Rhode Island Code of Regulations
Title 280 - Department of Revenue
Chapter 20 - Division of Taxation
Subchapter 25 - Business Corporation Tax
Part 10 - Combined Reporting (280-RICR-20-25-10)
Section 280-RICR-20-25-10.8 - Unitary Business - Further Defined

Universal Citation: 280 RI Code of Rules 20 25 10.8

Current through September 18, 2024

A. Combined reporting in Rhode Island is required only in those instances in which a unitary business exits. A "unitary business," as defined in § 10.5 of this Part, means the activities of a group of two (2) or more corporations under common ownership that are sufficiently interdependent, integrated or interrelated through their activities so as to provide mutual benefit and produce a significant sharing or exchange of value among them or a significant flow of value between the separate parts. The term "unitary business" also refers to a single business entity or a commonly owned or controlled group of business entities that are sufficiently interdependent, integrated, and interrelated through their activities so as to provide synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts.

B. A determination under this regulation of whether an entity forms part of a combined group engaged in a unitary business with another entity is determined based on the facts and circumstances of each case. To the extent compatible with Rhode Island law, any legal or factual determination relevant to the existence or nonexistence of a unitary business will favor consistency with legal and factual determinations of other unitary states.

C. Under the Rhode Island General Laws, the term "unitary business" shall be construed to the broadest extent permitted under the United States Constitution. Therefore, if the C corporation meets either of the tests set forth in this § 10.8 of this Part - the "Interdependence of functions test" or the "Three unities test" - the corporation is deemed to be part of the unitary business.

D. Interdependence of functions test

1. One or more related business organizations engaged in business activity - entirely within this state, or both within and without this state - are unitary if there exists interdependence in their functions. This test adopts the decisional law of the United States Supreme Court with respect to the constitutional prerequisites for requiring unitary combination. The Court has variously expressed the constitutional test, holding that a finding of unitary relationship requires "contribution or dependency" between businesses; "substantial mutual interdependency" or "flow of value"; functional integration, centralized management, or economy of scale.

2. These concepts collectively express the Court's view of the constitutional parameters of required combination. Rhode Island's "interdependence of functions test" extends as far as, but no further than, the constitutional limits found by the Court.

3. Any of the following circumstances indicates that an interdependence of functions exists:
a. Same Line of Business. The principal activities of the entities are in the same general line of business. Examples of the same line of business are manufacturing, wholesaling, and retailing of tangible personal property; transportation or finance.
(1) In determining whether two entities are in the same general line of business, consideration shall be given to the nature and character of the basic operations of each entity, including, but not limited to, sources of supply, goods or services produced or sold, labor force, and market.

(2) Two entities are in the same general line of business when their operations are sufficiently similar to reasonably conclude that the entities are likely to depend upon or contribute to one another.

b. Vertically Structured Business. The principal activities of the entities are different steps of a vertically structured business. Illustrations of such different steps are exploration, mining and drilling, production, refining, marketing, and transportation of natural resources.

c. Strong Centralized Management. Centralized management may be evidenced by executive level policy made by a central person, board or committee and not by each entity in areas such as, but not limited to, purchasing, accounting, finance, tax compliance, legal services, human resources, health and retirement plans, product lines, capital investment and marketing.

d. Non-Arm's-Length Prices. Goods or services or both are supplied at non-arm's length prices between or among entities. Existence of arm's-length pricing between entities, however, does not indicate lack of unity.

e. Existence of Benefits from Joint, Shared or Common Activity. A discount, cost-saving, or other benefit can be shown to result from joint purchases, leaseholds, or other forms of joint, shared, or common activities between or among entities.

f. Relationship of Joint, Shared or Common Activity to Income-Producing Operations. In determining whether or not there exists a joint, shared, or common activity which is indicative of a unitary relationship, consideration shall be given to the nature and character of the basic operations of each entity. Such consideration shall include, but not be limited to, the entity's sources of supply, its goods or services produced or sold, and its labor force and market, to determine whether the joint, shared, or common activity is directly beneficial to, related to, or reasonably necessary to the income-producing activities of the unitary business.

g. Exercise of Control. The exercise of control by one entity over another entity.

