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Treasury Issues Guidance on
Unitary Control and Relationship Tests
By Ed Kisscorni, CPA, MBA
In February, the Michigan Department of Treasury issued two
revenue administrative Bulletins providing long-awaited guidance for a
Michigan Business Tax Unitary Business Group. In order to be an UBG,
taxpayers must meet both the control test as well as one of two relationship
tests.
Outline of items covered in RAB 2010-1
Control Test
Unitary Business Group defined
Control Test defined
Controlled Groups of Entities
- Parent-Subsidiary Controlled Group of Entities
- Brother-Sister Controlled Group of Entities
Combined Controlled Group of Entities
Excluded Ownership Interest
Controlled Group of Entities Without Common Control
Voting Agreements
Nonstock Nonprofit organizations
Entities in more than one Controlled Group of Entities
Indirect Ownership
- Family Member Attribution
- Attribution from Partnerships, Corporations, and trusts and Estates
- Attribution to Partnerships, Corporations, and Trusts and Estates
- Options
- Operating Principle
- Re-Attribution
- Limitations on Re-Attribution
- Precedence of Option Principle
- Member of One Controlled group
- S Corporations Treated as Partnerships
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Control Test
After several drafts and significant input from the MACPA and other groups,
the Department approved their rules to administer the statutorily defined
“Control Test” on February 5 through
RAB 2010-1, Michigan Business Tax - Unitary Business Group Control
Test.
Based upon IRS Section 318, though not specifically mentioned, RAB 2010-1
defines indirect ownership. The Department has made some exceptions to a
strict following of Section 318. They have also rescinded two FAQs and
reversed previous positions. Most notably, there is parental attribution in
family member attribution applied on a lineal basis; and there is
attribution between brother-sister entities.
The RAB covers the effects of voting agreements on the “ownership or
control” statutory requirement. The Department specifies the “more than 50%
of the ownership interest” is based on voting rights or comparable rights
and links it to the ability to elect management of the entity.
Relationship Tests
In the February 24, 2010
RAB 2010-2 Michigan Business Tax - Unitary Business Group
Relationship Tests, the Department cites United States Supreme Court
cases that described a unitary business as a functionally integrated
enterprise whose parts are mutually interdependent such that there is a flow
of value between them. There must exist some sharing or exchange of value
not capable of precise identification or measurement beyond the mere flow of
funds arising out of a passive investment.
Items covered in RAB 2010-2 Relationship
Tests
Unitary Business Group Defined
Two Alternative Relationship Tests
- Flow of Value Test
- Functional Integration
- Centralized Management
- Economies of Scale
- Contribution/Dependency Test
Special Application Considerations
- Links in a Chain
- Instant Unity
Factors Demonstrating a Flow of Value or Dependency
Examples
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In determining whether a flow of value exists, a relevant question in the
inquiry is whether contributions to income resulted from "functional
integration," "centralization of management," and "economies of scale." No
one fact is determinative of whether functional integration, centralization
of management or economies of scale exist. Rather, the statute requires that
the totality of facts and circumstances surrounding the business activities
and operations be weighed and examined for cumulative effect.
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March/April 2010
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