State Tax Day - Current, S.1, California—Corporate Income Tax: Company’s Divisions Did Not Operate as a Unitary Business, (Sep 11, 2026)

A taxpayer’s Colorado-based beverage distribution division did not operate as a unitary trade or business with its other divisions, according to the California Office of Tax Appeals (OTA).

The beverage distribution division conducted its activities solely in Colorado. Thus, when the company sold that division, it reported income from the sale as nonbusiness income sourced entirely to Colorado for tax purposes.

The Franchise Tax Board (FTB) audited the company and determined that the beverage distribution division operated as a unitary business with the company’s other divisions, including an interstate trucking division. Accordingly, the FTB believed that a portion of the income from the sale was apportionable to California.

Unitary business tests not met

However, the OTA concluded that the three unities test for determining the existence of a unitary business was not met, because unity of use was not present. Also, the OTA found that the dependency or contribution test was not met, because there was insufficient operational interdependence between the divisions.

Tax benefit rule did not apply

As an alternative argument, the FTB contended that if the company's beverage distribution division was viewed as a separate business from the other divisions, the company should be forced to recapture certain past deductions under the tax benefit rule because characterizing the sale of the beverage distribution division's assets as a sale of the assets of a separate trade or business would be inconsistent with the company’s original characterization of the assets as part of a single unitary business. However, the record showed that the company previously apportioned a net loss to California, and the FTB did not show that the company actually received a tax benefit from the past deductions. Thus, the tax benefit rule did not apply.

Western Distributing Company, California Office of Tax Appeals, 2026-OTA-467P, June 18, 2026 (released September 2026), ¶408-119