Unitary Group (Considered One Taxpayer per § 59-7-101)

The Unitary Group Construct and the Utah Tax Credit for Research Activities: A Comprehensive Statutory and Regulatory Analysis

A unitary group represents a collective of corporations related by common ownership and economic interdependence that is treated as a single taxpayer for Utah tax purposes. Under Utah Code § 59-7-612, this "one taxpayer" status requires the group to aggregate all research expenses and gross receipts into a single calculation to determine credit eligibility.

The legal fiction of a single taxpayer is a cornerstone of Utah corporate franchise tax policy, designed to reflect the economic reality of modern integrated business enterprises. This approach, codified in Utah Code § 59-7-101 and further refined in the specific context of the Tax Credit for Research Activities under § 59-7-612, ensures that the state’s incentives for innovation are applied to the actual economic unit rather than being manipulated across various legal subsidiaries. By requiring a unitary group to act as one, the law prevents corporations from isolating research expenses in entities with low gross receipts to artificially inflate the "incremental" portion of the credit. This structural requirement forces a comprehensive view of the business’s footprint in the state, balancing the generous incentives for R&D with a rigorous methodology for calculating the base amount and apportioning receipts. The following analysis explores the statutory definitions, the tests for economic interdependence, the specific mechanics of the research credit components, and the extensive administrative guidance issued by the Utah State Tax Commission to govern these complex entities.

Statutory Foundations of the Unitary Group and the "One Taxpayer" Rule

The concept of a unitary group is not merely an accounting preference but a mandatory filing status for corporations that function as a single economic organism. Utah Code § 59-7-101 defines a unitary group through two primary lenses: common ownership and economic interdependence. This definition serves as the bedrock for the "one taxpayer" provision found in the research credit statute, creating a unified framework for both the determination of taxable income and the application of tax incentives.

The Threshold of Common Ownership

Under Utah law, common ownership is defined as the direct or indirect control or ownership of more than 50% of the outstanding voting stock of a group of corporations. This threshold is significantly lower than the 80% ownership required for filing a federal consolidated return under Internal Revenue Code § 1501. By setting the bar at 50%, Utah ensures that its unitary reach extends to any parent-subsidiary or brother-sister relationship where actual control is exercised, regardless of whether those entities are part of a federal consolidated group.

Ownership Type	Statutory Reference	Threshold Requirement
Parent-Subsidiary	§ 59-7-101(8)(a)(i)	> 50% voting stock ownership
Brother-Sister	§ 59-7-101(8)(a)(ii)	> 50% voting stock ownership
Combined Group	§ 59-7-101(8)(a)(iii)	Multi-tier ownership exceeding 50%

This 50% rule is absolute for corporations but excludes S corporations from the definition of a unitary group, as these are pass-through entities governed by different tax regimes. The calculation of outstanding voting stock is determined in accordance with Section 1563 of the Internal Revenue Code, though the 50% substitution for 80% remains the defining characteristic of Utah’s approach.

The Requirement of Economic Interdependence

Ownership alone is insufficient to establish a unitary group. The law requires that the entities be economically interdependent as demonstrated by a preponderance of evidence. This interdependence is typically evaluated through the "Three Unities" test or the "Flow of Value" test, both of which are deeply embedded in Utah’s administrative guidance and case law.

The Utah State Tax Commission identifies several factors that demonstrate this interdependence, including centralized management, functional integration, and economies of scale. Centralized management is evidenced by common officers and directors, shared legal or accounting departments, and a common parent corporation that makes major policy decisions for the group. Functional integration occurs when there is a significant flow of goods or services between the entities, such as a manufacturing subsidiary that produces components used exclusively by a sales subsidiary. Economies of scale are realized through collective bargaining, centralized purchasing, or combined insurance policies that benefit the group as a whole.

The Research Credit and the Unitary Mandate

Utah Code § 59-7-612(2) specifically mandates that a unitary group be considered "one taxpayer" for the purpose of claiming the research activities tax credit. This mandate has profound implications for the calculation of the credit’s three components: the incremental credit, the basic research credit, and the volume credit.

