How do apportionment factors roll up through tiers of partnerships, and what happens when a lower tier's data is late, partial or missing?

Which partner, which rule

California has two partnership apportionment regulations from the same 2019 rulemaking, and the partner decides which applies. A corporate partner unitary with a partnership combines its share of the partnership's factors with its own under section 25137-1(f). A partnership apportioning its own business income, for its nonresident partners, its LLC fee base and its withholding, does so at the partnership level under Cal. Code Regs., tit. 18, section 17951-4(d)(1); a partner's own factors enter only where the partner holds 20 percent or more and is unitary with the partnership, and then section 25137-1(f) governs that partner (section 17951-4(d)(2), (d)(6)(A)). An upper-tier partnership is therefore not the taxpayer of section 25137-1; it supplies the factors a corporate partner combines. The library's article on lower-tier factors flowing up covers section 17951-4(d) in more depth.

Which year of the lower tier, and whose share

The roll-up starts with two choices: the year and the share. Federal law includes partnership items for the partnership year "ending within or with" the partner's year (IRC section 706(a)), and California and New York adopt the same window for factors. California combines the partner's share of factors for "any partnership taxable year ending within or with the taxpayer's taxable year" (section 25137-1(f)); New York uses partnership amounts "during the applicable partnership year," defined the same way (20 NYCRR 9-2.3(f)(4), (i)), and the Form IT-204-CP instructions have the corporate partner report the partnership year that ends within its own. In a chain the window applies at each link: a calendar-year upper tier picks up a lower tier with a June year end in the calendar year in which June falls, and passes its calendar year to its own owner.

California adds a reservation: where a unitary partnership and corporation keep different years, "if necessary, in order to avoid distortion," the partnership's income and factors are determined on the corporate partner's accounting period (section 25137-1(f)(5)). The regulation is adopted under Rev. and Tax. Code section 25137, so a staff-imposed method is a "variance action" contested by petition to the FTB's Chief Counsel within 60 days of the written adverse determination (Cal. Code Regs., tit. 18, section 25137(d), operative November 3, 2023). Whether the rule reaches a partnership more than one tier down is open; the regulation is silent.

The second choice is the share. California measures a taxpayer's interest by its "interest in profits" (section 25137-1(f)(4)), a change from capital for periods on and after January 1, 2019. New York measures the proportionate part by capital interest, falling back to the profit-and-loss sharing ratio where capital does not reflect the share of income (20 NYCRR 9-2.3(a)(2)). The two states can therefore scale the same lower tier's factors by different percentages for the same partner. Neither regulation states how an indirect share is computed; multiplying the shares at each link is the arithmetic the tiered sentence of section 25137-1(a) implies, but no text reviewed prescribes it.

Unity is tested at each tier

California's subdivision (f) applies where the partnership's and the taxpayer's activities "constitute a unitary business under established standards, disregarding ownership requirements," and subdivision (a) applies "the same principle" to a partnership held "directly or indirectly" through another partnership. The FTB's likely position is that for a lower tier "the partnership" is that lower tier, so unity is tested between the corporate partner's activities and each lower tier's, however indirect the holding; a lower tier that is not unitary with the corporate partner is a separate trade or business apportioned on its own factors (section 25137-1(g)(1)). The regulation does not say in terms whether unity is tested against each lower tier or between adjacent tiers. Illinois states the tier-by-tier test expressly (86 Ill. Adm. Code 100.3380(d)(2)(B)); New York does not test unity at all, only access to information (20 NYCRR 9-2.2).

What each tier must supply, and in what form

California requires dollars: the partner's share of the partnership's property, payroll and sales enters the partner's numerators and denominators (section 25137-1(f)(1)(A), (f)(3)(A)), and the Form 565 instructions carry the factors on Table 2, Parts A to C for unitary partners and Part C for all non-unitary partners. The same data has a second use: a taxpayer's sales, property and payroll for the doing-business thresholds include its distributive share of pass-through entities (Rev. and Tax. Code section 23101(d)). The choice between single sales factor and three-factor formula is made at the partner level, so the upper tier supplies all three factors; for taxable years beginning on or after January 1, 2025, the three-factor formula is confined to agricultural and extractive activities (Rev. and Tax. Code section 25128(c)(2); Cal. Code Regs., tit. 18, section 25128, as amended for SB 132, Stats. 2025, Ch. 17, filed September 16, 2026).

