How does a combined group with both financial and general corporations apportion its income?
Edvin Givargis Published 7 minute read
The short answer
By first deciding what the group predominantly is. California banks and financial corporations still apportion under the evenly weighted three-factor formula of property, payroll, and sales, while general corporations have used the single sales factor since 2013. A unitary combined group containing both kinds of member does not split the difference; it takes one formula, determined by the group's predominant activity. A group deriving more than half its receipts from banking or financial business keeps the three-factor formula; a group whose predominant activity is general keeps the single sales factor. Regulation 25137-10 then supplies the mechanics for combining the two kinds of member inside whichever formula applies, including how the financial members' receipts, receivables, and intangible assets enter factors that were never designed for them. The classification is worth real money in both directions, it is measured at the group level rather than member by member, and it can flip when the business mix changes.
Why mixed groups need their own rules
The two regimes were built for different balance sheets. A general corporation's apportionment factors assume tangible property, conventional payroll, and receipts from selling goods and services. A bank's assets are overwhelmingly intangible, loans, securities, and receivables, its receipts are dominated by interest, and its regulatory world is different enough that California taxes it at its own rate, 10.84 percent for financial corporations against 8.84 percent for general corporations, the premium standing in lieu of the local business taxes financial institutions are exempt from. The entity-level test for financial classification, the predominance of moneyed-capital activity measured under regulation 23183 and covered in the related article on financial corporation classification, decides which regime each member belongs to. The group-level problem arises because unity does not respect that boundary: a retailer with a captive finance company, a manufacturer with a leasing and lending arm, a holding company with both a bank and an insurance-adjacent service business, are all one unitary business containing members on both sides of the line.
Left to the ordinary rules, the combination distorts. Folding a bank's intangible assets into a property factor built for plants and equipment, or a dealer's securities receipts into a sales factor built for merchandise, produces factors that reflect balance-sheet structure rather than activity location. Regulation 25137-10 exists because the Franchise Tax Board concluded that in a mixed group the normal statutory provisions presumptively fail to fairly reflect California activity, and it prescribes the standing correction, so that neither the taxpayer nor the Board has to petition for relief in every mixed-group year.
The predominance switch
The formula question comes first. Revenue and Taxation Code section 25128(b) keeps the evenly weighted three-factor formula for any apportioning trade or business deriving more than 50 percent of its gross business receipts from a qualified business activity, banking and financial business among them, measured for the combined group as a whole. Regulation 25137-10 works with the same idea from the other side, applying its mixed-group mechanics where the group's predominant activity, measured as more than 50 percent of gross income, is not financial, and it cushions the boundary: a group does not reclassify because a single unusual year nudges the percentage across the line, so a one-year trading windfall or a disposition does not whipsaw the formula. The two tests are phrased in slightly different units, receipts in the statute and gross income in the regulation, which in close cases is itself worth attention, because a group near the line can compute differently under the two measures.
The stakes of the switch are concrete. A predominantly financial group keeps property and payroll in the formula, which for a group whose people and operations sit outside California usually dilutes the California percentage relative to a receipts-only computation, and vice versa. A predominantly general group collapses to the single sales factor, where everything rides on receipts assignment, including the financial members' receipts. And whichever way the group formula goes, each member still pays tax at its own rate on its share of the apportioned income: a financial corporation inside a general group keeps its 10.84 percent rate, and a general corporation inside a financial group keeps 8.84 percent. The formula is group-level; the rate is not.
The 25137-10 mechanics
Inside a predominantly general group, the regulation's job since 2013 is mostly the receipts factor, and its subsection (g) says as much, applying the receipts rules alone for single-sales-factor years. The financial members' receipts enter the combined factor under the principles of the banks and financials apportionment regulation, 25137-4.2, receipts from loans, credit card operations, and securities assigned under that regulation's sourcing rules rather than the general market-based cascade, while the general members' receipts follow sections 25134 through 25137 and the market-based rules covered in the related article on sourcing services and intangibles. For any year or group where property and payroll still matter, the regulation's older machinery remains: the financial members' intangible assets, loans and credit card receivables among them, enter the property factor valued at 20 percent of federal tax basis, a haircut standing in for the fact that intangible capital does not occupy space the way tangible property does, with detailed rules assigning receivables to states by the location of the underlying activity. Payroll follows the ordinary rules for everyone.
One project that did not happen matters as much as the rules that did. In 2016 and 2017 the Franchise Tax Board ran an interested parties process aimed at mixed groups dominated by securities broker-dealer receipts, where a dealer's gross receipts from securities transactions swamp the combined sales factor and pull the group's income toward the dealer's locations. The ideas on the table included counting dealer receipts at net gain rather than gross, and splitting the group into separately apportioned financial and general subgroups. No amendment was ever adopted; the regulation's last amendment remains the 2013 one. The consequence is procedural: there is no standing rule for the broker-dealer distortion pattern, and both taxpayers and the Board must bring such cases through section 25137 itself, the variance provision requiring a showing that the standard rules do not fairly reflect California activity, with the burden on whichever party seeks the deviation. The gross receipts question has its own recent history, including precedential Office of Tax Appeals authority rejecting the Board's attempt to shrink 'gross receipts' in the factor, and statutory exclusions for treasury-function receipts that expressly spare a registered dealer's receipts in the ordinary course, so a mixed group with a trading operation should treat factor composition as contested ground rather than settled arithmetic.
Practice notes
The recurring failures in mixed groups are classification drift and formula inertia. Classification drift: the group's financial percentage is computed once, in some base year, and never revisited while the business mix moves, until an audit recomputes it and the formula flips retroactively, with the rate consequences following member by member. The percentage belongs on the annual compliance checklist, with the near-the-line years documented under both the receipts and gross income measures. Formula inertia: a group that crossed the line keeps filing on the old formula because the software rolled forward. Second, keep the entity-level and group-level tests separate in the workpapers; regulation 23183 decides which members are financial corporations and what rate they pay, while the group-level predominance decides the formula, and conflating them produces returns that are wrong in both directions at once. Third, in any group with a dealer or a heavy trading book, model the factor both ways, gross and net, before the Board does; the absence of a standing broker-dealer rule means the exposure runs through section 25137, where the party that wants to move off the standard computation carries the burden, and the contemporaneous distortion analysis is what wins or loses it. These provisions are California-native apportionment law, and the 2025 change to California's federal conformity date has no effect on any of it.
This article states the law as of September 15, 2026
Statutes, rates, thresholds, and agency practice change, and a different set of facts can change the answer. Before acting on anything discussed above, contact G&G State Tax Group to confirm what has changed since this was written and how the rules apply to a specific situation.
G&G State Tax Group, LLC is a state and local tax advisory firm. The firm provides state and local tax consulting and representation in state and local tax controversies. G&G does not prepare or file tax returns, perform attest services, or provide bookkeeping, and is not a CPA firm.