Proposed Regulations Issued for DC’s New Combined Reporting Rules

In the fall of 2011, the District of Columbia (DC) adopted a “combined reporting” regime that effectively shares the taxable income of a DC subsidiary to certain related non-DC corporations.  Other states have adopted similar rules, although the specifics vary significantly per state on questions such as whether related non-DC corporations are removed from combined reporting because of a lack of DC “nexus” or not being a “unitary business” with the DC activity or entity.  On January 20^th, the DC issued proposed regulations clarifying these new rules, effective December 31, 2010.  The proposed regulations clarify many issues including: (i) defining related (commonly controlled) corporations by a “more than 50%” relatedness test; (ii) clarifying that the category of potentially includible corporations includes financial institutions, utility companies, S corporations, REITs and RICs; and (iii) providing examples of entities satisfying the unitary business standard.  We understand that there will be another round of regulations that will address questions such as how to determine whether the non-DC corporation satisfies the nexus requirement and mechanical issues such as how the rules operate in the REIT context with regard to dividends.    Comments to the proposed regulations may be submitted to the DC Office of Tax and Revenue by February 20, 2012.