Question

Green company is a domestic company engaged in the business of manufacturing and sellling cars in the U.S. and abroad. Green is the parent company and is headquartered in Dallas,Texas. That is here it’s senior management is located and here most support functions are performed. Green also owns all of the automobile assembly plants in Texas, New Mexico, California and Illinois. Green also owns 100% of the stock of the following subsidiaries:

Red company. Red is a domestic company that manufacturers seats and dashboards hat are used in the manufacture of Greens cars. Red’s manufacturing plants are located in Tennessee, Texas, and Georgia.

Blue company: blue manufactures tires made in Indiana and a Ohio that are used in manufacturing Greens cars.

Yellow company: yellow is a leasing company that entered into leases of greens newly manufactured cars with u related parties. Yellow also finances purchases of Greens cars by unrelated dealers. Yellow does business in all 50 states.

Brown company: brown manufacturers cars in Frankfurt Germany. The cars are sold to dealers throughout Europe. Brown is a German corporation.

Orange company: Orange owns patents originally developed when Green was in airplane manufacturing business during WWII— a business it divested itself of after the war. The patents are still valuable and still generate a royalties from third party airplane manufacturers.

You are the tax advisor for the company and Tennessee has just adopted a new income statute patterned after UDITPA. Tennessee uses the water’s edge combined method of apportionment based on the unitary business principle. You are asked to advise following.

1. What is a unitary business? What distinguishes apportionable income from allocable income?

Answer 1

Ans: Unitary business is a business segment in which the contributors are mutually dependent and work for the mutual benefit. it is based on the concept of functional integration, centralized management and economies of scale. it could be a corporation , trust or partnership firm.

Allocable income is based on the principle of identification i.e. when a particular source of income could be identified with a particular segment , business or state. Apportionable income is not identifiable with a particular source , so it is divided based upon some business activity and various state apportionable formula