Press Room: Tax Release

April 17, 2012

District of Columbia Now Requires Unitary Combined Reporting

The District of Columbia enacted mandatory unitary combined reporting for tax years beginning after December 31, 2010. The proposed regulations issued by the Office of Tax and Revenue on January 20, 2012, are currently undergoing revisions based on feedback received during the 30-day comment period. However, due to the impending filing deadlines, taxpayers should not delay in determining if and how they may be impacted by this new reporting requirement.

Taxpayers are required to file a combined D.C. Franchise Tax Return if they are engaged in a unitary business with one or more entities that are related by common ownership. The proposed regulations define “unitary business” as a single economic enterprise that is made up either of (1) separate parts of a single business entity or (2) a commonly owned or controlled group of business entities that are sufficiently interdependent, integrated, and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts. Commonly owned or controlled is defined as more than 50% voting control of each member of the group, directly or indirectly owned by a common owner or owners, either corporate or non-corporate. Entities included in the combined report include, but are not limited to, any financial institution, utility company, transportation company, S corporation, real estate investment trust (REIT) and regulated investment company (RIC). Insurance companies are not included in the combined group. 

The proposed regulations provide that passive holding companies are considered to be unitary even if the holding company’s activities are primarily passive. There is also a rebuttable presumption of unity for newly-formed or newly-acquired corporations. If there are two or more groups, it is unclear how to determine to which group the holding company belongs.

Each taxable member of the combined group is responsible for tax based on its taxable income or loss apportioned or allocated to the District including the taxable member’s apportioned share of the combined group’s business income. Net operating losses (NOL) and credits carried forward into the unitary group before 2011 must follow the entity that earned the attribute. If the NOL was generated during a tax year in which the taxable member filed a consolidated return, the NOL must be determined on a separate entity basis and the carryover of the loss may only be utilized by that taxable member.

To ensure compliance with this new D.C. law, taxpayers should consider the following:

  • The current combined reporting proposed regulations revoke all consolidated return elections for tax years beginning after December 31, 2010.
  • If an entity filed a separate or consolidated return prior to December 31, 2010, and that entity will now be filing on a combined reporting basis, it will also be required to file a separate “final” return so it will file two returns for 2011.
  • Combined reporting is on a water’s edge basis unless the combined group elects to report on a worldwide basis. A worldwide reporting election is in effect for 10 years. It is unclear whether foreign LLCs that have elected to check-the-box and be disregarded by their domestic parent are included in the water’s edge group, or how dividends from foreign subsidiaries are treated.
  • The due date and taxable year of the combined return and group is that of the designated agent. 
  • The designated agent is the combined group's common parent or the taxable member of the combined group that reasonably expects to have the largest amount of District taxable net income on a recurring basis.
  • For the transitional year only, each member of the combined group must file a separate extension and submit the payment with the extension. The designated agent must also file an extension and submit the payment with extension but only for itself and not on behalf of the other group members. In the following tax year, only the designated agent may file the extension on behalf of the entire combined group.
  • Estimated tax payments that were made on a separate entity basis for the tax year beginning after December 31, 2010, will be electronically transferred and posted to the designated agent’s combined group’s account when the separate final zero return is filed.

A number of issues in the proposed regulations appear to be unclear or contrary to existing D.C. statutes, which the final regulations may or may not address. Issues such as how a water’s edge group is defined, whether SRLY NOL limitations apply, how attribution rules apply when defining the unitary group, and how a holding company is assigned where there are two or more groups remain unaddressed.