space occupied by each separate company and/or
other services provided by XXXXX. The
rates charged to lease space and/or provide services will be based upon those
obtainable from an unrelated party. A
separate subsidiary is needed to separate the management of the facility from
the many other management matters handled by XXXXX and to isolate the liability
which such a facility carries with it.
Analysis
of Law and Discussion of Authorities
Issue
1
Utah
Code Annotated, 1953 (UCA) Section 59-7-101 (27) defines a unitary business or
unitary group as “a group of corporations that: (a) are related through common
ownership; and (b) are economically interdependent with one another as
demonstrated by the following factors:
(I)
centralized management;
(ii)
functional integration;
(iii)
economies of scale.
UCA
Section 59-7-101 (6) defines common ownership as “the direct or indirect
control or ownership of more than 50% of the outstanding voting stock of:
(I)
a parent-subsidiary controlled group as defined in Section 1563, Internal
Revenue Code except that 50% shall be substituted for 80%;
(ii)
a brother-sister controlled group as defined in Section 1563, Internal Revenue
Code except that 50% shall be substituted for 80%; or
(iii)
three or more corporations each of which is a member if a group of corporations
described in Subsection (2)(a)(I) or (2)(a)(ii), and one of which is:
(A)
a common parent corporation included in a group of corporations described in Subsection
(2)(a)(I); and
(B)
included in a group of corporations described in Subsection (2)(A)(ii).
From
a practical, economic, and business standpoint, the proposed transaction does
nothing more than shift the corporate ownership of an office building from one
member of the unitary group, XXXXX, to another, XXXXX. The XXXXX unitary business will not
otherwise change, notwithstanding the fact that XXXXX will charge the various
XXXXX companies rent on their respective office space.
Inasmuch
as XXXXX is 100% owned by XXXXX, it will meet the common ownership test. XXXXX's assets will consist of the office
building. XXXXX's income will consist
mainly of lease income derived from XXXXX unitary companies. Such activity will be unitary with the
activities of the XXXXX unitary group members since the space leased will be
used by the unitary group in the production of business income, and without
access to such office space the unitary group would not be able to efficiently
management the production of their various products. Accordingly, the XXXXX companies will clearly be dependent upon
XXXXX for such office space.
Additionally,
XXXXX will be managed by XXXXX executives, and utilize various XXXXX resources such
as common accounting systems, legal services, insurance services, etc. We believe that the above factors clearly
establish that XXXXX will be functionally integrated with the XXXXX companies,
and will continue to be considered a part of the XXXXX unitary group.
Issue
2
a)
UCA Section 59-7-402 (1) provides that any unitary group that has a member(s)
which does business in the state of Utah shall file a combined report showing
the combined net income of the group. Utah
Rule R865-6-4F discusses the requirements for affiliated corporations filing a
consolidated return in Utah. Section J
of the rule provides that no gain or loss is recognized on intercompany
transactions, other than provided elsewhere in the rule. Section J.3 provides that supporting
schedules should be filed with the consolidated return, including a column
showing the intercompany eliminations and adjustments.
Although
Rule R865-6-4F discusses the requirements for filing a Utah consolidated
return, we believe that the same principles regarding the treatment of
intercompany transactions apply in a unitary report context as well.
As
applied to the instant case, we believe the logic of Rule R865-6-4F supports a
finding that business income derived by XXXXX from other members of the XXXXX
group should be eliminated from the computation of unitary business income,
given its intercompany character.
b)
Based on the statutory support shown in a), it follows that any intercompany
gross receipts (i.e., rent paid from XXXXX companies to XXXXX) should be
excluded from the combined sales factor of the unitary group for Utah purposes.
c)
In addition to the statutory support shown in a), the 1989 instructions for
filing Form TC-20 provide that in the preparation of a combined return, any
intercompany dividends are excluded from the total unitary net income. In combination, these factors support a
finding that any intercompany dividends paid by XXXXX to XXXXX should be excluded
from the computation of the XXXXX group's unitary business income.
