CAT 2005-05 - Commercial Activity Tax: Application of "Common
Owners" and Joint Ventures - Issued September, 2005; Revised
March, 2006
This rule clarifies the application of “common owners.”
This rule is now final and
effective. Please direct any questions to the
Commercial Activity Tax Division of the Ohio Department of
Taxation at 1-888-722-8829.
Rule 5703-29-02 Application of “common owners” and
joint ventures.
(A) Consolidated elected and combined taxpayer groups under
sections 5751.011 and 5751.012 of the Revised Code are
required to file as one taxpayer if persons in the group meet
certain requirements. One of those requirements is that the
persons have a specified portion of the value of their
ownership interest owned and controlled by “common owners”
included in the group. In addition to an ownership interest,
the higher-tiered entity must have the ability through its
voting rights to control the operations of the lower-tiered
entities at each level of the vertical chain. There is a
different “control test” for combined groups than for
consolidated elected groups. For combined groups, the
“control test” is that the higher-tiered entity must own more
than 50 percent of the lower-tiered entity at each level of
the vertical chain and effectively, through its ownership,
possess the voting rights to be able to control the
lower-tiered entity. For consolidated elected groups, the
“control test” is that the higher-tiered entity must own at
least 50 percent or at least 80 percent of the lower-tiered
entity at each level of the vertical chain and effectively,
through its ownership, possess the voting rights to be able
to control the lower-tiered entity. For purposes of this
paragraph, “effectively” means that the entity has the
ability to actually control the operations of the
lower-tiered entity and is not required to be part of another
combined or consolidated group.
(B)(1) Subject to paragraphs (B)(2), (C), and (D) of this
rule, if a person owns and controls, directly or
constructively through related interests, more than 50
percent of the value of the ownership interest of another
person, the first person is a common owner of the second
person, and those persons must be members of a combined
taxpayer group unless they elect to be members of a
consolidated elected taxpayer group. Consolidated elected
taxpayers may choose the 50 percent or more ownership test or
the 80 percent or more ownership test, and choose to either
include or exclude all foreign entities. Common owners are
not limited to business organizations but also include
individuals, trusts, and estates. Further, “common owner”
includes an entity that is not a “person” as that term is
defined in division (A) of section 5751.01 of the Revised
Code. Not being a “person” will not prevent such an entity
from making an election to be in a consolidated elected group
as an owner, thereby allowing the entity to exclude receipts
between members. If a person has common ownership of persons
who report as a consolidated elected taxpayer group as well
as persons who are in a combined taxpayer group, the common
owner is to register as part of both groups but must report
its taxable gross receipts as part of the consolidated
elected taxpayer group.
(2) A de minimis test applies in determining whether
an individual, a trust, or an estate must be included as a
common owner in a combined or consolidated elected taxpayer
group. If the individual, trust, or estate has less than
$4,500 in taxable gross receipts for the calendar year, the
individual, trust, or estate will not be required to be
registered as part of a combined or consolidated elected
taxpayer group for that year. However, the individual, trust,
or estate is still a common owner for all purposes of the
commercial activity tax.
(C) There are general rules that are to be applied when
determining the common ownership of any person. These
are applicable to all persons defined in division (A) of
section 5751.01 of the Revised Code.
(1) The determination of whether a person owns and controls
another person constructively through related interests shall
be made using a vertical ownership test, based on voting
rights, pursuant to paragraph (D) of this rule. Attribution
rules under the Internal Revenue Code, such as attribution
between a husband and wife, do not apply. The vertical chain
shall continue as long as the ownership test is satisfied,
separately or in the aggregate, by any one or more members of
the group.
(2) In the event a person or a group of persons believes that
the uniqueness of its organizational structure justifies that
“common ownership” exists despite the strict application of
this rule, the person may file in writing with the Tax
Commissioner a request for a finding that common ownership
exists. Such request must be made prior to the end of the
reporting period for which the request is to become
effective. The person making this request has the burden of
proof to show that common ownership exists and must provide
the commissioner with detailed probative evidence in support
of its position.
(3) If the ownership test is met for any part of the calendar
quarter or calendar year, as applicable, the group must
include the taxable gross receipts of that person for the
portion of the tax period in which the ownership test was
met. A person who no longer meets the ownership test of the
group shall report taxable gross receipts only through the
date it qualifies as a member of that group. The person shall
report all taxable gross receipts during the remaining
portion of the tax period either as a separate taxpayer, as a
member of a combined taxpayer, or as a member of another
consolidated elected group if it satisfies the requirements
with respect to such group.
