State Tax: Corporate Income Tax

Scenario: Joe Smith, who owns 100% of Corporation X (a C corporation), has decided to Corporation X acquire all the stock of Corporation Y (a C Corporation). The selling parent of Y is amenable to characterize the sale as a qualified stock purchase and so Joe intends to have Corporation X make a joint I.R.C. 338(h)(10) election. Corporation X headquartered in California and currently provides consulting services to customers in in California, New York, and Pennsylvania. Corporation Y is a provider of information services that is related to Corporation Xs industry, but Joe intends to have it operate independently, for now, from its location in D.C. Corporation Ys customers, who access its services online, are located throughout the country. He knows that there are going to be decisions to be made on how it may affect apportionment of the income in those states and whether those states comply with the federal provisions.

Building on the scenario from question 2, after the transaction, Corporation X and Corporation Y will file a federal consolidated return. For the following questions, assume Corporation Y has customers only in DC and Florida. Questions:

1. Given the facts, as stated, would the two corporations constitute a unitary business group?
2. What are the state filing options/requirements for the two corporations?
3. How would you change the facts (if at all) to avoid combined reporting in states where it is mandatory?
4. How will the two companies apportion income from sales of services to the states in which they do business?