Aggregation of Qualified Research Expenses (QREs)

The "one taxpayer" rule requires that the qualified research expenses incurred by every member of the unitary group in the State of Utah be summed and treated as a single figure. Because the definition of QREs is tied to Section 41 of the Internal Revenue Code, the group must identify expenses that meet the federal "four-part test"—qualified purpose, elimination of uncertainty, process of experimentation, and technological in nature—but must exclusively focus on those activities performed within the borders of Utah.

Expense Category	Federal Standard (IRC § 41)	Utah Specific Restriction
In-House Wages	Included if for R&D services	Only for services performed in Utah
Supplies	Included if used in R&D	Only for supplies used or consumed in Utah
Contract Research	65% of payments to 3rd parties	Only for research conducted in Utah

The aggregation process ensures that research spending is tracked at the enterprise level. If Subsidiary A conducts the research but Subsidiary B pays the wages through a centralized payroll system, the "one taxpayer" construct allows the group to capture those expenses regardless of which specific legal entity is the employer of record, provided they are part of the same unitary filing.

The "One Taxpayer" Base Amount Calculation

Perhaps the most complex aspect of the unitary group’s R&D claim is the calculation of the "base amount." Under § 59-7-612(4), the base amount is calculated as provided in IRC § 41(c), but with a critical modification: the gross receipts used in the calculation must include only those receipts attributable to sources within Utah.

For a unitary group, this calculation must be performed using the aggregated gross receipts of all group members, even those that do not themselves conduct research. This prevents a company from creating a "pure" R&D subsidiary with zero gross receipts to achieve a zero base amount and thus receive a 5% credit on every dollar spent. Instead, the group’s total Utah-sourced sales are compared against its total Utah-based R&D, creating a consolidated benchmark for "incremental" growth.

Local State Revenue Office Guidance: The USTC Framework

The Utah State Tax Commission (USTC) provides comprehensive guidance through Administrative Rule R865-6F, which details the practical application of the unitary business concept. These rules are essential for understanding how the Commission audits research credit claims and how it interprets the "one taxpayer" principle in the context of various corporate events.

Rule R865-6F-24: Nexus and the Unitary Group

A significant administrative clarification is found in R865-6F-24, which states that in the case of a unitary group, nexus created by any member of the group creates nexus for the entire unitary group. This means that if a single subsidiary has a warehouse or a sales representative in Utah, every corporation in the unitary group—regardless of their individual contact with the state—is pulled into the Utah tax net and becomes part of the "one taxpayer" for R&D credit purposes. This broad attribution ensures that the group’s entire economic presence is reflected in the gross receipts used to determine the base amount.

Rule R865-6F-27: The Order of Credits

The Commission also provides strict guidance on the sequence in which credits must be applied against the corporate franchise tax. Under R865-6F-27, a taxpayer must apply credits in the following order:

1. Nonrefundable credits without a carryforward.
2. Nonrefundable credits with a carryforward.
3. Refundable credits.

In the context of the R&D credit, this rule has significant consequences. The 7.5% volume credit, which has no carryforward provision, must be used first to offset tax liability. Only after the 7.5% credit has been exhausted (or if there is still remaining tax liability) can the group apply the 5% incremental credits, which enjoy a 14-year carryforward period. This ordering prevents taxpayers from "saving" the volume credit for a future year and potentially losing its value if they have low tax liability in the current year.

Rule R865-6F-32: Sourcing of Income for Financial Institutions

While primarily focused on banks, R865-6F-32 provides a methodology for sourcing intangible income that is often referenced when determining the "Utah gross receipts" for the R&D base amount. It clarifies that the location of the borrower or the location where the benefit of the service is received determines the sourcing of the receipt. For a unitary group, this means that even service-based income from out-of-state subsidiaries must be carefully analyzed to see if the "benefit" was delivered to a customer in Utah, thereby increasing the group’s Utah gross receipts and raising the base amount hurdle.

