Could three subsidiaries satisfy the ownership requirement for a California combined report when the same parent controlled each subsidiary but the parent itself was not unitary with them?

Plain-English summary

California Legal Ruling 410 held that three subsidiaries satisfied the unity-of-ownership requirement for combined reporting when the same parent owned more than 50% of each subsidiary's voting stock.

The parent did not have to be engaged in the subsidiaries' unitary business. It could remain outside the combined report while the subsidiaries combined with each other.

The ownership question and the operational unitary-business question were separate: controlling common ownership linked the subsidiaries, while their own business relationships determined whether they formed the unitary group.

Facts addressed by the ruling

One parent corporation owned more than 50% of the voting stock of each of three subsidiaries.

The three subsidiaries conducted one unitary business inside and outside California. None of them was unitary with the parent, so the parent was not includible in the subsidiaries' combined report.

FTB was asked whether the parent's exclusion defeated unity of ownership among the subsidiaries.

Why common control was enough

The ruling relied on authority finding unity of ownership between subsidiaries held by a common parent even when the parent had few unitary ties to them.

It described the ownership requirement as controlling ownership over all parts of the business, generally established by direct or indirect common ownership of more than 50% of voting stock.

Because the same parent controlled all three subsidiaries, that ownership bond existed. Nothing required the parent itself to be operationally unitary and combinable with the subsidiary group.

What this means for you

Corporate groups

An entity can supply common ownership without becoming a member of the unitary group. Trace who controls each corporation's voting stock separately from the operational analysis of which entities are unitary.

Multistate businesses

The ruling's answer depended on both elements: the siblings shared controlling ownership, and the siblings themselves were already engaged in one unitary business.

Accountants and tax professionals

Do not automatically include a common parent merely because it owns the subsidiaries. Determine whether the parent shares the necessary unitary business relationship under current law.

Common questions

Q: Did the parent have to join the combined report?

A: No. The facts stated that the parent was not unitary with the subsidiaries and therefore was not includible.

Q: Did excluding the parent break unity of ownership among the subsidiaries?

A: No. Its controlling ownership of each subsidiary supplied the ownership link.

Q: What ownership level did the ruling use?

A: Direct or indirect common ownership of more than 50% of voting stock.

Q: Was common ownership alone enough to prove a unitary business?

A: No. The facts separately established that the three subsidiaries conducted one unitary business.

Citations and references

• Chase Brass & Copper Co. v. Franchise Tax Board, 10 Cal. App. 3d 496 (1970)
• Appeal of Revere Copper and Brass Incorporated (Cal. St. Bd. of Equal., July 26, 1977)
• Appeal of Standard Brands Incorporated (Cal. St. Bd. of Equal., October 18, 1977)

The official HTML's older parallel and Board of Equalization citation strings were not fully resolved by the citation index. They are preserved verbatim in the source text below.

Source

• Landing page: California FTB Legal Rulings
• Official HTML: Legal Ruling 410

Original ruling text

Legal Ruling 410

STATE OF CALIFORNIA
Franchise Tax Board - Legal Division

January 16, 1979

Ownership Requirement for Combined Reporting Purposes Where the Parent is a General Corporation

Facts

Over 50 percent of the voting stock of each of three corporations (subsidiaries) is owned by a common corporation (parent). The three subsidiaries are engaged in a single unitary business conducted within and without this state. None of the subsidiaries are, however, engaged in a unitary business with the parent company. Therefore, the parent company is not a part of the unitary business conducted by the three subsidiaries and thus not includible with the three subsidiaries for combined reporting purposes.

Question

Is the unity of ownership requirement for purposes of combining the three subsidiaries satisfied where the subsidiaries are owned and controlled by the same parent corporation and are engaged in a single unitary business, but none of which are unitary with the parent corporation?

Decision

Yes

Discussion

In the case of Chase Brass & Copper Co. v. Franchise Tax Board, 10 Cal.App.3d 496, 87 Cal.Rptr. 239, appeal dismissed and Cert. denied, 400 U.S. 961, 27 Law.Ed.2d 381, 91 Sup. Ct. 365 (1970), the court was faced with the question of whether unity of ownership existed where it was found that two wholly owned subsidiaries were engaged in a unitary business but one had only a few unitary ties with the common parent company. The court held that unity of ownership was present, as the parent was the sole owner of the stock of both subsidiaries.

In the Appeal of Revere Copper and Brass Incorporated, Cal. St. Bd. of Equal, July 26, 1977, CCH 205-752, P-H 13,102-S, the Board of Equalization stated:

The ownership requirement contemplates an element of controlling ownership over all parts of the business; -

Generally speaking, controlling ownership can only be established by common ownership, directly or indirectly, of more than 50 percent of a corporation’s voting stock. (Emphasis added.)

See also the Appeal of Standard Brands Incorporated, Cal. St. Bd. of Equal., October 18, 1977, CCH 205-789, P-H .

The language in the above case is consistent with the result reached by the court in Chase Brass and makes it clearly evident that all that is needed to satisfy the ownership requirement for combination purposes is the presence of the element of controlling ownership. There is no requirement that the corporation holding controlling ownership itself be unitary and combinable with the unitary group.

Last updated: 09/24/2025