Corporate Franchise

Signed 11/13/03







Petitioner, )

) Appeal No. 01-0726

v. ) Account No. #####


AUDITING DIVISION OF ) Tax Type: Corp. Franchise


COMMISSION, ) Judge: Phan


Respondent. )




Jane Phan, Administrative Law Judge


For Petitioner: PETITIONER REP 1, CPA


For Respondent: Susan Barnum, Assistant Attorney General

Laurie LeFevre, Senior Auditor




This matter came before the Utah State Tax Commission for an Initial Hearing pursuant to the provisions of Utah Code Ann. '59-1-502.5, on August 26, 2002.

Petitioner is appealing an audit deficiency of $$$$$ in corporate franchise tax, as well as the interest accrued thereon, for the audit period of January 1, 1996 through December 31, 1999.



(1) "Business income" means income arising from transactions and activity in the regular course of the taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitutes integral parts of the taxpayer's regular trade or business . . .

(4) "Nonbusiness income" means all income other than business income. (Utah Code Ann. 59-7-302(1) & (4).)


All business income shall be apportioned to this state by multiplying the income by a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is three. (Utah Code Ann. 59-7-311.)


A. Business and Non business Income Defined. Section 59-7-302 defines business income as income arising from transactions and activity in the regular course of the taxpayer's trade or business operations. In essence, all income that arises from the conduct of trade or business operations of a taxpayer is business income. For purposes of administration of the Uniform Division of Income for Tax Purposes Act (UDITPA), the income of the taxpayer is business income unless clearly classifiable as nonbusiness income.

1. Nonbusiness income means all income other than business income and shall be narrowly construed . . . (Utah Admin. Rule R865-6F-8(A).)



There was not a dispute between the parties to the facts in this matter, the issue before the Commission was a legal issue, whether income which resulted from the cancellation of debt was business income or nonbusiness income.

COMPANY A ("COMPANY A"), which conducts business in Utah, is a wholly owned subsidiary of Petitioner. Petitioner is also the parent of COMPANY B ("COMPANY B"), which does business in STATE. In addition Petitioner owns 45 other subsidiaries which operate throughout the United States. Petitioner files a unitary return for federal and state tax purposes with its subsidiaries in Utah and the other states in which it conducts business.

COMPANY B and COMPANY A are two separately operated business. They have no shared operations or shared assets. They do not provide financing for the other, nor do they do business together. They are not in the same line of business.

The income at issue in this appeal came from COMPANY B. In 1998 and 1999, COMPANY B canceled debt in the amounts of $$$$$ and $$$$$ respectively, related to its redemptions of Certificates of Land Appreciation Rights ("COLA's"). The COLA's were issued to unrelated third parties by COMPANY B in 1988 as part of a financing mechanism to purchase agricultural property in STATE. COMPANY B, is one of the largest land holders in STATE, and the purchase of the property was clearly within the scope of COMPANY B's regular trade or business. The result of the cancellation of the debt was a taxable gain. It was Petitioner's conclusion that the gain was nonbusiness income and Petitioner allocated the entire gain to STATE on its 1998 and 1999 STATE combined returns, rather than apportioned the gain as business income to Utah and the other states.

In determining whether the gain at issue is business income or nonbusiness income, the Commission considers the functional and transactional tests pursuant to the definition of "business income" provided at Utah Code Ann. Sec. 59-7-302. It is import to note that the Commission has determined that the statutory definition set out at Utah Code Ann. Sec. 59-7-302(1) requires that only one or the other of the two tests be met.[1] In the transactional test the question is whether the gain at issue occurred within Petitioner=s regular course of business. The functional test includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitutes integral parts of the taxpayer's regular trade or business.

Petitioner argues the fact that the financing of the purchases of real estate is part of Petitioner's regular trade or business is not the relevant factor for the transitional test, that the Commission should focus on the whether the event resulting in the cancellation of debt income was regular and recurring and part of the taxpayer's regular trade or business. It is Petitioner=s position that the cancellation of debt income is highly irregular and unusual. Petitioner had declared it as an extraordinary gain on its financial statements.

In turning to the functional test, Petitioner argues that Allied-Signal, Inc. v. Division of Taxation, 112 S.Ct. 2251 (1992) requires that the focus be on the objective characteristics of the asset=s use and its relation to the taxpayer and its activities within the taxing state. Petitioner points out that the debt, on which the forgiveness arose, occurred nearly eight years before Petitioner had any Utah operations. Petitioner purchased the land in STATE and incurred the debt in 1988. Petitioner purchased the Utah subsidiary in 1995. Prior to that time Petitioner had no Utah operations. Petitioner states that there was no relationship between the Utah operations and the debt incurred by the STATE operations. Neither the COLA=s proceeds, nor operations from STATE provided capital for the Utah operations. The debt relief did not provide a benefit to the Utah operations. The benefit was limited to STATE.

It is Respondent=s position that the debt forgiveness income at issue met both the transactional and functional tests. Respondent points out that income is considered to be business income Aunless clearly classifiable as nonbusiness income,@ citing Utah Admin. Rule R865-6F-8.

The Commission agrees with Respondent that the income at issue meets the transactional test. From the information presented by the parties the issuance of COLA=s would be considered a typical type of financing arrangement used by Petitioner to acquire property in STATE and as the acquisition of property was part of its regular trade or business, the cancellation of the debt incurred when the COLA=s were redeemed would also be part of the Petitioner=s trade or business.

Because the Commission concludes that the income at issue would be business income if it meets either the transactional or the functional test, and the transactional test has been met, the Commission does not look further at the functional test.


Based on the foregoing, the corporate franchise tax audit deficiency for the period of January 1, 1996 through December 31, 1999 is sustained. It is so ordered.

This decision does not limit a party's right to a Formal Hearing. However, this Decision and Order will become the Final Decision and Order of the Commission unless any party to this case files a written request within thirty (30) days of the date of this decision to proceed to a Formal Hearing. Such a request shall be mailed to the address listed below and must include the Petitioner's name, address, and appeal number:

Utah State Tax Commission

Appeals Division

210 North 1950 West

Salt Lake City, Utah 84134

Failure to request a Formal Hearing will preclude any further appeal rights in this matter.

DATED this 13th day of November , 2002.



Jane Phan

Administrative Law Judge




The Commission has reviewed this case and the undersigned concur in this decision.

DATED this 13th day of November , 2002.



Pam Hendrickson R. Bruce Johnson

Commission Chair Commissioner





Palmer DePaulis Marc B. Johnson

Commissioner Commissioner


[1] As noted by Respondent this position is supported by cases in other jurisdictions with a similar statute. See Polaroid v. Offerman, 507 S.E.2d 284 (N.C. 1998); and Hoechst Celanese Corp. v. Franchise Tax Board, 22 P.3d 324, 335 (Cal. 2001) cert. denied 122 S.Ct. 614 (2001).