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Considering Instant Unity? Timing Is Everything
When considering the tax impact of your company's 2011 acquisitions, instant unity is likely not the first thing that comes to mind during this review process. However, from a state and local tax perspective, the consequences of instant unity may have a significant impact on your upcoming state income and franchise tax filings, estimated payments and year-end tax provision analysis. Taxand US discusses the concept of instant unity, highlighting a selection of the reasons why your company should review its recent acquisitions to ensure they are receiving the proper unitary treatment for state tax purposes.
With Instant Unity, Timing Is Everything
The unitary business principle is a cornerstone of state and local taxation. As the United States Supreme Court declared in Mobil Oil Corp. v. Commissioner of Taxes of Vermont, 445 U.S. 425 (1980), "the linchpin of apportionability in the field of state income taxation is the unitary-business principle." That is to say, absent a unitary relationship to a taxpayer's business, the state income tax treatment of an item of income must be determined separately from that of the taxpayer's unitary business income.
The issue of instant unity most often arises in the context of one entity's acquisition of either another entity or an asset. Unlike a standard unitary analysis, instant unity is an enquiry that does not answer the question of whether entities are unitary, but rather, when they become unitary. For example, when one entity acquires another entity that engages in a similar line of business, it is often clear that a unitary relationship will eventually develop between the companies. However, the relevant question in the context of instant unity is whether the unitary relationship developed immediately (or instantly) upon acquisition or was forged over the course of weeks, months or even years.
Enterprise vs. Asset Unity
To re-iterate, the issue of instant unity most often arises either when one entity acquires another entity or when an entity acquires an asset. While much of the guidance addressing instant unity does so specifically in the context of entity acquisitions, instant unity also applies to the determination of when acquired assets become a part of the acquirer's unitary business. In the asset acquisition context, the underlying test for unity is not the more familiar test used to determine enterprise unity i.e functional integration, centralised management and economies of scale but rather the operational-function test.
So is instant unity a good thing or a bad thing? Stated simply, it depends. A determination that two entities (or an entity and an asset) are instantly unitary is neither an automatic victory nor a signal of defeat for a taxpayer. Rather, the facts of each individual situation must be examined. It may be advantageous for a newly acquired company with significant acquisition-year losses to be characterised as instantly unitary. Conversely, if a newly acquired company has significant taxable income, it may not be advantageous for the two companies to be deemed unitary upon acquisition. And the state apportionment impact of treating a new entity or asset as instantly unitary may skew the analysis in either direction. All relevant facts must be examined to determine the potential impact of an instant unity determination.
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