Historical Antecedents Article

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Historical Antecedents

The continued existence of the unitary tax in its present form is uncertain. Political considerations shape our tax laws and the unitary tax is certain to be altered.

Author: Stephen Sears

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In 1936 California began requiring corporations which were controlled or owned by the same interests to file a tax retrun combining the operations and net income of all the entities within the group. A formula was then applied to the net income to apportion the income to the operations located within California. Thus, California could levy their tax on the net income deemed to be earned by the business in California.

This system evolved from a similar method of taxation imposed in the late 1800’s. When the railroads came out West the state sought to charge them property taxes, not just on the value of their track located within the sate, but also on their porperty located elsewhere.

The state devised a method which involved determining the entire value of the company’s property located everywhere and then applying a factor with the numerator representing the miles of track located within the sate and the denominator the total miles of track. This system worked so well it was expanded to include telegraph, telephone and express companies.

Various court cases upheld this approach to taxation. One of the early cases was a United States Supreme Court case, Adams Express Co. v. Ohio, 165 U.S. 194 (1897), which permitted the company to be valued as a unit because a common purpose existed for the entire property. In Fargo v. Harte, 193 U.S. 490 (1904), the Court defined the property permitted to be included in the formula specifying that any non-business property should not be included. The actual formula method was upheld by the Supreme Court in Underwood Typewriter Co. v. Chamberlain, 254 U.S. 113 (1920).

California became the most aggressive state in using the unitary method of taxation. It was assisted by a major victory in the California Supreme Court, Butler Bros. v. McColgan, 17 C. 2d. 664 (1940); aff’d 315 U.S. 501 (1942), which established a test for determining whether a business is unitary. The test includes three items:

1. Unity of ownership
2. Unity of operations as evidenced by central purchasing, advertising, accounting and management decisions
3. Unity of use in its centralized executive force and general system of operation.

If any of these are present, a unitary business exists and combined reporting is required.

A further significant case is Edison California Stores Inc., 30 C. 2d. 472 (1947), upholding the combined reporting as a reasonable method of determining the tax and also extended the method to apply to separate corporations operating in several states in interstate commerce but under common ownership, management and operations. The most recent case was the 1983 United States Supreme Court case, Container Corporation of America v. Franchise Tax Board, 103 S Ct 2933, upholding the constitutionality of the unitary method.

About Author

Stephen Sears is a Certified Public Accountant (CPA) and an investment advisor with a Masters degree in Taxation. He has a Bachelor's degree in Business Administration. Mr. Sears has been the featured speaker at hundreds of seminars and has been intereviewed countless times on television and radio.

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