Idaho Admin. Code r. 35.01.01.342 - PRINCIPLES FOR DETERMINING THE EXISTENCE OF A UNITARY BUSINESS: DESCRIPTION AND ILLUSTRATION OF FUNCTIONAL INTEGRATION, CENTRALIZATION OF MANAGEMENT AND ECONOMIES OF SCALE
Section 63-3027, Idaho Code
01.
Functional Integration.
Functional integration refers to transfers between, or pooling among, business
activities that significantly affect the operation of the business activities.
Functional integration includes, but is not limited to, transfers or pooling
with respect to the unitary business 's products or services, technical
information, marketing information, distribution systems, purchasing, and
intangibles such as patents, trademarks, service marks, copyrights, trade
secrets, know-how, formulas, and processes. There is no specific type of
functional integration that must be present. The following is a list of
examples of business operations that can support the finding of functional
integration. The order of the list does not establish a hierarchy of
importance. (4-6-23)
a. Sales, exchanges, or
transfers (collectively "sales") of products, services, or intangibles between
business activities provide evidence of functional integration. The
significance of the intercompany sales to the finding of functional integration
will be affected by the character of what is sold and the percentage of total
sales or purchases represented by the intercompany sales. For example, sales
among business entities that are part of a vertically integrated unitary
business are indicative of functional integration. Functional integration is
not negated by the use of a readily determinable market price to effect the
intercompany sales, because such sales can represent an assured market for the
seller or an assured source of supply for the purchaser. (4-6-23)
b. Common Marketing. The sharing of common
marketing features among business entities is an indication of functional
integration when such marketing results in significant mutual advantage. Common
marketing exists when a substantial portion of the business entities' products,
services, or intangibles are distributed or sold to a common customer, when the
business entities use a common trade name or other common identification, or
when the business entities seek to identify themselves to their customers as a
member of the same enterprise. The use of a common advertising agency or a
commonly owned or controlled in-house advertising office does not by itself
establish common marketing that is suggestive of functional integration. (Such
activity, however, is relevant to determining the existence of economies of
scale and centralization of management.) (4-6-23)
c. Transfer or Pooling of Technical
Information or Intellectual Property. Transfers or pooling of technical
information or intellectual property, such as patents, copyrights, trademarks
and service marks, trade secrets, processes or formulas, know-how, research, or
development, provide evidence of functional integration when the matter
transferred is significant to the businesses' operations. (4-6-23)
d. Common Distribution System. Use of a
common distribution system by the business entities, under which inventory
control and accounting, storage, trafficking, or transportation are controlled
through a common network provides evidence of functional integration.
(4-6-23)
e. Common Purchasing.
Common purchasing of substantial quantities of products, services, or
intangibles from the same source by the business entities, particularly where
the purchasing results in significant cost savings or where products, services,
or intangibles are not readily available from other sources and are significant
to each entity's operations or sales, provides evidence of functional
integration. (4-6-23)
f. Common or
Intercompany Financing. Significant common or intercompany financing, including
the guarantee by, or the pledging of the credit of, one (1) or more business
entities for the benefit of another business entity or entities provides
evidence of functional integration, if the financing activity serves an
operational purpose of both borrower and lender. Lending which serves an
investment purpose of the lender does not necessarily provide evidence of
functional integration. (See Subsection
342.02 of this rule for
discussion of centralization of management.) (4-6-23)
02.
Centralization of
Management. Centralization of management exists when directors,
officers, or other management employees jointly participate in the management
decisions that affect the respective business activities and that may also
operate to the benefit of the entire economic enterprise. Centralization of
management can exist whether the centralization is effected from a parent
entity to a subsidiary entity, from a subsidiary entity to a parent entity,
from one (1) subsidiary entity to another, from one (1) division within a
single business entity to another division within a business entity, or from
any combination of the foregoing. Centralization of management may exist even
when day-to-day management responsibility and accountability has been
decentralized, so long as the management has an ongoing operational role with
respect to the business activities. An operational role can be effected through
mandates, consensus building, or an overall operational strategy of the
business, or any other mechanism that establishes joint management. (4-6-23)
a. Facts Providing Evidence of Centralization
of Management. Evidence of centralization of management is provided when common
officers participate in the decisions relating to the business operations of
the different segments. Centralization of management may exist when management
shares or applies knowledge and expertise among the parts of the business.
Existence of common officers and directors, while relevant to a showing of
centralization of management, does not alone provide evidence of centralization
of management. Common officers are more likely to provide evidence of
centralization of management than are common directors. (4-6-23)
b. Stewardship Distinguished. Centralized
efforts to fulfill stewardship oversight are not evidence of centralization of
management. Stewardship oversight consists of those activities that any owner
would take to review the performance of or safeguard an investment. Stewardship
oversight is distinguished from those activities that an owner may take to
enhance value by integrating one (1) or more significant operating aspects of
one (1) business activity with the other business activities of the owner. For
example, implementing reporting requirements or mere approval of capital
expenditures may evidence only stewardship oversight.
(4-6-23)
03.
Economies of Scale. Economies of scale refers to a relation among
and between business activities resulting in a significant decrease in the
average per unit cost of operational or administrative functions due to the
increase in operational size. Economies of scale may exist from the inherent
cost savings that arise from the presence of functional integration or
centralization of management. The following are examples of business operations
that can support the finding of economies of scale. The order of the list does
not establish a hierarchy of importance. (4-6-23)
a. Centralized Purchasing. Centralized
purchasing designed to achieve savings due to the volume of purchases, the
timing of purchases, or the interchangeability of purchased items among the
parts of the business engaging in the purchasing provides evidence of economies
of scale. (4-6-23)
b. Centralized
Administrative Functions. The performance of traditional corporate
administrative functions, such as legal services, payroll services, pension and
other employee benefit administration, in common among the parts of the
business may result in some degree of economies of scale. A business entity
that secures savings in the performance of corporate administrative services
due to its affiliation with other business entities that it would not otherwise
reasonably be able to secure on its own because of its size, financial
resources, or available market, provides evidence of economies of scale.
(4-6-23)
Notes
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