Current through Register Vol. 49, No. 13, September 23, 2024
Subpart
1.
Definitions of corporation and United States.
The term "corporation" does not include an S corporation. The
term "United States" includes any state of the United States, the District of
Columbia, the Commonwealth of Puerto Rico, any possession of the United States,
or any political subdivision of any of the foregoing.
Subp. 2.
Unitary business.
"Unitary business" means business activities or operations
which result in a flow of value between them. The term is applied to a flow
either between multiple entities that are related through common ownership or
within a single legal entity, and without regard to whether each entity is a
sole proprietorship, a corporation, a partnership, or a trust. Flow of value is
determined by reviewing the totality of facts and circumstances of business
activities and operations.
Some activities that evidence a flow of value between related
corporations include the following: assisting in the acquisition of equipment,
assisting with filling personnel needs, lending funds or guaranteeing loans,
interplay in the area of corporate expansion, providing technical assistance,
supervising, providing general operational guidance, providing overall
operational strategic advice, or common use of trade names and patents. Flow of
value must be more than the flow of funds arising out of passive investment and
consists of more than occasional financial oversight.
Transactions separately accounted for may evidence a flow of
value. The fact that a business uses or can use a separate accounting system,
including, but not limited to, separate accounting between divisions of a
single legal entity, between multiple entities under common ownership, on an
arm's length basis, on a geographical basis, or by business function, does not
determine whether a corporation is operating as a unitary business.
Subp. 2a.
Presumption of
unity.
A. Business activities or
operations carried on by more than one corporation related through common
ownership are presumed to be unitary in nature when:
(1) the business activities or operations are
of mutual benefit, dependent upon, or contributory to one another,
individually, or as a group; or
(2)
there is both unity of operation as evidenced generally by staff functions such
as centralized advertising, accounting, financing, management, or centralized,
group, or committee purchasing; and
(3) there is unity of use as evidenced
generally by line functions, centralized executive force, and general system of
operation.
B. The
unitary nature of the business activities or operations is presumed when
contributions to income result from functional integration, centralized
management, and economies of scale.
(1)
Examples of functional integration are centralized manufacturing, warehousing,
accounting, legal staff, personnel training, financing, retirement plans,
corporate-level tax return preparation, or centralized, group, or committee
purchasing.
(2) Examples of
centralized management are common officers or directors, exchange of personnel,
frequent communication between management of the corporations, centralized
administrative services, companywide payroll processing, common insurance
plans, or where the parent must approve of major financial decisions.
(3) Examples of economies of scale are
commingling of funds, providing centralized services, or elimination of
interest expense attributable to common financing.
All of the examples are not needed to show functional
integration, centralized management, or economies of scale.
C. All of the examples in item A,
subitems (2) and (3), are not needed to show the unity of operation or unity of
use. The presumptions of unity stated in item A, subitem (1), are independent
from the presumption of unity stated in item A, subitems (2) and (3). The mere
ownership of as much as 100 percent of the stock of another corporation does
not, in the absence of other indicia of a unitary business, mean that the
business of the group is unitary in nature. The presence of any one of the
factors contained in subparts
2a and
5 is evidence that the
activities of the corporations constitute a unitary trade or business. The
presence of any one of the factors contained in subparts
3 and
4 creates a presumption that
the activities of the corporations constitute a unitary trade or
business.
Subp. 3.
Horizontal type of business.
Business activities or operations carried on by more than one
corporation, related through common ownership, are generally unitary when the
activities of the corporations are in the same general line of business and
exhibit functional integration and economies of scale.
For example, separately incorporated grocery stores, related
through common ownership, will usually be engaged in a unitary trade or
business if they are functionally integrated, and have centralized management
and economies of scale.
Subp.
4.
Steps in a vertical process.
Business activities or operations carried on by more than one
corporation, related through common ownership, are unitary in nature when the
various members are engaged in a vertically structured enterprise.
For example, assuming that the common ownership requirement is
met, a trade or business that is functionally integrated and which benefits
from centralized management and controlled interaction which involves the
exploration and mining of copper ore by one of the related corporations; the
smelting and refining of the copper ore by another of the related corporations;
and the fabrication of the refined copper into consumer products by another of
the related corporations, is unitary in nature.
Subp. 5.
Centralized management.
Centralized management in determining the policies of each
corporation in a group of corporations that are related through common
ownership indicates that the corporations, which might otherwise be considered
to be carrying on separate trades or businesses, are engaged in a unitary trade
or business.
The fact that the executive officers of one of the corporations
in a group of corporations are normally involved in determining the policies
respecting the business activities of the other corporations in the group
indicates that the group of corporations is carrying on a unitary trade or
business.
