When a Nebraska unitary business group includes an S corporation, how is the group's income apportioned, who files which return, and how are the S corporation's shareholders taxed?

Plain-English summary

A unitary group is a set of related corporations run as one integrated business; Nebraska taxes them by figuring out one apportionment factor for the whole group (roughly, the share of the group's activity that is in Nebraska) and applying it to the group's income. This ruling addresses what happens when one of the members is an S corporation -- a pass-through whose income is taxed to its shareholders rather than to the corporation.

The core holding: "The S corporation(s) and the other corporations in a unitary group will use the same apportionment formula. Each S corporation will file a return and the other unitary corporations will file one combined return."

How it works, step by step:

• One factor for the whole group. The apportionment factors are determined for the entire unitary group. That single apportionment factor is applied to the combined federal taxable income of the regular (C) corporations, and the same factor is applied to the S corporation's income to determine the income attributable to the S corporation's operations conducted within Nebraska.
• Who files what. Each S corporation files its own return; the other unitary corporations file one combined return.
• Which years. This procedure applies to tax years both before and after 1984, so there is a consistent method across all open tax years.
• Resident shareholders. They are taxed on their entire federal taxable income, even income earned for activities outside Nebraska, with a credit under section 77-2730 for taxes properly paid to another state.
• Nonresident shareholders. They are taxed on income in federal gross income that is derived from or connected with Nebraska sources, including their distributive share of the S corporation's income and deductions -- but only the portion related to Nebraska-source income. In practice that is the nonresident's pro rata share of the S corporation's Nebraska income, computed using the group factor as above.

What this means for you

S corporations that are part of a larger related-company group

You do not compute your own separate apportionment percentage. If your business is unitary with affiliated corporations, you apply the group's apportionment factor to your income to find the Nebraska share. You still file your own S corporation return, separate from the affiliated C corporations' single combined return.

Shareholders of a unitary S corporation

Where you live changes what Nebraska taxes. Residents are taxed on all of their federal taxable income (claiming the section 77-2730 credit for tax paid to other states), while nonresidents are taxed only on their pro rata share of the S corporation's Nebraska income.

Accountants preparing combined and S corporation returns

Keep the group's single apportionment factor consistent across the combined C corporation return and each S corporation return, and apply it identically to compute each entity's Nebraska income. Because the ruling reaches back to pre-1984 years for consistency and the corporate apportionment statutes have since changed, confirm current law before applying it to a live year.

Common questions

Q: Does an S corporation in a unitary group use its own apportionment factor?
A: No. It uses the same apportionment formula as the rest of the unitary group -- one factor is computed for the whole group and applied to each member's income.

Q: Does the S corporation join the combined return?
A: No. Each S corporation files its own return; the other (C) corporations in the unitary group file one combined return.

Q: How are the S corporation's shareholders taxed?
A: Resident shareholders are taxed on their entire federal taxable income, with a credit under section 77-2730 for tax paid to another state. Nonresident shareholders are taxed on their pro rata share of the S corporation's Nebraska income.

Q: Can I rely on this ruling today?
A: It states the Department's position and is "binding on the Nebraska Department of Revenue until amended," but it dates to 1987 and Nebraska's apportionment and S corporation rules have changed since. Verify current law and consult a Nebraska tax professional.

Citations and references

• Nebraska Revenue Ruling 24-87-1, "Corporate Income Tax -- S Corporation(s) in a Unitary Group" (Nebraska Department of Revenue, Tax Policy Division, issued March 17, 1987; approved by State Tax Commissioner Donald S. Leuenberger).
• Neb. Rev. Stat. § 77-2730 -- credit against Nebraska income tax for taxes properly paid to another state (as cited in the ruling).

Source

• Landing page: https://revenue.nebraska.gov/about/legal-information/revenue-rulings-issued-tax-commissioner
• Original PDF: https://revenue.nebraska.gov/sites/revenue.nebraska.gov/files/doc/legal/rulings/rr248701.pdf

Source-quality note: This ruling survives only as a scanned image and was transcribed by OCR, so the machine-extracted text below contains scanning artifacts (for example "$ corporation" and stray characters). The holding, the single-group-factor method, the filing rules, and the resident/nonresident shareholder treatment are legible and are the basis for this summary.

Original ruling text

department Revenue Ruling 24-87-1
of revenue Tax Policy Division
, March 17, 1987

| | | [essere

Corporate Income Tax-_S Corporation(s) in a Unitary Group. THE
S CORPORATION(S) AND THE OTHER CORPORATIONS IN A UNITARY
GROUP WILL USE THE SAME APPORTIONMENT FORMULA. EACH
S CORPORATION WILL FILE A RETURN AND THE OTHER UNITARY COR-
PORATIONS WILL FILE ONE COMBINED RETURN.

Advice has been requested about how income tax is to be computed when
a portion of the unitary group is an S corporation.

if a unitary group includes an S corporation, the apportionment factors
for the entire unitary group will be determined. The apportionment
factor will applied against the taxable income of the corporate tax-
payer, the combined federal taxable income of the regular corporations.
The same apportionment factor will be applied to the income of the S cor-
poration to determine the income that is attributable to operations of
the S corporation that are conducted within the state. .

Procedure and Implementation. This procedure is to bé done for both
tax years before. and after 1984. This will provide for a consistent
application for all open tax years.

Resident shareholders are subject to tax on their entire federal taxable
income, even if some of it may have been earned for activities outside
Nebraska. A credit is allowed for the taxes properly paid to another
state under the provisions of section 77-2730 of the Nebraska Revised
Statutes.

Nonresident shareholders are subject to Nebraska income tax on all
income included in federal gross income which is derived from or con-
nected with Nebraska sources, including the distributive share of income
and deductions from S corporations. Only that income and deductions
which are related to income derived from sources within Nebraska are
allowed. For a nonresident shareholder this will be their pro rata
share of the Nebraska income of the S$ corporation. The Nebraska
income of the $ corporation will be computed as determined above.

AP.

dS. Leuenberger
State Tax Commissioner

March \7 1987