Issue
3
UCA
Section 59-7-302(1) defines “business income” as income arising from
transactions and activity in the regular course of the taxpayer's trade or
business and includes income from tangible and intangible property if the
acquisition, management, and disposition of the property constitutes integral
parts of the taxpayer's regular trade or business operations. Utah Rule R865- 6-8F(A) further elaborates
on this definition by providing that the income of the taxpayer is business
income unless clearly classifiable as nonbusiness income, and that the
definition of nonbusiness income shall be narrowly construed.
Any
assets held by XXXXX are a direct result of or in support of the business of
the XXXXX group. Consequently, it would follow that any income generated by
these assets would be considered business income under the above definition.
The building was acquired and is being utilized by the XXXXX companies as
integral parts of the XXXXX unitary business and will continue to be such as a
part of XXXXX. While the form in which the XXXXX group owns the office building
will change, the substance or manner in which the building is employed by the
XXXXX group will remain unchanged.
Accordingly,
it follows that the business character of any income derived by any of the
XXXXX operating companies from leasing of excess building space to unrelated
third parties will transfer to XXXXX when and if XXXXX generates such income
from outside parties.
If
you have any questions or if we can provide you with any additional
information, please call XXXXX. We
appreciate your consideration of this request at your earliest convenience.
Sincerely,
XXXXX
XXXXX
RE:
Advisory Opinion - Taxation of new subsidiary
Dear
XXXXX,
We
have received your request for an advisory opinion regarding taxation of a new,
wholly owned subsidiary, “XXXXX.” The
subsidiary is being formed to manage financing for other members of the XXXXX
group. We find as follows:
1. Based on the facts presented, XXXXX is a
part of the XXXXX unitary group under criteria set out in sections 59-7-101 (7)
and (28) of the Utah Code.
2. Under section 59-7-404 of the Utah Code, a
unitary group should make certain intercompany adjustments. It is appropriate to eliminate intercompany
income and expenses. However, since
these items generally offset on another on a dollar for dollar basis, there is
usually no net difference in bottom line income. Further, as suggested in your letter, the company should also
eliminate the dividends received from subsidiaries whose income and factors are
included in the combined report, since the alternative would result in double
inclusion of the dividend paying subsidiary's income in the appropriate tax
base. Finally, section 59-7-404.5 of
the Utah Code requires elimination of intercompany sales for purposes of
determining the sales factor and elimination of intercompany rents for purposes
of determining the property factor.
3. We agree that income derived from rents as
described in your letter constitute business income.
Please
let us know if we can be of further assistance.
For
the Commission.
Alice
Shearer
Commissioner
XXXXX
Mr.
Val Oveson Chairman
Utah
State Tax Commission
210
North 1950 West
Salt
Lake City, Utah 84134
Dear
Mr. Oveson:
Request
for Ruling Regarding Inclusion of XXXXX
XXXXX
(XXXXX) respectfully requests a ruling from the Utah state Tax Commission
regarding their treatment for tax purposes of the following transaction:
1. XXXXX will create one or more separate
subsidiaries (XXXXX) to provide and manage financing for members of the XXXXX
group. XXXXX or its operating
subsidiaries will own all of the voting stock of XXXXX.
2. Financing services provided by XXXXX will
include the borrowing and investing of funds for and lending of funds to
members of the XXXXX group as needed.
3. XXXXX will be considered a member of the
XXXXX unitary group from its inception.
4. For Utah state income tax reporting purposes
the following will apply:
a) As a member of the XXXXX unitary group, XXXXX' s
income to the extent derived from unitary XXXXX companies, will be eliminated
as intercompany transactions.
b) XXXXX's gross receipts from such transactions will be
eliminated from the sales factor as intercompany transactions.
c) Dividends paid by XXXXX to XXXXX or its operating subs
will be eliminated as intercompany dividends.
5. Any income derived by XXXXX from the investment
or lending of its assets to unrelated third parties will be classified as
business income subject to apportionment for Utah tax purposes.
Summary
of the parties and the Transaction
XXXXX
is the Utah parent corporation of a number of subsidiaries that produce styrene
monomer, polystyrene as well as a number of other products in the
petrochemicals industry and the packaging industry.