New York's business apportionment factor is receipts only: the corporate partner includes its distributive share of the partnership's business receipts (20 NYCRR 9-2.3(f)(1)), and lower-tier items keep the source and character determined at the lower tier (9-2.3(a)(4)). A partner subject to the metropolitan transportation business tax surcharge also takes its share of receipts, payroll and property for the MCTD allocation percentage (9-2.3(g)), so its lower tiers supply property and payroll as well. The partnership reports the aggregate of its items on Form IT-204.1 and passes them to each corporate partner on Form IT-204-CP; a partner that is itself a partnership or LLC receives both Forms IT-204-IP and IT-204-CP. The instructions go beyond the regulation in two places: a corporate partner that receives a complete Form IT-204-CP must use the aggregate method, and it may not change any item on its copy but must notify the partnership of an error.

Illinois carries the factors on an attached schedule. For a unitary partner, the partnership enters "see attached schedule of factors" on Schedule K-1-P and attaches the partner's share of its apportionment factors, Illinois and everywhere, and its business income, including factors passed up from a lower unitary partnership. A partnership that is itself a partner prepares a pro forma Schedule K-1-P for its own partners. Where partners owning more than 90 percent of the partnership are unitary with it, the partnership is instead reported on Schedule UB with the group (Schedule K-1-P(1) instructions; 86 Ill. Adm. Code 100.3380(d)(4)).

When a lower tier files nowhere, or somewhere else

None of the aggregate rules reviewed conditions the roll-up on whether the lower tier files in the state; a lower tier that files nothing still has property, payroll and receipts the owner's formula needs. For individuals, New York states the point: an upper tier not carrying on business in New York still has New York source income from a lower tier that is, sourced at the lower tier's business allocation percentage (20 NYCRR 137.6; Form IT-204 instructions). The opposite case is California's subdivision (g)(2): a non-unitary partnership whose business income is entirely within or entirely outside California is not subject to formula apportionment, so an all-outside, non-unitary lower tier contributes nothing to California through the separate-business route, while an all-outside lower tier unitary with the partner still contributes its denominators.

When the information is missing

New York and Illinois both write a rule for a missing lower tier; New York's is the fuller. A corporation that has the upper tier's information but not a lower tier's uses the aggregate method for the upper tier's own items and the entity method for the lower tier's, and "this methodology must be employed at each tier" (20 NYCRR 9-2.2(c), effective December 27, 2023). The fallback is not automatic. It requires that the corporation "does not and will not have access" to the information "within the time period allowed for filing a report, determined with regard to all available extensions of time to file," and a certification to the Commissioner; where a presumption of access is met at each tier, the corporation must also establish the lack of access "to the satisfaction of the Commissioner" (9-2.2(b)(1), (b)(2), (c)). The Department's likely position is that, for a corporation unitary with the chain or holding 5 percent or more at each tier, the Department decides whether the entity method is available; the corporation does not elect it by certifying. Under the entity method the corporation's own factor is computed "without regard to its distributive share of any partnership items" (9-2.4(e)). Lateness that ends before the extended due date is not lack of access. A corporation that received a complete Form IT-204-CP must aggregate, and a late lower-tier figure reaches it through a corrected Form IT-204-CP from the partnership, not through its own substitution.

Whether an indirect interest counts toward the 5 percent presumption at a lower tier is not answered: the presumption borrows a measure, a distributive share under IRC section 704, that speaks to a direct interest (20 NYCRR 1-2.3(e)(1)). The Department's likely position is that the presumptions are tested "at each tier" and that an indirect holder's section 704 share is its share through the chain. The question seldom matters because a complete Form IT-204-CP settles the method.

Illinois's rule sits in the withholding instructions: a partnership that received income from another partnership but no Schedule K-1-P must calculate the partner's share as if the amounts were reported on one (Schedule K-1-P(4) instructions, Step 3). It concerns income for withholding, not apportionment factors, but shows that a missing schedule does not excuse the computation.

Illinois: unity and a shared formula, tested against the lower tier

Where a partner is unitary with a first partnership that owns a second, the second partnership's business income and factors reach the partner only if the partner is unitary with the second partnership; otherwise the partner takes its share of the base income the second partnership apportioned to Illinois (86 Ill. Adm. Code 100.3380(d)(2)(B)). Unity is necessary but not sufficient. For taxable years ending on or after December 31, 2017, where the partner and the partnership apportion "using different apportionment formulas under IITA Section 304," the partner does not combine the partnership's factors with its own: the partnership's percentage is computed under Section 100.3600 "using only that partner's distributive share of the partnership's apportionment factors and sales," and the partner's percentage is its own plus that partnership percentage ((d)(2)(C)(i)). Partners that share the partnership's formula combine under (d)(2)(A) ((d)(2)(C)(ii)). For earlier years a partner on a different formula was excluded from subsection (d) altogether ((d)(3)(A)(i)). The Department's likely position is that it tests the formula question before any factors combine, so a partner on a different formula never carries a distribution partnership's gross factors into its own.

