The gain from an S-Corporation’s sale of assets of its beverage business conducted in Colorado was not apportionable by California. Matter of the Consolidated Appeals of Western Distributing Company et al., 2026-OTA-467P (June 18, 2026) (Pending Precedential). The Office of Tax Appeals (“OTA”) held that the Colorado beverage business was not operated as a unitary business with the S-Corporation’s multistate transportation business under California unity principles.
Western Distributing Company (“WDC”) is a Colorado-based S-Corporation not formed under the laws of California. It started business in the 1930s, after prohibition ended, as a beer distributor known as “Western Beverage.” By 1977, it had purchased six long-haul trucks that were intended to be used to pick up Western Beverage’s inventory; by 1986, the long-haul trucking business became a profitable interstate transportation business; and in 1987, the company established a separate trade name for the trucking business, Western Distributing Transportation Corp. (“Western Transportation”). WDC acquired beer distributorships and beverages rights in the 1990s and 2000s. Finally, in 2010, WDC sold the assets of the Western Beverage division.
By the time of the 2010 sale of the Western Beverage assets, WDC consisted of business activities organized in 14 divisions, the largest of which were Western Beverage and Western Transportation (Western Transportation conducted business in California). One individual owned more than 84 percent of the voting shares of WDC, was its president and chief executive officer (“CEO”), and allowed each division to operate separately from the others, with each division’s managers running each division independently. Of the president and CEO, the OTA found that, “He regularly spoke with division managers and made suggestions but, in his words, they were ‘ultimately responsible’ for whether to accept his suggestions and for business operations decisions.”
WDC’s corporate office had 15 employees: 10 in accounting, two in information technology, and three in building maintenance. There was no centralized advertising, marketing, sales, or legal departments, with each division conducting its own bookkeeping, accounting, advertising, and sales activities (Western Beverage’s sales department included approximately 100 people). WDC-corporate-office accounting prepared tax returns and financial statements based on reporting from the divisions.
WDC had a line of credit that was secured by Western Beverage’s assets, linked to WDC’s checking account, and used by Western Beverage (Western Transportation had its own debt). WDC had one insurance policy for general commercial liability and employee benefits coverage that listed WDC and all of its divisions. WDC had centralized human resources functions, a central retirement plan, and centralized payroll and employee benefits processing.
Each division had one or more managers (some were vice presidents) who managed the day-to-day operations of the division while “periodically discussing operations with” the president and CEO. There was testimony that the president and CEO had “very little involvement” in the day-to-day operations of Western Transportation, and a sales manager for Western Beverage said “he had ‘very limited contact’ with corporate executives” and that “because the business was doing well, ‘they left us to run the business as we saw fit’ and were ‘very hands-off.’” Slip Op. at 5-6.
Each division controlled its own purchasing. The testimony demonstrated that all the divisions used the single checking account of WDC, the president and CEO signed “the vast majority of checks[,]” and the centralized checking account allowed the president and CEO and the vice president and chief financial officer to monitor cash flow while the divisions made the purchasing decisions and placed the orders. Slip Op. at 6.
From 2006 to 2010, WDC subtracted Western Beverage’s expenses from the total apportionable income reported to California, which increased WDC’s net losses apportioned to California for those years. For 2010, WDC reported the gain on the sale of the Western Beverage assets as income for federal reporting purposes, and on its California tax return, it reported the gain as non-apportionable non-business income sourced to Colorado. On audit, the Franchise Tax Board apportioned the gain and increased the California apportionment factor by approximately 35 percent, resulting in additional tax, interest, and penalty for the S-Corporation and a pro-rata pass-through to the shareholders.
The OTA analyzed, in California style, the “three unities” test (all three of unity of ownership, operations, and use) and the “dependency or contribution” test. The U.S. Supreme Court had already confirmed that common ownership alone is insufficient for apportionability because otherwise all commonly owned companies would be unitary—there has to be more than common ownership. See F.W. Woolworth Co. v. Taxation & Rev. Dep’t of New Mexico, 458 U.S. 354 (1982); ASARCO, Inc. v. Idaho State Tax Comm’n, 458 U.S. 307 (1982).
The OTA found that unity of use (indicated by centralized management) was not present, and it, therefore, concluded that the three unities test was not met. The OTA found that WDC’s divisions lacked common advertising, significant intercompany sales, centralized management, or other indicators of dependency or contribution, and it, therefore, concluded that the dependency or contribution test was also not met. On the aforementioned facts that included separate decision-making supported by the level of oversight one would expect from the steward/owner of a business (see Woolworth), the facts should also fail the test of unity under the Due Process and Commerce Clauses of the U.S. Constitution.
The Takeaway: The inquiry as to unity of businesses and a sale of assets will involve delving into the facts. The U.S. Supreme Court’s Woolworth decision is clear that common ownership of businesses, occasional oversight that a parent would give to investment in a subsidiary, and little integration of business activities or centralized management, do not support a unity finding as a matter of Constitutional principles, and the OTA concluded that for WDC and its shareholders the same factual underpinnings are true in California under that state-level unity analysis.
This update is one in a series of updates written for the September 2026 edition of The BR State + Local Tax Spotlight.
© 2026 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.