The Virginia Supreme Court upheld a ruling that allows a taxpayer to allocate all income from a minority partnership interest to their home state, rejecting the state’s attempt to require apportionment due to the absence of a unitary business relationship.

On May 30, 2025, the Virginia Supreme Court denied the Virginia Department of Taxation’s (Department) appeal of the Appellate Court’s decision in the case of Department of Taxation v. FJ Management Inc., Virginia Ct. of Appeals, Record No. 0701-23-2 (Nov. 12, 2024). This decision allowed FJ Management, Inc. (FJM or Taxpayer) to directly allocate 100% of their pro-rata share of income generated from a minority interest in a partnership doing business in Virginia to their state of domicile outside of the state. In doing so, the Appellate Court denied the Department’s attempt to require apportionment of partnership income based on the partner’s pro-rata share of property, payroll, and sales of the partnership on grounds the minority partner did not have a unitary business relationship with the underlying partnership. 

As a result, the 2024 decision by the Appellate Court was upheld and the Taxpayer’s assertion that the Department’s assessment is improper and unconstitutional was sustained. This case serves as a win for the Taxpayer and provides insight into the proper application of the unitary business principle. 

Background

FJM is a Utah corporation that owns limited liability company interests in many different operating businesses including a 17% minority interest in Pilot Travel Centers, LLC (PTC) which operates truck stops in multiple states including Virginia.

For tax years 2013-2015, FJM filed Virginia corporate income tax returns that apportioned their distributive share of Schedule K-1 income from PTC. The income earned through PTC was subject to Virginia income tax based in part on FJM’s apportionment factors combining their pro-rata apportionment factors from their interest in PTC. Subsequent to these filings, the Taxpayer had amended these Virginia income tax returns to exclude PTC’s income and pro-rata factors from apportionable business income and recast such Schedule K-1 income as allocable nonbusiness income given that they did not maintain a unitary business relationship with PTC. The Department denied the amended returns on the grounds that FJM’s ownership interest in PTC was not limited enough to exclude the partnership’s income from apportionment. 

The Trial Court ruled in favor of the Taxpayer, finding that a unitary relationship did not exist between the parties and therefore, income from PTC was allocable and not subject to apportionment. The Department appealed the ruling of the Trial Court. Upon review, the Virginia Court of Appeals ruled in favor of the Taxpayer, upholding the decision of the Trial Court.

Unitary business principle

The Department argued that the Taxpayer and PTC constituted a unitary business, thereby requiring the income of the unitary relationship to be apportioned for Virginia income tax purposes. The Trial Court determined that the hallmarks of a unitary business relationship – functional integration, centralized management and economies of scale – were lacking in the relationship between FJM and PTC. Specifically, the Trial Court noted that there were separate and discrete lines of business, no shared functions or operations, and all business transactions between FJM and PTC were at arm’s length and followed market standards. Additionally, the Taxpayer held no significant management duties or responsibilities and lacked managerial control over these decisions, as well as lacking control over PTC’s board of managers. 

On review, the Appellate Court upheld the conclusions of the Trial Court, agreeing that the hallmarks of a unitary relationship were lacking between FJM and PTC. In the absence of a unitary relationship, the Appellate Court concluded that Department’s application of the apportionment method to their Schedule K-1 income from PTC income violated the Due Process and Commerce Clauses of the U.S. Constitution.

Secondary arguments

In addition to rejecting the Department’s assertion that FJM and PTC were unitary, the Appellate Court also rejected additional arguments made by the Department on either procedural grounds or on the basis that the Department misunderstood the basis of the court precedent and statutory law it sought to assert. 

Supreme Court review 

The Department petitioned the Virginia Supreme Court for review of the Appellate Court’s decision. The Supreme Court, however, denied review. As such, the judgment of the Appellate Court controls.

What does CohnReznick think? 

This case highlights the critical issue of the relationship between the unitary business principle and state apportionment and allocation. In particular, the analysis of the Appellate Court provides additional guidance on the interpretation and enforcement of the unitary business principle in Virginia based on a taxpayer’s facts and circumstances in determinations of whether income received from ownership interests in underlying entities should be apportioned or allocated. 

The guidance established in this recent Appellate Court decision is of particular importance for taxpayers with investments in other businesses. While not overruling existing precedent, the FJM case provides a Virginia-specific roadmap for how to analyze the unitary relationship between a taxpayer and a third-party entity in which the taxpayer is invested. Given the complexities of analyzing apportionment and allocation issues in Virginia (and other states), taxpayers are encouraged to consult with their tax advisors to determine what impact this case may have on them based on their particular facts.