CF 1992-02 - Schedule B-3 (Combined) - Related Entity and
Related Member Adjustments for Corporations Included in a
Combined Franchise Tax Report. - May 6, 1992
Several taxpayers have asked if the franchise tax
computations of the Related Entity Adjustment (gains and
losses attributed to a taxpayer from a nontaxpayer related
entity) and the Related Member Adjustment (disallowed
interest expense and intangible expense paid to certain
related entities) for taxpayers included in a combined
franchise tax report are determined on a combined basis or,
instead, determined on a separate company basis. That is,
does each member determine its adjustment by combining the
adjustments for all members of the combined group,
apportioning the combined adjustment on the basis of the
combined group's apportionment factor, and then prorating the
apportioned adjustment to each member of the group on the
basis of each member's proportionate share of the combined
Ohio apportionment factor; or, instead, does each member
determine its adjustments without regard to the combined
report by multiplying its separate company adjustment by its
separate company apportionment ratio?
The Department maintains that members of a combined
report must compute the adjustments as follows:
-
The interest expense and intangible expense adjustment is
apportionable and is computed on a combined basis. The
combined group's total adjustment is first apportioned to
Ohio on the basis of the combined group's apportionment
factor and then is prorated to each member of the
combined report on the basis of each member's
proportionate share of the combined Ohio apportionment
factor.
-
Capital gains and capital losses attributed to a member
of a combined report from a related entity's sale or
other disposition of dividend
producing
property
are allocable and separately determined by each member.
Such gains and losses are allocated within and without
Ohio on the basis of the ratio of the investee
corporation's book value of physical assets in Ohio to
book value of physical assets everywhere.
-
Gains and losses attributed to a member of a combined
report from a related entity's sale or other disposition
of intangible property other than dividend
producing
property
are apportionable and are computed on a combined basis. The
combined group's total apportionable gains and losses are
first apportioned to Ohio on the basis of the combined
group's apportionment factor and then are prorated to
each member of the combined group on the basis of each
member's proportionate share of the combined Ohio
apportionment factor.
The statutory basis for the Department's position is
as follows:
-
The Related Entity Adjustment, Ohio Revised Code (ORC)
section 5733.04(I)(12), and the Related Member
Adjustment, ORC sections 5733.04(I)(13) and 5733.042, are
adjustments to federal taxable income in determining "net
income" for purposes of the franchise tax.
-
The value of a taxpayer's issued and outstanding shares
of stock under the net income basis is the sum of the
corporation's net income allocated to Ohio and net income
apportioned to Ohio. ORC section 5733.05(B).
-
Allocable income includes net income from the following
sources: rents and royalties from real property and
tangible personal property, patent and copyright
royalties and technical assistance fees not representing
the taxpayer's principal source of gross receipts,
dividends, and capital gains and capital losses from the
sale or other disposition of real property, tangible
personal property, and dividend producing intangible
property. ORC section 5733.051.
-
Net income from sources not specifically allocable is
apportionable. ORC section 5733.05(B) and 5733.051(H).
-
Two or more corporations meeting certain ownership
requirements and each having income from sources within
Ohio may elect to combine net income. ORC section
5733.052(A) and (B).
-
The net income of each member of a combined report is
measured by the combined net income of all corporations
included in the combined report. Each member's net income
from allocable sources is separately determined and
allocated within and without Ohio as provided by ORC
section 5733.051. Combined net income, other than net
income from specifically allocable sources, is first
apportioned to Ohio on the basis of the combined group's
apportionment factor and then prorated to each member of
the combined group on the basis of each member's
proportionate part of the factor. ORC sections
5733.052(D) and (E).
In accordance with the above statutory provisions capital
gains and capital losses attributed to a member of a combined
report from a related entity's sale or other disposition of
dividend producing property are separately allocable by each
member. All other related entity and related member
adjustments are apportionable and are computed on a combined
basis.
Attached are the format and instructions for computing the
Related Entity Adjustment and the Related Member Adjustment
for taxpayers included in a combined franchise tax report.
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 614-433-7862.