State Tax Day - Current, S.3, California—Corporate Income Tax: Holding Company and Equipment Rental Business Subsidiary Were Not Unitary, (Sep 11, 2026)

An Arizona holding company and its equipment rental business subsidiary, which operated throughout the United States including California, were not engaged in a unitary business when the holding company sold part of its interest in the equipment rental business. Thus, gain from the sale of that interest was nonbusiness income allocable outside of California for tax purposes. The Franchise Tax Board argued that the holding company and the equipment rental business were engaged in a unitary business, so gain from the sale of the membership interest was apportionable business income. However, the contribution or dependency test for determining the existence of a unitary business was not met, as there was no substantial flow of value or integrated executive force. Also, the three unities test was not met, because unity of operation was not established.

Watts, California Office of Tax Appeals, 2026-OTA-423, February 28, 2025, petition for rehearing denied, 2026-OTA-424, July 14, 2026, ¶408-121