A decision issued by the Virginia Court of Appeals, FJ Management, Inc. v. Commonwealth of Virginia Department of Taxation, No. 0701-23-2 (Virginia Appeals Court 2024), addressed the computation of a corporation’s Virginia-apportioned taxable income, when the corporation owns a partnership interest. The Court of Appeals determined that, in this case, FJ Management, Inc. (FJM) and the company in which it held a seventeen percent partnership, Pilot Travel Centers (PTC), were not a single economic unit—that is, they were not unitary—and therefore FJM was not required to combine seventeen percent of the net income and apportionment information of PTC with its own net income and apportionment information when determining FJM’s Virginia corporate state tax liability.
To address the significant implications of this decision, the Virginia Department of Taxation issued Virginia Tax Bulletin 25-5 in October 2025.
Because the court’s reasoning could be applied to other states, corporate tax departments should reconsider how they apportion their distributive share of partnership income in all states where they file corporate income tax returns.
Blended and Nonblended Approaches to Apportionment
When a corporation owns a partnership interest, corporate taxpayers have a choice of two apportionment methods when determining how much of their corporate business taxable income is subject to tax in a given state: blended appointment and nonblended apportionment. Because these approaches can lead to materially different state taxable income and tax results, using the appropriate method is essential for both multistate income tax compliance and planning. The two choices are as follows.
1. Blended Apportionment
Under a blended—or “factor flow-up”—approach, the corporation incorporates its distributive share of the partnership’s business taxable income and apportionment factors (sales, property, and payroll) into its own taxable business income and factors. This commingled apportioned taxable income base is subject to tax.
2. Nonblended Apportionment
Under a nonblended apportionment approach, the corporation excludes partnership distributive income and factors from its own apportionable taxable business income base and apportionment factors.
Instead, the corporation separately sources its share of the partnership’s income based on the partnership’s stand-alone apportionment factors. Then the partnership’s separately determined apportioned taxable income is added to the corporation’s separately determined apportioned taxable income; the combined taxable business income base is subject to taxation.
The FJM Decision: Unitary Business as a Constitutional Requirement
As noted earlier, FJM held a seventeen percent interest in a partnership, PTC. On FJM’s original Virginia corporate income tax return, FJM applied Virginia’s required statutory blended apportionment method. The company later amended its return and sought a tax refund, arguing that PTC’s operations were not unitary with its own and that Virginia’s required statutory blended approach, therefore, violated US constitutional limits on state taxation.
The Virginia Court of Appeals agreed; the Virginia Supreme Court subsequently denied certiorari. The Court of Appeals found no unitary relationship between FJM and PTC. Drawing on established US Supreme Court precedent, the court determined whether the two entities could be considered one economic unit (and thus unitary) by analyzing whether the two entities shared:
- functional integration, including shared operations, intercompany services, or supply chains;
- centralized management, including overlapping leadership or common decision-making; and
- economies of scale, reflecting efficiencies achieved through joint activity.
The absence of these unitary relationship characteristics (the minority ownership percentage of PTC was not considered) meant that Virginia could not constitutionally treat PTC’s income as part of FJM’s apportionable business income. As a result, FJM was allowed to use the nonblended method to determine FJM’s apportioned Virginia taxable income—significantly reducing its Virginia tax income base and yielding a refund of approximately $450,000.
Virginia Department of Taxation Response
In reaction to the court’s decision, on October 28, 2025, the Virginia Department of Taxation issued Tax Bulletin 25-5 to clarify how taxpayers should apply the court’s reasoning.
For Tax Years 2025 and Beyond
If a corporation and a partnership are not unitary:
- The corporation must exclude the partnership’s income from its apportionable base; and
- The corporation must separately source its distributive share of the partnership’s income using the partnership’s apportionment percentage.
Blended apportionment is permissible only when a unitary relationship is present.
For Tax Years 2024 and Earlier
Virginia will allow taxpayers to:
- continue using blended apportionment even without a unitary relationship; or
- file original or amended returns using the nonblended method.
This approach may create tax refund opportunities for taxpayers with partnership income in prior years. Corporations that file Virginia corporate returns and are engaged in partnerships should review their prior-year Virginia returns to ascertain if a refund opportunity exists.
Potential Implications for Multistate Corporations
Although the FJM decision and subsequent guidance apply directly to Virginia, the court’s rationale is grounded in constitutional principles rather than in state-specific statutes. A state may lack explicit rules requiring or prohibiting blended apportionment for partnership income, which makes this decision potentially consequential.
Corporate taxpayers with partnership investments should consider whether:
- their current apportionment methodology is consistent with constitutional limitations;
- blended apportionment has been applied without a demonstrable unitary relationship; or
- refund opportunities (or tax exposures) exist for open years.
Multistate Tax Commission
In 2021, the Multistate Tax Commission’s Uniformity Committee embarked on a project to examine the state income taxation of partnerships. Among the areas the working group continues to look at are the sourcing of partnership income; sourcing and taxation of gains and losses from the sale of partnership interests; entity-level taxation issues, including transfer pricing or combined filing issues; and other administrative and enforcement issues such as information reporting and withholding.
On January 29, the MTC published a draft white paper titled “State Tax Sourcing of Partnership Income Under the Pass-Through Tax System & the Blended Apportionment Method” as part of its uniformity project. The white paper analyzes the issues taxpayers may encounter when sourcing partnership income.1 Corporate tax staff who prepare state income tax returns that include the distributive share of partnership income should familiarize themselves with this publication and monitor the MTC’s progress.
Key Considerations for Tax Executives
States should not constitutionally impose blended apportionment on a corporation unless the corporation and its partnership are engaged in a unitary business. Challenge the method being used on multistate corporate income tax return filings.
A unitary analysis of the corporation and partnership relationship is critical when determining whether the blended or separate apportionment method should be used to determine a corporation’s state apportioned business taxable income.
Refund opportunities may exist not only in Virginia but also potentially in other states where blended apportionment has historically been applied by default but where a unitary relationship does not exist.
Next Steps for Corporate Tax Departments
Tax professionals may wish to:
- conduct a multistate review of how partnership income is included in their corporate apportioned taxable business income base;
- reassess unitary relationships under established constitutional standards;
- obtain factor information from the partnership (if using the blended method);
- review apportionment calculations for open years; and
- consider opportunities for refunds or amended filings in Virginia and other jurisdictions.
As instructive as the Virginia court decision is, it does not set precedent in other jurisdictions; as a result, other state authorities may challenge claimed refunds, requiring taxpayers to file appeals.
Tony Switajewski is state and local tax principal in the national tax office at CLA.
Disclaimer: The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment, or tax advice or opinion provided by CliftonLarsonAllen LLP.
Endnotes
- The current version (as of April 27, 2026) of the Multistate Tax Commission’s draft white paper is available at www.mtc.gov/wp-content/uploads/2025/08/White-Paper-on-Sourcing-Partnership-Income-8-18-25-Final.pdf.