Two threshold rules can remove a partnership from the roll-up: a partnership that cannot be in a unitary business group with the partner, including under the 80/20 test, contributes no factors ((d)(3)); and a partnership more than 90 percent owned, by income, by one unitary group's members is treated as a member of that group "for all purposes" and reported on Schedule UB ((d)(4)). No rule reviewed limits flow-through by the number of tiers.

Estimates and the true-up

No rule reviewed authorizes estimated lower-tier factors. California's regulation and the Form 565 instructions assume the partner has its share of the factors; New York replaces missing information with the entity method, not an estimate; Illinois tells a partnership without a lower-tier schedule to compute the share as if it had been received. A return filed on estimated or prior-year factors is therefore a return whose factors may change, and the correction rules are what matter. In California the partnership checks the amended return box and should file an amended Form 565 and an amended paper Schedule K-1 (565) for each affected partner, with a statement identifying each amended line. In New York it marks the amended box, explains the changes, submits only the amended Forms IT-204-IP and IT-204-CP with the amended return and provides them to its partners; the corporate partner does not alter its own copy.

The tax moves at the partner level, and the correction runs both ways. A refund is available only within each partner's own period. In California it is four years from the filing of a timely return, four years from the last day prescribed for filing (without extensions), or one year from the overpayment, whichever expires later (Rev. and Tax. Code section 19306(a)). In New York a corporate partner under Article 9-A has three years from the return or two years from payment, whichever is later (Tax Law section 1087(a)), and an individual partner has the same periods under Article 22 (Tax Law section 687(a)). An increase is not bounded by the refund period. No rule reviewed sets a filing window for an amended return that raises tax after a lower-tier true-up; the six-month rule of Rev. and Tax. Code section 18622 reaches federal changes and federal amended returns only. The assessment period runs from the original return, four years in California, or six where the omission from gross income exceeds 25 percent of the gross income stated (Rev. and Tax. Code sections 19057(a), 19058(a)), and three years in New York, or six for the same omission (Tax Law section 1083(a), (d)). California adds a penalty: the large corporate understatement penalty is 20 percent of the amount by which the tax finally imposed exceeds the tax shown on the original return, or on an amended return filed by the extended due date, where that understatement exceeds the greater of $1,000,000 or 20 percent of the tax shown (section 19138(a)(1), (b)(1)). An amended return filed after the extended due date does not raise the baseline, so a corporation whose original return used low lower-tier figures carries the exposure. The library's California penalty article covers the exceptions.

Losses, negatives and property values

In California a lower tier's loss does not take its receipts out of the roll-up. Gross receipts are "the gross amounts realized" in a transaction that produces business income "in which the income, gain, or loss is recognized" (Rev. and Tax. Code section 25120(f)(2)), and the partnership rule includes "the partnership's sales which give rise to business income" with no carve-out for a loss year (section 25137-1(f)(3)(A)).

New York is different for net-measured receipts. The corporate partner combines its share of the partnership's receipts with its own, and "netting of gains and losses must be computed on the combined corporation and partnership amounts" (20 NYCRR 9-2.3(f)(1)). For the receipts items Tax Law section 210-A measures as net gains not less than zero, among them sales of real property in the state, loans, debt instruments, stock and partnership interests and other financial instruments, a lower tier's losses are netted against the corporation's gains after combination. The Department's likely position is that a partner cannot carry a lower tier's gross receipts from those items into the factor and leave its losses behind. Receipts from sales of goods and services are not net-measured, so a distribution partnership's loss year does not reduce them.

Property cannot go negative in California's factor. Owned property is valued at original cost (Rev. and Tax. Code section 25130), which the regulation defines as federal basis "prior to any federal adjustments," and the regulation's example says the depreciation deduction is not taken into account (Cal. Code Regs., tit. 18, section 25130(a)(1)); rented property enters at eight times the net annual rental rate; and the average is the beginning and ending values, subject to the FTB requiring monthly values (section 25131). A lower tier that reports net book value, or accumulated depreciation as a negative line, has reported something the California factor does not use.

One state, two methods

The same structure is aggregate for one partner and separate-entity for another in New York. A corporate partner with access aggregates receipts through the tiers; a nonresident individual allocates lower-tier income at the lower tier's business allocation percentage and upper-tier income at the upper tier's (20 NYCRR 137.6). An upper tier with both kinds of partners prepares both schedules. The filing fee worksheet on the same form follows the same tier logic for a different base and belongs to the library's New York filing fee article.