E. Three unities test

1. This test adopts the state law test for unity followed in Butler Brothers.
a. Unity of ownership. "Unity of ownership" exists with respect to corporations when the fifty percent (50%) ownership test is met.

b. Unity of operations and unity of use. These unities exist if each entity that is to be included in the unitary business benefits or receives goods, services, support, guidance, or direction arising from the actions of common staff resources or common executive resources, personnel, third-party providers, or operations under the direction of such common resources. The tests are overlapping and the indicators of each test also indicate the existence of interdependence of functions. The existence or non-existence of the following factors will assist in the determination of whether unity of operations and use exist with respect to a combined group. The existence or non-existence of any one factor, by itself, is normally not determinative of whether there is a unity of operations and use. Factors that may be considered include, but are not limited to:
(1) Common purchasing;

(2) Common advertising;

(3) Common employees, including sales force;

(4) Common accounting;

(5) Common legal support;

(6) Common retirement plan;

(7) Common insurance coverage;

(8) Common marketing;

(9) Common cash management;

(10) Common research and development;

(11) Common offices;

(12) Common manufacturing facilities;

(13) Common warehousing facilities;

(14) Common transportation facilities;

(15) Common computer systems and support;

(16) Financing support;

(17) Common management, meaning that one or more officers or directors of the parent are also officers or directors of the subsidiary;

(18) Control of major policies. For example, the parent's board of directors require that it approve any acquisition by either the parent or subsidiary of any interest in any other company, or the parent's board of directors requires that it approve any lending in excess of a minimum set amount to any one or more of either the parent's or subsidiary's suppliers;

(19) Inter-entity transactions. For example, the subsidiary has licensed to parent the use of personal property developed by the subsidiary. The parent uses the property for its production;

(20) Common policy or training manuals. For example, the parent's employee handbook has been expanded to apply to all of a subsidiary's employees, or the subsidiary's employees are required to attend parent's employee training courses, or disciplinary procedures are the same for both the parent and subsidiary's employees - even if the appeal is only through their respective entities;

(21) Required budgetary approval. For example, the parent's board of directors requires that it approve the budget and expenditure plans of the subsidiary on a periodic basis; and

(22) Required capital asset purchases approval. For example, the parent's board of directors requires that it approve any capital expenditures by the subsidiary in excess of a minimum set amount.

2. The factors listed above refer to the relationship between a parent and subsidiary. For purposes of this regulation, the factors also refer to the relationship between a brother and sister entity.

F. Holding Companies. The test for a unitary business established by this § 10.8 of this Part applies in determining whether a holding company is included or excluded from a unitary business. If a holding company is organizationally between two unitary entities, such holding company does not negate unity of ownership.

1. Passive holding companies. A passive holding company that is in a commonly controlled economic enterprise and holds intangible assets that are used by the enterprise in a unitary business shall be deemed to be engaged in the unitary business, even though the holding company's activities are primarily passive.

2. A passive parent holding company that directly or indirectly controls one (1) or more operating company subsidiaries engaged in a unitary business shall be deemed to be engaged in a unitary business with the subsidiary or subsidiaries, even if the holding company's activities are primarily passive.

G. A commonly controlled group may be engaged in one or more unitary businesses. Therefore, a commonly controlled group may contain more than one combined group.

H. Newly formed entities

1. When a corporation forms another corporation, a presumption exists in favor of finding unity between the two corporations as of the date of formation. Any party may rebut such presumption by proving that the entities are not unitary or became unitary at a later date. For purposes of this § 10.8 of this Part, a newly formed entity includes - but is not limited to - the following:
a. A corporation that is formed through a corporate reorganization, a corporate divestiture, split-up, or split-off;

b. One (1) or more new subsidiaries is acquired and substantially all of the assets and operations of an existing division or operation are placed into or under the administrative or operational responsibility of the acquired corporation;

c. A partnership is created or formed; or

d. An existing corporation changes its form of doing business from one (1) organizational structure to a new organizational structure or merges into an existing or newly formed entity.