Application of the Law to Combined Reporting Methods

The "one taxpayer" rule interacts differently depending on whether a unitary group files a "Water's Edge" or a "Worldwide" combined report. These methods determine which entities are included in the aggregated pool for the research credit calculation.

Water's Edge Combined Reporting

Most unitary groups in Utah file a water's edge combined report under § 59-7-402. This report includes only those members of the unitary group that are incorporated in the United States or are "foreign operating companies" with significant U.S. presence. For the research credit, this means only the Utah QREs and the Utah gross receipts of these domestic affiliates are aggregated.

Filing Method	Statutory Reference	Members Included
Water's Edge	§ 59-7-402	U.S. corporations + Foreign Operating Companies
Worldwide	§ 59-7-403	All unitary members regardless of incorporation
Affiliated Election	§ 59-7-402(2)	Non-unitary affiliated group members doing business in Utah

Worldwide Combined Reporting

If a group elects to file a worldwide combined report under § 59-7-403, it must include all unitary members, regardless of where they are incorporated. While R&D expenses incurred abroad are never eligible for the Utah credit (as the statute explicitly limits QREs to those incurred "in this state"), the gross receipts of the foreign subsidiaries might still impact the base amount if those receipts can be sourced to Utah under UDITPA principles. However, Utah law generally prevents the inclusion of non-U.S. sales in the Utah sales factor denominator, creating a protective "ring-fence" around the state’s tax base.

The Three Pillars of the Utah R&D Tax Credit

The "one taxpayer" unitary group must calculate its credit by summing three distinct components, each with its own logic and carryforward rules. This hybrid approach differentiates Utah from the purely incremental federal research credit.

Component 1: The 5% Incremental Credit for Increasing Research

The first component is 5% of the taxpayer's qualified research expenses for the current taxable year that exceed a base amount. The "base amount" calculation is the primary area where the unitary "one taxpayer" status is applied. It is the product of the group's "fixed-base percentage" and its "average annual gross receipts" for the four years preceding the credit year.

For startups, Utah provides a 3% fixed-base percentage for the first five taxable years in which the company has both QREs and gross receipts. A unitary group may elect to be treated as a startup company even if it does not meet the strict federal definition, provided that election is made for the first year it claims the credit and is never revoked.

Component 2: The 5% Credit for Basic Research Payments

The second component is 5% of payments made to qualified organizations (such as Utah universities) for basic research that exceed a separate base amount. Basic research is defined as original investigation for the advancement of scientific knowledge not having a specific commercial objective. Like the incremental credit, the group is treated as one taxpayer, and payments from any member to a Utah university are aggregated to determine the total group spend.

Component 3: The 7.5% Volume Credit

The third component is a straight "volume" credit equal to 7.5% of the taxpayer's total Utah qualified research expenses for the current year. This component is unique because it does not require an increase in spending over a base amount. However, there is a significant trade-off: while the 5% incremental and basic research credits can be carried forward for 14 years if they exceed tax liability, the 7.5% volume credit cannot be carried forward. If the unitary group’s tax liability is zero, the 7.5% credit is lost for that year.

Practical Example: The "Precision Tech" Unitary Group

To illustrate the interplay of these rules, consider the "Precision Tech" unitary group, which consists of three corporations: Alpha Corp (The Parent), Beta R&D (The Researcher), and Gamma Sales (The Distributor).

Group Dynamics and Utah Footprint

• Alpha Corp: Headquartered in Salt Lake City. Owns 100% of Beta and Gamma. Provides all HR, legal, and executive management.
• Beta R&D: Operates a laboratory in Provo, Utah. It has $2,000,000 in Utah payroll for engineers.
• Gamma Sales: Based in Delaware but has a retail presence and substantial sales in Utah. It has $50,000,000 in total sales, of which $5,000,000 are to Utah customers.

