Information Release

CF 1991-01 - Taxpayer-Elected Franchise Tax Combinations - May 15, 1991

Set forth below is a review of the Department's policy for taxpayer-elected franchise tax combinations. This policy is based upon the Department's interpretation of ORC section 5733.052 and Ohio Administrative Code Rule 5703-5-06.

• Two or more corporations may elect to combine on the net income basis if they satisfy all of the following requirements:

1. Each corporation must have income, other than dividend income, from sources within Ohio. "Income" means both positive income and negative income (losses). "Income from sources within Ohio" means income that would be allocated or apportioned to Ohio if the taxpayer filed separately (that is, if the taxpayer were not included in a combined report). Some taxpayers erroneously believe that corporations with Ohio losses may not be included in a combined report.

2. The corporations must satisfy the ownership or control requirements set forth in division (A) of ORC section 5733.052 on January 1 of the tax year; and

3. The corporations must elect the combination in a timely filed report which sets forth any information that the Tax Commissioner requires.

• Brother-sister corporations (corporations owned by a common parent) meet the ownership requirements set forth in division (A) of ORC section 5733.052; therefore, they may elect to combine without inclusion of the parent corporation (if they otherwise qualify to combine).

• Where an election to combine is made by less than all eligible taxpayer corporations, the taxpayer must explain the reason(s) for the non-participation by such eligible corporation(s) on form FT-1120C (see Rule 5703-5-06). An eligible corporation is a taxpayer which on January 1 of the tax year satisfies the ownership or control requirements set forth in division (A) of ORC section 5733.052 and during the taxable year has income, other than dividend income, from sources within Ohio.

• Corporations may not change their election to combine with respect to amended reports or reports for future years without the written consent of the Tax Commissioner. Requests to amend existing elected (as well as required or permitted) combined reports must be filed with the Tax Commissioner on form FT-COM.

Corporations which properly elect to combine for a given tax year must continue to combine for tax years thereafter if the corporations continue to satisfy the ownership or control requirements set forth in division (A) of ORC section 5733.052 and each corporation on a separate company basis has income, other than dividend income, from sources within Ohio. For example, Corporations F, G, and H properly elect to combine for tax year 1991. Corporations F, G, and H must continue to combine for tax year 1992 and tax years thereafter if the corporations continue to satisfy the ownership or control requirements and F, G, and H on a separate company basis, each have income, other than dividend income, from sources within Ohio.

Corporations requesting to change their existing combination by either adding or deleting eligible corporations must file form FT-COM and request the inclusion of additional eligible members to an existing combination. A corporation which acquires a group of corporations, which group in previous years elected to file combined, may not join the combination without the consent of the Tax Commissioner. The acquired group must continue to combine unless the acquiring corporation timely files form FT-COM and the Tax Commissioner grants permission.

• Corporations need not request the Tax Commissioner's permission to delete from the combination corporations no longer eligible to be included because of merger, withdrawal, dissolution, or change of ownership. For example, Corporations A, B, and C properly elected to combine for report year 1990 based on their fiscal year ending June 30, 1989. On December 31, 1990 Corporation A sold its 100% interest in Corporation C to an unrelated party. C may not be included in A's 1991 combined report because on January 1, 1991 the ownership requirements were not met. Accordingly, Corporation A need not request the Tax Commissioner's permission to delete C from the combination for 1991. However, Corporations A and B must continue to combine for 1991 and tax years thereafter unless the Tax Commissioner grants permission otherwise.

• If the Tax Commissioner grants a combined franchise tax group permission to file separately, those corporations in future years may again elect to combine without the consent of the Tax Commissioner if they satisfy the eligibility requirements as stated on page 1 (see Pneumo Corporation and Subsidiaries v. Lindley, November 19, 1984, BTA Case No. 82-G-195).

• Eligible corporations may elect to combine only in a timely report. A report is timely if it is filed within the time prescribed by ORC section 5733.02 as extended under ORC section 5733.13. Thus, corporations which file their reports after the due date or extended due date may not elect to combine (see Olan Mills Inc. of Tenn. v. Limbach (1990) 56 Ohio St. 3d 70). However, the Tax Commissioner has the authority to permit or require a combined report under Divisions (A) and (C) of ORC section 5733.052 if a combination is necessary because of intercorporate transactions and the tax imposed by Chapter 5733.

• Corporations which filed separate reports for a given tax year may amend their reports and elect to combine for that tax year only if they do so on or before the due date or extended due date (see Olan Mills v. Limbach). For example, Corporations A and B are eligible to combine for tax year 1991, but instead filed separate reports on January 31, 1991. A and B may elect to combine for 1991 only if they do so by the March 31, 1991 due date.

• Eligible Corporations which choose to file separate reports for one tax year may, if meeting the eligibility tests, elect to combine for the following tax year. For example, Corporations C, D, and E could have elected to combine for Ohio franchise tax year 1991 but instead filed separate reports. Corporations C, D and E may elect to combine for tax year 1992 notwithstanding the fact that they filed separately for 1991.

• The Tax Commissioner may not disallow a properly elected combination even if the members of the combined group are nonunitary. For example, a parent mining company in a timely report may elect to combine its income with that of its nonunitary restaurant subsidiary even though separately filed reports would result in a much greater franchise tax liability. However, the Tax Commissioner may require the inclusion of additional members to an elected combination in order to properly reflect income where such a combination is necessary because of intercorporate transactions.

• Corporations included in a combined report are not required to have the same taxable year.

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Franchise Tax Information Releases are not "Opinions of the Tax Commissioner" within the meaning of ORC section 5703.53. Accordingly, the Tax Commissioner is not bound by this release. Nevertheless, the above discussion does reflect the Income Tax Audit Division's interpretation of the law.

For further assistance please call 614-433-7617.