6.5.1.3.i. Phased investments. -- In the case
of phased investments, physical, engineering, economic and functional
integration of the qualified capital addition property placed in service shall
typically be shown for all phases of the investment. The investment phases
shall be integrated with each other and typically shall be integrated with the
preexisting facility.
6.5.1.3.i.1. Physical
integration occurs where the qualified capital addition property is located in
or on the premises of a preexisting facility or in near proximity to, or
incorporated as part of, a preexisting production unit of the preexisting
facility.
6.5.1.3.i.2. Engineering
integration occurs where the qualified capital addition property is
deliberately designed to operate in coordination with other parts of the
preexisting production machinery and apparatus at the facility so as to improve
productivity, quality control or overall capacity of the manufacturing
operation at the facility.
6.5.1.3.i.3. Economic integration occurs
where the capital addition is designed to enhance the overall economic
efficiency of the preexisting manufacturing facility by either decreasing costs
per unit of production, or increasing net revenues.
6.5.1.3.i.4. Factors indicating functional
integration. -- The determination of whether or not the operations resulting
from phased investments and preexisting facilities are functionally integrated
(both between phases and between the preexisting facility and the property
represented by the phased investment) turns on the facts and circumstances of
the case. Several factors may evidence that the operations are functionally
integrated. A non-exclusive list of these factors is found below. Generally,
several functionally integrating factors shall exist in a given business,
although functional integration may exist as a result of few factors or even
one factor, if the factor or factors involved are particularly significant. In
determining whether functional integration exists, factors should not be
examined in isolation. Instead, it should be determined whether the factors
which are present, in combination, result in functional integration between
phased investment property and the preexisting facility. In addition, the
presence or absence of any one factor or any particular factors is not
necessarily determinative as to whether a functional integration exists,
although absence of all of the factors described in this subsection shall
generally result in a finding that functional integration does not exist.
6.5.1.3.i.4.1. Factors. -- A non-exclusive
listing of factors to be considered in determining whether business segments
are functionally integrated include the following:
(1) Functional integration may be indicated
where the capital addition, in conjunction with other preexisting assets at the
manufacturing facility is operated to send, receive, exchange or transfer
products, materials or goods between the qualified capital addition property
and production, storage, receiving, or shipping units of the preexisting
facility. The greater the quantity of these exchanges as a percentage of
overall exchanges, the more significant this factor becomes;
(2) Functional integration is indicated where
there is common management of both the qualified capital addition property and
the preexisting facility;
(3)
Functional integration is indicated where there is a common use or transfer of
technical information, know-how or research and development on a significant
scale between operations of the preexisting facility and operations engaged in
with the qualified capital addition property;
(4) A distribution system common to
operations represented by property acquired in investment phases and to one or
more production units of the preexisting facility for either production inputs
or production outputs is indicative of functional integration;
(5) Evidence of functional integration may be
found in use of a common distribution system under which inventory control and
accounting, storage, trafficking and transportation are controlled through a
common network for both the capital addition and the preexisting
facility;
(6) Evidence of
functional integration may be indicated by common purchasing or supply of
substantial quantities of products, services, intangibles, or the like from the
same source for both the preexisting facility and the qualified capital
addition property, where the supply results in a significant economy of scale,
or where the products, services, intangibles, or the like are not readily
available from other sources and are particularly important to each component
of the Taxpayer's business, both the preexisting facility and the qualified
capital addition property. For purposes of this provision the term
"intangibles" means and includes, but is not limited to, patents, copyrights,
formulas, processes, trade secrets, trademarks, and similar property;
(7) Centralized management may indicate
functional integration and exists when directors, officers or management
employees jointly participate in management decisions which significantly
affect the operations of the property resulting from phased capital investment
and the operations of the preexisting facility. The transfer of officers or
management employees between business segments may also provide evidence of
centralization of management;
(7a) The mere
presence of centralized management is not sufficient to support a finding that
the operations relating to the property acquired through phased investment and
of the preexisting facility are functionally integrated. Only those centralized
management activities which contribute to the integration of the operations
under consideration constitute a functionally integrating factor. Centralized
efforts to fulfill investment stewardship responsibilities, such as the
implementation of a uniform system of internal controls, or regulatory
reporting requirements, such as the establishment of centralized information
processing, are not determinative for this purpose;
(7b) When operations resulting from the
phased investment in qualified capital addition property and operations of the
preexisting facility are carried on in the same general line of business or
constitute steps in a vertically integrated enterprise, the centralized
management is more significant as a factor indicative of functional integration
than in other business contexts because of the opportunity the respective
operations have in making use through such central management of readily
transferable knowledge and expertise between operations, and developing
coordination between the operations;
(8) Other factors. -- Functional integration
of business segments are generally not be evidenced by such factors (alone or
in combination with other factors described by this subparagraph) as common
financing, advertising, labor relations, warehousing (in the absence of a
central distribution system), pension plans, insurance, and personnel
recruitment. However, these factors do not clearly demonstrate that functional
integration exists, they may, in combination with the factors described,
demonstrate sufficient additional evidence of functional integration to warrant
a finding that functional integration exists.
6.5.1.3.i.4.2. Factors accorded little
weight. -- Factors such as common legal services, accounting, tax
administration, and financial reporting shall generally be accorded little
weight in the determination of whether operations relating from property
acquired through phased investment and preexisting facilities are functionally
integrated.
6.5.1.3.i.4.3. The
presence of functional integration shall be presumptively shown by the presence
of the following:
(1) Same general line of
business: There is a strong presumption that the property acquired through
phased investment and the preexisting facility are functionally integrated when
the activities engaged in with the qualified capital addition property and the
preexisting facility are in the same general line of business.
(2) Steps in a vertical process: The
operations resulting from use of the property acquired through phased
investments and the operations of the preexisting facility are functionally
integrated when the qualified capital addition property and preexisting
facility are used in different steps in a vertically structured enterprise. For
example, a corporation which explores for and mines copper ores; concentrates,
smelts and refines the copper ores and fabricates the refined copper into
consumer products and distributes these products and is engaged in a vertically
integrated and functionally integrated 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 corporation's executive
offices.
6.5.1.3.i.4.4.
Phased investments in which qualified capital addition property placed in
operation is not used either in the same general line of business as the other
property attributable to other phases or in steps in a vertical process, are
presumptively non-integrated investments absent a determination that the
respective segments are functionally integrated.
6.5.1.3.i.4.5. In the event that one phase of
a capital addition is functionally integrated with a second phase, and the
second phase is functionally integrated with a third phase, the first, second
and third phases constitute functionally integrated phases notwithstanding the
fact that the first and third phases are not functionally integrated with each
other. The preceding sentence shall not apply where the second phase's
functional integration with one phase is not substantial viewed from the
perspective of either of the remaining phases. All three phases, in turn, shall
be treated as functionally integrated with the preexisting facility if any one
of the functionally integrated phases is functionally integrated with the
preexisting facility.
6.5.1.3.i.4.6. Where the Taxpayer asserts
that property acquired through phased investment and the preexisting facility
are functionally integrated, the Taxpayer has the burden of proof. Failure by
the Taxpayer to produce requested evidence which lies within the control of the
Taxpayer gives rise to a presumption that the evidence would be unfavorable if
provided.
