A unitary business is characterized by a flow of value as evidenced by functional integration, centralized management and economies of scale.
- Functional integration is characterized by transfers between, or pooling among, business activities that significantly affect the operation of the business activities. Functional integration includes, but is not limited to, transfers or pooling with respect to the business’s products or services, technical information, marketing information, distribution systems, purchasing and intangibles. The use of market-based or arm’s length pricing for such transactions does not negate the presence of functional integration.
- Centralized management exists when directors, officers, and/or other management employees jointly participate in the management decisions that affect the respective business activities and that may also operate to the benefit of the entire economic enterprise. Centralized management may exist even when day-to-day management responsibility and accountability have been decentralized, so long as the management has an operational role with respect to the business activities, such as participation in overall operational strategy for the business.
- Economies of scale refers to a relationship among and between business activities resulting in a significant decrease in the average per unit cost of operational or administrative functions due to the increase in operational size. Economies of scale may exist from the inherent cost savings that arise from the presence of functional integration or centralized management.
The following examples are intended to illustrate the presumptions set forth above.
Example 1: Corporations A and B sell natural and organic foods at their retail stores located throughout the United States. Corporation C sells the same types of foods at its retail stores located in Canada. Corporations A, B and C are presumed to be engaged in a unitary business.
Example 2: Corporations A, B and C manufacture and sell children’s apparel to customers located throughout the United States. Corporations D and E operate a chain of restaurants located in New York and Florida. Corporation F provides centralized purchasing, advertising and finance services to Corporations A, B, C, D and E. The executive officers of Corporation F are also actively engaged in the operations of Corporations A, B, C, D and E. Corporations A, B, C, D, E and F are presumed to be engaged in one unitary business.
Example 3: Corporation A contributes all of its intellectual property to Corporation B for 100% of Corporation B’s capital stock. Corporations A and B are presumed to be engaged in a unitary business in the first taxable year in which they satisfy the capital stock requirement.