XXXXX's
address, federal identification number and Utah charter number are as follows:
XXXXX
Currently
the XXXXX group of companies borrow money on a separate company basis. Each separate company negotiates their own
credit terms, credit line amounts, etc. resulting in a number of different
borrowing rates and conditions. Each
company also independently invests any excess funds temporarily on hand.
For
a variety of business reasons XXXXX management deems it prudent to centralize
the financing process. These business
reasons include:
1)
reduction of borrowing costs through consolidation of all loans and debt
obligations into one or more large centralized loans with a much lower
effective interest rate;
2)
creation of more effective management of funds investment through combination
of all investment activities into one entity;
3)
reduction of administration costs through administering fewer loans;
4)
creation of more efficient and effective cash flow through consolidation of
money management;
To
facilitate the above, XXXXX management plans to form one or more new
subsidiaries (XXXXXs) to borrow, loan and invest money. Initial financing will be acquired by XXXXX
and then loaned to XXXXX. A separate
subsidiary is needed to separate the management of finances from the many other
management matters handled by XXXXX.
More than one XXXXX may be required due to minority ownership of certain
XXXXX operating subsidiaries. XXXXX
will then loan money to the various other subsidiaries of XXXXX and charge
interest at a rate comparable with that at which the companies could obtain
financing in the open market.
Analysis
of Law and Discussion of Authorities
Issue
1
Utah
Code Annotated, 1953 (UCA) Section 59-7-101 (27) defines a unitary business or
unitary group as “a group of corporations that: (a) are related through common
ownership; and (b) are economically interdependent with one another as
demonstrated by the following factors:
(I)
centralized management;
(ii)
functional integration;
(iii)
economies of scale.
UCA
Section 59-7-101 (6) defines common ownership as “the direct or indirect
control or ownership of more than 50% of the outstanding voting stock of:
(I)
a parent-subsidiary controlled group as defined in Section 1563, Internal
Revenue Code except that 50% shall be substituted for 80%; or
(ii)
a brother-sister controlled group as defined in Section 1563, Internal Revenue
Code except that 50% shall be substituted for 80%; or
(iii)
three or more corporations each of which is a member if a group of corporations
described in Subsection (2)(a)(I) or (2)(a)(ii), and one of which is:
(A)
a common parent corporation included in a group of corporations described in
Subsection (2)(a)(I); and
(B)
included in a group of corporations described in Subsection (2)(A)(ii).
From
a practical, economic, and business standpoint, the creation of XXXXX does
nothing more than shift the corporate obligation of debt from various members
of the unitary group to one member of the group, XXXXX. The XXXXX unitary business will not
otherwise change, notwithstanding the fact that XXXXX will charge the various
XXXXX companies interest on their respective borrowings.
In
that XXXXX will be nearly 100% owned by XXXXX, it will meet the common
ownership test. XXXXX's assets will consist of the notes receivable from the
other members of the group and potentially some other investments. XXXXX's income will consist mainly of
interest income derived from XXXXX unitary companies. Such activity will be unitary with the activities of the XXXXX
unitary group members since the money loaned will be used by the unitary group
in the production of business income, and without access to such financing the
unitary group would not be able to produce their various products. Accordingly, the XXXXX companies will
clearly be dependent upon XXXXX for such financing.
Additionally,
XXXXX will be managed by XXXXX executives, and utilize various XXXXX resources
such as common accounting systems, legal services, insurance services,
etc. We believe that the above factors
clearly establish that XXXXX will be functionally integrated with the XXXXX
companies, and will be considered a part of the XXXXX unitary group from
XXXXX's inception.
Issue
2
a)
UCA Section 59-7-402 (1) provides that any unitary group that has a member(s)
which does business in the state of Utah shall file a combined report showing
the combined net income of the group. Utah Rule R865-6-4F discusses the
requirements for affiliated corporations filing a consolidated return in
Utah. Section J of the rule provides
that no gain or loss is recognized on intercompany transactions, other than
provided elsewhere in the rule.
Section J.3 provides that
supporting
schedules should be filed with the consolidated return, including a column
showing the intercompany eliminations and adjustments.