(4)(a) When an election under section 5751.011 of the Revised
Code is made, the election remains in place for at least
eight calendar quarters. During that time the composition of
the consolidated elected taxpayer group is only changed when
a person falls within or without the elected ownership
threshold. At the end of the eight calendar quarters, the
consolidated elected group must notify the commissioner in
writing if it does not wish to renew its election. In the
absence of such notification, the election to consolidate
automatically renews for another eight calendar quarters.
(b) A separate taxpayer or a combined taxpayer may make an
election under section 5751.011 of the Revised Code at any
time after it has registered. However, once the election is
made, it remains in place for at least eight calendar
quarters. Such election is effective prospectively unless a
retroactive application has been requested by the taxpayer
and approved by the Tax Commissioner.
(D)(1) In the case of a corporation, the valuation is
calculated with respect to only those classes of stock having
voting rights. Interests held in a corporation
are attributable to any shareholder in the corporation based
on the percentage of total value of the voting equity
interests in the corporation owned and controlled by that
shareholder.
(2) In the cases of partnerships and entities with membership
interests (e.g., a limited liability company) or beneficial
interests (e.g., business trusts, or other unincorporated
business interests), the value is calculated with respect to
the fair market value of the voting interest in those
entities.
(3) In the case of a limited partnership, only the value of
general partnership interests will be considered.
(4)(a) In the case of a trust to which section 677 of the
Internal Revenue Code applies, commonly referred to as a
“grantor trust,” the grantor is the common owner of the trust
described in that section.
(b) In the case of a trust to which section 678 of the
Internal Revenue Code applies, the person, other than the
trust, described in section 678 of the Internal Revenue Code
is the common owner of the trust.
(c) In the case of a trust treated as a corporation for
federal income tax purposes, including but not limited to
real estate investment trusts and business trusts, the
beneficiaries are treated as shareholders and the common
ownership rules for corporations apply.
(d) In the case of any other trust, there is no common owner
unless paragraph (C)(2) of this rule applies.
(5) In the case of two or more persons having an interest in
an unincorporated business, including but not limited to
rental property, where there is no formal partnership
agreement between the persons, an implied partnership is
deemed to exist. One implied partnership exists for all such
commonly owned and controlled interests. The implied
partnership is a separate entity for purposes of the
commercial activity tax and the ownership interests are
determined as follows:
(a) In the case where the owners file a federal income tax
form 1065, paragraphs (D)(5)(b) and (D)(5)(c) do not apply,
and the ownership and control is based on the capital account
contribution as reported at the end of the tax filing
occurring in the previous calendar year.
(b) If, for some reason, the owners are not required to file
a federal income tax form 1065, in the case of rental
property, the common ownership is based on the deed to the
property. If two persons are listed on the deed, the property
is considered to be owned and controlled 50 percent by each
of those persons. The burden is on those persons to prove an
alternate ownership structure.
(c) If paragraph (5)(b) does not apply, the common ownership
of the implied partnership is based on the number of persons
in the group. The burden is on those persons to prove an
alternate ownership structure.
(E) If a person elects to consolidate with all others in
which it has at least a 50 percent ownership and control
interest, that person must include all taxable gross receipts
of a joint venture so owned and controlled unless there is
another 50 percent owner of the joint venture that makes the
50 percent election to consolidate. In other words, if one 50
percent owner of a joint venture makes an 80 percent election
to consolidate with others or decides to be part of a
combined taxpayer group or be a single taxpayer, and the
other 50 percent owner makes the 50 percent election, that
other owner is required to include all the taxable gross
receipts of the joint venture except for any receipts the
joint venture has from that other owner. If both 50 percent
owners make the 50 percent election, the taxable gross
receipts of the joint venture, after subtracting any receipts
between the owner and the joint venture, are split evenly
between the two consolidated elected taxpayer groups. Each of
the joint venture owners making the 50 percent election are
only allowed to exclude those receipts the joint venture
entity has from that owner. In addition, each owner cannot
exclude receipts the joint venture has from the other owner
since the other owner is not in the same consolidated elected
taxpayer group.
(F) For purposes of combined taxpayer groups, persons who do
not have nexus with the state of Ohio may nevertheless be
“common owners,” but are not required to register for the
commercial activity tax. Such combined taxpayer groups only
need to include persons with substantial nexus with the state
of Ohio, as defined in divisions (H) and (I) of section
5751.01 of the Revised Code.
(G) The commissioner shall publish, and make available on the
Department of Taxation’s Web site, examples of the
application of this rule.