Tax Rules: Final: 5703-29
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 fifty per cent 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 fifty per cent or at least eighty per cent 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 fifty per
cent 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 fifty percent or more ownership test
or the eighty 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 termed 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, 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 four
thousand five hundred dollars 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 fifty per cent 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 fifty per cent ownership and control
interest, that person must include all taxable gross receipts
of a joint venture so owned and controlled unless there is
another fifty per cent owner of the joint venture that makes
the fifty per cent election to consolidate. In other words,
if one fifty per cent owner of a joint venture makes an
eighty per cent election to consolidate with others or
decides to be part of a combined taxpayer group or be a
single taxpayer, and the other fifty per cent owner makes the
fifty per cent 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 fifty per cent owners make the fifty per cent
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 fifty per cent 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 website, examples of the application
of this rule.
Effective: 3-21-06
Promulgated under: 5703.14
Authorized by: 5703.05
Amplifies: 5751.011, 5751.012