Because Alpha Corp owns more than 50% of the voting stock and provides centralized management and functional integration, the three companies are a unitary group and must file as "one taxpayer".

Step 1: Aggregate Qualified Research Expenses (QREs)

The group identifies its Utah-only QREs. Beta R&D has $2,000,000 in wages and $500,000 in supplies used in its Utah lab. Alpha and Gamma have no research expenses.

• Total Group Utah QREs: $2,500,000.

Step 2: Calculate the Base Amount

The group is in its 6th year of operations and has already exhausted its initial 3% startup fixed-base period. Its actual fixed-base percentage (ratio of Utah R&D to Utah Gross Receipts) is 10%. The group’s average Utah-sourced gross receipts for the prior four years (Years -4 through -1) were $4,000,000.

• Calculated Base Amount: $4,000,000 × 10% = $400,000.
• The 50% Floor: IRC § 41(c)(2) states the base amount cannot be less than 50% of current year QREs. $2,500,000 × 50% = $1,250,000.
• Final Base Amount: Since $1,250,000 is greater than $400,000, the group must use $1,250,000 as its base.

Step 3: Calculate the Credit Components 5% Incremental Credit

• QREs in excess of base: $2,500,000 - $1,250,000 = $1,250,000.
• Credit: $1,250,000 × 5% = $62,500.
• Carryforward: 14 years if unused.

7.5% Volume Credit

• Total current QREs: $2,500,000.
• Credit: $2,500,000 × 7.5% = $187,500.
• Carryforward: None (Must be used in current year).

Total R&D Credit (Code 12)

• Total = $62,500 + $187,500 = $250,000.

Step 4: Applying the Credit to the Combined Return

The group’s combined Utah tax liability (after apportionment and before credits) is $200,000. Following Rule R865-6F-27, the group applies the credits in order.

1. First, apply the 7.5% Volume Credit: $200,000 tax - $187,500 credit = $12,500 remaining tax.
2. Second, apply the 5% Incremental Credit: $12,500 remaining tax - $62,500 credit = $0 tax due.
3. Final Result: The group pays $0 tax. It has a remaining carryforward of $50,000 ($62,500 - $12,500) from the incremental portion that it can use over the next 14 years.

Administrative Guidance on Member Departures and Mergers

The "one taxpayer" concept becomes particularly relevant when the composition of a unitary group changes. The Utah State Tax Commission has provided specific guidance, and recent administrative appeals have clarified the ownership of research credits in these scenarios.

Ownership of Credits and Carryforwards

A frequent point of contention is whether a subsidiary that leaves a unitary group can "take" its portion of the R&D credits with it. In Appeal No. 23-1208, the Commission addressed a former member of a unitary group that attempted to claim a portion of the group’s carryforwards on its own separate return after being sold to a new parent.

The Commission ruled that because the credits were generated and reported by the unitary group as a collective "one taxpayer," the credits belong to the unitary group entity that filed the return, not to the individual subsidiary that performed the research. There is no provision in Utah law for transferring tax credits between taxpayers. Therefore, if a subsidiary leaves a group, any unused R&D credits remain with the original unitary group and cannot be used by the departing entity or its new parent.

Treatment of Net Operating Losses (NOLs)

Similarly, for tax years beginning on or after January 1, 2021, the amount of Utah net loss that a taxpayer may carry forward is limited to 80% of Utah taxable income. In a unitary group, this 80% limitation is applied to the group’s aggregated income. If a member leaves the group, the same principle applies: the losses remain with the "one taxpayer" (the group) that identified them on the return.

Compliance and Reporting Mechanics

For the unitary group to successfully claim the research credit, it must adhere to specific filing procedures outlined in the Form TC-20 instructions.

Schedule M and Combined Filings

The parent or lead corporation must file Form TC-20, Utah Corporation Franchise and Income Tax Return. Accompanying this return must be Schedule M (Corporations Included in Combined Filings), which lists every corporation in the unitary group and identifies their federal Employer Identification Number (EIN) and whether they are doing business in Utah.