Although
Rule R865-6-4F discusses the requirements for filing a Utah consolidated
return, we believe that the same principles regarding the treatment of
intercompany transactions apply in a unitary report context as well.
As
applied to the instant case, we believe the logic of Rule R865-6-4F supports a
finding that business income derived by XXXXX from other members of the XXXXX
group should be eliminated from the computation of unitary business income,
given its intercompany character.
b)
Based on the statutory support shown in a), it follows that any intercompany
gross receipts (i.e., interest paid from XXXXX companies to XXXXX) should be
excluded from the combined sales factor of the unitary group for Utah purposes.
c)
In addition to the statutory support shown in a), the 1989 instructions for
filing Form TC-20 provide that in the preparation of a combined return, any
intercompany dividends are excluded from the total unitary net income. In combination, these factors support a
finding that any intercompany dividends paid by XXXXX to XXXXX should be
excluded from the computation of the XXXXX group's unitary business income.
Issue
3
UCA
Section 59-7-302(1) defines “business income” as income arising from
transactions and activity in the regular course of the taxpayer's trade or
business and includes income from tangible and intangible property if the
acquisition, management, and disposition of the property constitutes integral
parts of the taxpayer's regular trade or business operations. Utah Rule R865- 6-8F(A) further elaborates
on this definition by providing that the income of the taxpayer is business
income unless clearly classifiable as nonbusiness income, and that the
definition of nonbusiness income shall be narrowly construed.
Any
assets held by XXXXX including the loans to other subsidiaries and instruments
used to invest excess funds are a direct result of or in support of the
business of the XXXXX group. Consequently, it would follow that any income
generated by these assets would be considered business income under the above definition. The loans were acquired and utilized by the
XXXXX companies as integral parts of the XXXXX unitary business and will
continue to be such as a part of XXXXX.
While the form in which the XXXXX group obtains and manages financing
will change, the substance or manner in which the financing is employed by the
XXXXX group will remain unchanged.
Accordingly,
it follows that the business character of any income derived by any of the
XXXXX operating companies from investment of excess funds in unrelated third
party instruments will transfer to XXXXX when and if XXXXX generates such
income from outside parties.
If
you have any questions or if we can provide you with any additional
information, please call XXXXX. We
appreciate your consideration of this request at your earliest convenience.
Sincerely,
XXXXX
XXXXX
RE:
Advisory Opinion - Taxation of new subsidiary
Dear
XXXXX,
We
have received your request for an advisory opinion regarding taxation of a new,
wholly owned subsidiary, “XXXXX.” The
subsidiary is being formed to manage financing for other members of the
XXXXX. We find as follows:
1. Based on the facts presented, XXXXX is a part
of the XXXXX unitary group under criteria set out in sections 59-7-101(7) and
(28) of the Utah Code.
2. Under section 59-7-404 of the Utah Code, a
unitary group should make certain intercompany adjustments. It is appropriate to eliminate intercompany
income and expenses. However, since
these items generally offset on another on a dollar for dollar basis, there is
usually no net difference in bottom line income. Further, as suggested in your letter, the company should also
eliminate the dividends received from subsidiaries whose income and factors are
included in the combined report, since the alternative would result in double
inclusion of the dividend paying subsidiary' s income in the appropriate tax
base. Finally, section 59-7-404.5 of
the Utah Code requires elimination of intercompany sales for purposes of
determining the sales factor and elimination of intercompany rents for purposes
of determining the property factor.
3. With regard to the issue of whether XXXXX's
income is business income for purposes of determining income apportionment,
income received from members of the unitary group from intercompany loans
constitute business income. However,
with regard to the investment income, we decline to agree to the broad
statement in your letter. If the
investments constitute short term investments of working capital or investments
that service operational function, the income qualifies as business
income. However, XXXXX may have
investment income that arises from transactions that are not sufficiently
related to the business for apportionment under U.S. Supreme Court
guidelines. Therefore. whether income
arising from XXXXX's various investment transactions is business income depends
on the circumstances surrounding the investment in question. We invite you to work with our Auditing
Division to resolve those questions as they arise.
Please
let us know if we can be of further assistance.
For
the Commission,
Alice
Shearer
Commissioner