Information Release

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.