Income/Franchise:
California FTB Legal Ruling Considers Unitary Treatment of Pass-Through Entities and Holding Companies

Legal Ruling No. 2021-01, Cal. Fran. Tax Bd. (10/25/21). A recently released California Franchise Tax Board legal ruling (Legal Ruling 2021-01) considers whether, in a series of differing situations, pass-through entity holding companies are unitary with other pass-through entities – ultimately concluding that pursuant to state caselaw and because traditional tests for unity are not “an exact fit” in the context of pass-through entity holding companies, “it becomes apparent that a unity determination in the context of pass-through holding companies requires additional consideration, and may expand on a traditional unity analysis.” Legal Ruling 2021-01 explains that in some instances where a pass-through entity holding company holds less than a controlling interest in an operating entity, the holding company potentially can still be unitary with the operating entity, to the extent of its ownership interest in the entity – “this is because pass-through entities need not hold more than fifty percent of an entity to be unitary with that entity.” In this respect, “if a pass-through entity holding company provides value and support to the operating business, it will be properly treated as unitary with that business.”

See forthcoming Multistate Tax Alert for more details on Legal Ruling 2021-01, including related taxpayer considerations, and please contact us with any questions in the meantime.