A worked example

A calendar-year corporation in the distribution business owns 50 percent of the profits of a calendar-year holding partnership. The holding partnership has no property, payroll or sales of its own and owns profits interests in four operating partnerships, all distributors of goods: A (40 percent, calendar year), B (60 percent, year ending June 30 of the current year), C (25 percent, calendar year) and D (50 percent, calendar year, with an ordinary loss of $500,000). The corporation is unitary with the holding partnership and with each of A through D, so section 25137-1(f) applies at every tier, and every partner apportions under the single sales factor, so the Illinois different-formula rule does not arise. The facts are invented. The corporation has $41,000,000 of sales everywhere and $4,000,000 in California of its own, and combined business income is $10,000,000. Only the sales factor is shown; all receipts are sales of goods, and D's loss is an ordinary operating loss, not a net-measured gain item.

• Lower-tier sales at 100 percent (everywhere / California): A $20,000,000 / $5,000,000; B $10,000,000 / $2,000,000 (its year ended June 30, within the holding partnership's calendar year); C $8,000,000 / $4,000,000; D $4,000,000 / $1,000,000.
• The holding partnership's share: A $8,000,000 / $2,000,000; B $6,000,000 / $1,200,000; C $2,000,000 / $1,000,000; D $2,000,000 / $500,000. Total $18,000,000 / $4,700,000.
• The corporation's 50 percent: $9,000,000 / $2,350,000.
• Combined: $41,000,000 plus $9,000,000 is $50,000,000 everywhere, and $4,000,000 plus $2,350,000 is $6,350,000 in California. The factor is 6,350,000 / 50,000,000, or 12.700000 percent, and California income is $10,000,000 times 12.700000 percent, or $1,270,000.

Variant 1, a late lower tier. C's figures arrive after the corporation files, and the return used C's prior-year figures, $6,000,000 / $1,500,000 at 100 percent. The holding partnership's share of C becomes $1,500,000 / $375,000, its total $17,500,000 / $4,075,000, and the corporation's share $8,750,000 / $2,037,500. The combined factor is 6,037,500 / 49,750,000, or 12.135678 percent, so California income is $1,213,568 (computed on the unrounded factor). The actual figures add $56,432. The correction runs through an amended Form 565 and Schedule K-1 (565) and an amended return from the corporation; no rule reviewed sets a filing window for the increase, the four-year assessment period runs from the original return, and the $56,432 counts toward the large corporate understatement penalty threshold if the corporation's total understatement crosses it. No rule reviewed treats the prior-year figures as acceptable in the first place.

Variant 2, the loss tier dropped. If D's receipts were left out because D had a loss, the corporation's share falls to $8,000,000 / $2,100,000, the combined factor to 6,100,000 / 49,000,000, or 12.448980 percent, and California income to $1,244,898 (unrounded factor). Section 25120(f)(2) and section 25137-1(f)(3)(A) include D's receipts, so the $25,102 difference is an understatement. New York gives the same result for D's sales of goods, which are not net-measured; netting would matter only if D's receipts included net-gain items such as sales of stock.

New York, same structure. If the corporation also files in New York, its 50 percent interest meets the 5 percent presumption at the holding partnership tier, and a complete Form IT-204-CP requires the aggregate method. If C's information will not exist by the extended due date, the corporation is unitary with C, so a presumption is met at C's tier, and the entity method for C's items requires a certification and a showing to the Commissioner's satisfaction. Otherwise C's receipts are aggregated, and a late figure arrives through an amended Form IT-204-CP.

The example leaves out property and payroll, intercompany eliminations, tax amounts, the common period question and the Illinois different-formula computation.

Practice notes

Request dollar factors (numerators and denominators by state, at 100 percent), each lower tier's year end, its ownership measure and its apportionment formula, not percentages. For a New York corporate partner, decide by the extended due date whether a lower tier's information will exist; where a complete Form IT-204-CP arrives, aggregate; where it will not, document the certification tier by tier, the presumptions met at each tier, and the showing to the Commissioner where one is met. In Illinois, test unity and the formula against each lower tier, not only the first partnership, apply the 80/20 and 90 percent rules before carrying any factors up, and attach the schedule of factors a unitary partner needs. Keep loss partnerships' receipts in the California factor and property at original cost, with no accumulated depreciation lines; in New York, net a lower tier's gains and losses on net-measured items against the corporation's own after combination.

When actual lower-tier figures replace the ones filed, issue amended partnership returns and schedules with the line statement the instructions require, file the partner's amended return whether the change is up or down, and calendar each partner's refund and assessment periods; for a California corporate partner, measure the change against the section 19138 threshold. G&G State Tax Group provides multistate partnership apportionment and amended-return reviews alongside its state and local tax practice.