I. Newly acquired entities

1. When an entity acquires another entity so that the acquired entity is a member of a commonly controlled group for the first time, it shall be presumed that the acquiring and acquired entities are engaged in a unitary business for the purchaser's taxable year that includes the acquisition. If the purchaser is already a combined group member, the taxable year that includes the acquisition is the taxable year of the combined group.
a. The presumption may be rebutted by proving that the entities are not unitary. If the presumption is rebutted, then the entities shall not be considered unitary as of the date of acquisition, unless the evidence shows that unity was established as of another date.

b. In the succeeding reporting period after the first reporting period subsequent to an acquisition whereby an entity that is a member of a combined group acquires another entity, and for all reporting periods thereafter, a presumption of a unitary relationship exists. The presumption may be rebutted by proving that the entities are not unitary.

J. Examples: The following examples illustrate some of the principles set forth in this § 10.8 of this Part:

1. Kilo Corp., which has its headquarters in Delaware, engages in the United States - directly and indirectly, through subsidiaries and affiliates - in the petroleum business, ranging from exploration for petroleum reserves to production, refining, transportation, and distribution and sale of petroleum and petroleum products. Its business activities in Rhode Island include the retail sale of gasoline, oil, and other such products. The principal activities of the entities are different steps of a vertically structured business. Executive policy is set by a centralized management team in purchasing, accounting, legal services, and other areas. Entities in the group receive cost-savings from joint purchases. Thus, there is an interdependence of functions. For these and other reasons, its business is deemed to be unitary under Rhode Island statute. Combined reporting is therefore required.

2. Lima Corp. is located in Rhode Island and manufactures tin cans. A separate but related corporation is located in California and operates a sheep farm. The two corporations are under common ownership, but do not meet the "Interdependence of functions" or the "Three unities" tests described elsewhere in this § 10.8 of this Part - and are not part of a unitary business. Thus, a Rhode Island combined return must not be filed.

3. Mike Corp. is an Illinois corporation. Its home office is in Chicago, Illinois. It is engaged in the wholesale dry goods and general merchandise business, buying from manufacturers and others and selling to retailers only. There are separate wholesale distribution operations in seven states, including Rhode Island. Each wholesale distribution operation maintains its own stock of goods, serves a separate territory, has its own sales force, handles its own sales as well as solicitation, credit, and collection arrangements, and keeps its own books of account. Each wholesale distribution operation is a separate corporation and shares common ownership with Mike Corp. Also, Mike Corp. sells products to the wholesale distribution operations, indicating a flow of value among the members of the group. This factor and other factors indicate that the enterprise is unitary - and that, combined with members being in the same line of business, indicate a unitary relationship. Rhode Island combined reporting is therefore required.

4. Timco and some of its subsidiaries and affiliates are commonly owned and part of a combined group and are engaged in oil and oil-related businesses, including land, gas, pipeline, agricultural, and chemical activities. The oil and oil-related businesses are in the same general line of business; Timco sets policy and provides for legal services, human resources, marketing, and other functions for all subsidiaries and affiliates; there is common advertising, accounting, and computer systems among Timco and all subsidiaries and affiliates; and capital asset purchases cannot be made without prior approval by Timco. The group is deemed to be unitary due to functional integration, unity of operations and unity of use, and other reasons. However, Timco also has an affiliate in Rhode Island that is engaged in shipbuilding and ship repair. The shipbuilding and repair business stands alone; it sets its own policies and procedures, makes its own purchases, shares no common processes or procedures with Timco or other Timco units, and has virtually no involvement with Timco or Timco's other subsidiaries or affiliates. Thus, the shipbuilding and repair business is deemed not to be unitary with the Timco combined group and is therefore excluded from the group for purposes of Rhode Island mandatory unitary combined reporting.

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