Form / Schedule	Purpose	Key Data for R&D Credit
TC-20	Main Return	Final credit amount entered using Code 12
Schedule M	Group Listing	Identification of all "one taxpayer" members
Schedule J	Apportionment	Calculation of Utah gross receipts for the base amount
Form TC-40A	Supplemental	Specific to individuals/pass-throughs, but Code 12 is consistent

The Certification Process for Basic Research

Under § 59-7-612(6), the Commission is authorized to make rules prescribing a certification process for qualified organizations receiving basic research payments. Unitary groups must ensure that any payments made to Utah universities or non-profits for basic research are accompanied by appropriate documentation from those organizations to verify that the research was indeed "basic" and conducted within the state.

Strategic Implications of the "One Taxpayer" Rule

The unitary group structure necessitates a holistic approach to tax planning. Corporations must consider the impact of every group member on the R&D credit, even those not involved in research.

Dilution of the Credit via Gross Receipts

Because the base amount is tied to the group’s aggregated gross receipts, a highly profitable subsidiary with no R&D can "dilute" the credit for the entire group by raising the base amount threshold. If a group acquires a new company with significant Utah sales but no research activity, the group’s average Utah gross receipts will increase, potentially making it harder to exceed the base amount and qualify for the 5% incremental credit in future years.

Optimization of the 14-Year Carryforward

Conversely, the "one taxpayer" rule allows the research credits generated by a small, R&D-heavy subsidiary to be used to offset the massive tax liability generated by a profitable manufacturing or sales subsidiary in the same group. This "credit sharing" is one of the primary benefits of unitary combined reporting, as it ensures that innovation incentives are immediately useful to the larger corporate enterprise rather than being trapped in a loss-making subsidiary.

Intercompany Transaction Eliminations

A final strategic consideration is the elimination of intercompany transactions. Under § 59-7-404.5, corporations filing a combined report must eliminate intercompany sales when determining the sales factor and intercompany rents when determining the property factor. This is vital for the R&D credit because it prevents the group from "creating" gross receipts through internal sales to artificially lower its fixed-base percentage or manipulated base amount.

Comparison with Federal Consolidation Rules

The Utah unitary group is often confused with the federal consolidated group, but they are distinct legal concepts with different impacts on the research credit.

Feature	Federal Consolidated Group	Utah Unitary Group
Ownership Threshold	80%	> 50%
Membership Criteria	Common parent + stock chains	Common ownership + economic interdependence
R&D Credit Basis	Aggregate Group Credit	One Taxpayer Rule (§ 59-7-612)
Intercompany Items	Consolidated adjustments	Statutory eliminations (§ 59-7-404.5)

The broader 50% threshold in Utah means that many companies that file separate federal returns must file combined Utah returns. This necessitates a separate, Utah-only data collection process for the research credit that cannot rely solely on the federal Form 6765.

Final Thoughts: The Unified Theory of the Utah Taxpayer

The treatment of a unitary group as "one taxpayer" for the Utah research activities tax credit represents a coherent and economically grounded policy. By mandating the aggregation of all Utah-based research efforts and comparing them against the group’s total Utah-based business activity, the state ensures that its tax incentives are both targeted and robust. The 14-year carryforward for incremental growth and the immediate 7.5% credit for volume spending provide a dual-track incentive that rewards both the "disruptive" startup and the "established" innovator.

However, the complexity of these rules—spanning from the 50% ownership threshold to the intricate "Joyce/Finnegan" nexus questions and the rigid credit ordering rules—requires that unitary groups maintain exhaustive documentation and a sophisticated understanding of both state and federal law. As demonstrated by recent Commission rulings, the "one taxpayer" identity is permanent and collective; credits and losses belong to the unitary entity, not its constituent parts. For corporations operating in Utah, the unitary group is more than just a filing status—it is the defining characteristic of their existence in the eyes of the state’s revenue office.