A finding of centralized management is not supported merely by
showing that the requisite ownership percentage exists. When a more than
incidental economic benefit accrues to a group because such ownership improves
its financial position, it indicates that the group is carrying on a unitary
trade or business. Both centralized management authority and the exercise of
that authority must exist in order to justify a conclusion that unity of use is
present.
Subp. 6.
Common ownership.
Common ownership does not exist unless the corporation is one
which is a member of a group of two or more corporations and more than 50
percent of the voting stock of each member is directly or indirectly owned by a
common owner or by common owners, either corporate or noncorporate, or by one
or more of the member corporations of the group. The term "common owner"
includes the constructive ownership of stock by related taxpayers as provided
by the Internal Revenue Code of 1986, section 267, as amended through December
31, 1999. Examples of common ownership are:
A. Corporation P owns 51 percent of the
voting stock of corporation R1 and corporation R1 owns 51 percent of the voting
stock of each of corporations R2 and R3. Common ownership exists among P, R1,
R2, and R3.
B. Corporation P owns
51 percent of the voting stock of corporation R1, corporation R1 owns 49
percent of the voting stock of corporation R2 and corporation R2 owns 51
percent of the voting stock of R3. Common ownership exists among P and R1 and
will be identified as group A. Common ownership exists among R2 and R3 and will
be identified as group B. There is no common ownership between group A and
group B.
Subp. 7.
Examples.
The provisions of subparts
1 to
6 may be illustrated by the
examples in items A to C.
A. Sales
corporation owns 51 percent of the outstanding voting stock in each of four
subsidiaries: refining corporation, drilling corporation, transport
corporation, and research corporation. Sales corporation markets and sells
petroleum products in the United States and abroad. Some of the petroleum
products are obtained from refining corporation which acquires some of the
crude oil from drilling corporation. Transport corporation operates pipeline
facilities to transport crude oil from drilling corporation's storage
facilities to refining corporation's refineries. Research corporation conducts
research and development for both sales and refining corporations. Since the
corporations are operating a vertically integrated business and since there is
common ownership, the five corporations are conducting a unitary
business.
B. Corporation A owns 60
percent of the outstanding voting stock in each of three corporations: B, C,
and D. Corporation B, in turn, owns 100 percent of the outstanding voting stock
in corporation E. Corporation A is primarily engaged in operating multiline
department stores in Minnesota and other midwestern states. Corporation B
operates a chain of department stores in the northwestern portion of the United
States. B's stores sell only high quality, top grade consumer items.
Corporation C operates a chain of discount stores throughout the southwestern
portion of the United States. Corporation D is a finance company, handling all
of the consumer credit and financing arrangements of purchases at the stores
owned by corporations A, B, and C. Corporation E is the purchasing agent for
corporations A, B, and C and maintains warehouses for the stores' inventories.
Corporation A provides management services for all of the other corporations
and maintains overall control in determining the policies respecting the
primary business activities of the other corporations, including their
budgetary and financial affairs. All of these corporations are engaged in the
conduct of a unitary business since they are operating a horizontally
integrated business and since they have common ownership.
C. Corporation K was incorporated in 1945 and
thereafter was engaged primarily in activities connected with the manufacture
and sale of canned goods. In 1960, K embarked upon a diversification campaign
designed to insulate its profits from fluctuations in the demand for canned
goods. One hundred percent of the voting stock of corporation L was acquired.
Corporation L operated a chain of department stores throughout the United
States. In 1961, K purchased 80 percent of the voting stock of corporation M
which was engaged primarily in the manufacture and sale of household goods. In
1962, K acquired 75 percent of the voting stock of corporation N which
developed and marketed computer software and programs. There was no significant
flow of goods between any of the corporations. While these subsidiaries were
relatively autonomous in their day-to-day operations, each subsidiary did not
operate as a distinct business enterprise at the level of full-time management.
Corporation K involved itself in policy determinations respecting the primary
business activities of all the corporations. The subsidiaries were required to
submit annual budgets to K for approval. Capital expenditures in excess of
$500,000 needed approval from K. All of the financing arrangements for the
subsidiaries were made by or with the approval of K's management team which
authorized and directed intercompany loans when feasible. Tax matters were
supervised by K's tax department which prepared the subsidiaries' federal
income tax returns. Corporation K also performed centralized warehousing and
accounting functions for itself and its subsidiaries. A uniform system of
inventory control for corporation K and the subsidiaries was developed and
managed by corporation N. Due to the control that corporation K exerted over
policy determinations respecting the primary business activities of the
subsidiaries and the integration and interdependence occasioned by the
centralization of various business functions, all of the corporations are
engaged in a unitary business.
Statutory Authority: MS s 270.06;
270C.06;
290.52
