BEFORE THE UTAH STATE TAX
COMMISSION
____________________________________
XXXXX,
Petitioner, : FINDINGS OF FACT,
: CONCLUSIONS
OF LAW
v. : AND FINAL DECISION
:
AUDITING
DIVISION OF THE : Appeal No. 90-1607
UTAH STATE TAX COMMISSION, :
: Account
No. XXXXX
Respondent. :
_____________________________________
STATEMENT OF CASE
On
XXXXX, Petitioner appealed Respondent's assessment of additional Utah corporate
franchise tax for the XXXXX tax year.
The parties subsequently submitted a stipulation of facts, followed by
their respective memoranda of argument and authority.
The
parties having waived their right to further hearing in this matter, the Tax
Commission hereby makes its:
FINDINGS OF FACT
1. Petitioner was a corporation for purposes of
Utah Corporate Franchise Tax as defined in Utah Code Ann. §59-7-101(3) for the
calendar year ended XXXXX.
2. Petitioner's commercial domicile as defined
in Utah Code Ann. §59-7-302(2) for purposes of Utah State Corporate Franchise
Tax is the state of XXXXX.
3. Dividend income, capital gain from the sale
of stock, and the gain from the sale of XXXXX in the amount of $$$$$ was
allowed as nonbusiness income based on interpretation of existing case law and
statutes.
4. Petitioner earned interest income in the
amount of $$$$$ in the calendar year ended XXXXX.
5. Petitioner's investments in interest bearing
instruments were made with the profits from its business or as short-term
investments of its working capital.
6. The interest and dividend income which was earned
was used by Petitioner in its business.
7. Petitioner managed and maintained the
investments which generated interest and dividend income in XXXXX at its XXXXX.
8. Petitioner incurred gain and loss from the
sale of personal property used in the course of Petitioner's business in the
following amounts:
Gain
(Loss)
Furniture & Fixtures used in XXXXX $$$$$
Machinery & Equipment used in XXXXX $$$$$
Machinery & Equipment used in Utah $$$$$
Airplane $$$$$
___________
Total $$$$$
9. Depreciation and other related expenses in
connection with the foregoing personal property was used to reduce Petitioner's
business income for Utah tax purposes over the period of time the assets were
held.
10. The airplane listed above was a corporate
jet used to transport corporate personnel.
The corporate jet was based and maintained in XXXXX.
CONCLUSIONS OF LAW
"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
operations. (Utah Code Ann. §59-7-302(1).)
For
purposes of administration of the Uniform Division of Income for Tax Purposes
Act, the income of the taxpayer is business income unless clearly classifiable
as nonbusiness income. (Utah State Tax
Commission Admin. RuleR865-6F-8.)
11. Nonbusiness income means all income other
than business income and shall be narrowly construed. (Utah State Tax Commission Admin. RuleR865-6F-8.)
In
general all transactions and activities of the taxpayer which are dependent
upon or contribute to the operation of the taxpayer's economic enterprise as a
whole constitute the taxpayer's trade or business and will be transactions and
activity arising in the regular course of, and will constitute integral parts
of a trade or business. (Utah State Tax
Commission Admin. RuleR865-6F-8.)
Gain
or loss from the sale, exchange or other disposition of real or tangible or
intangible personal property constitutes business income if the property while
owned by the taxpayer was used in the taxpayer's trade or business. However, if such property was utilized for
the production of nonbusiness income the gain or loss will constitute
nonbusiness income. (Utah State Tax
Commission Admin. RuleR865-6F-8.)
Interest
income is business income where the intangible with respect to which the
interest was received arises out of or was created in the regular course of the
taxpayer's trade or business operations or where the purpose for acquiring and
holding the intangible is related to or incidental to such trade or business
operations. (Utah State Tax Commission
Admin. RuleR865-6F-8.)
DECISION AND ORDER
This
matter presents two issues to the Commission, which will be discussed as
follows: First, did Respondent
correctly classify gains realized on sale of certain assets as business income;
and second, did Respondent correctly classify certain interest income as
business income.
As
noted in the stipulated facts, Petitioner incurred gain in the amount of $$$$$
on its sale of a corporate jet.
Petitioner incurred loss totaling $$$$$ on its sale of various items of
furniture, fixtures and equipment located in XXXXX or Utah. Respondent has classified the resulting net
gain of $$$$$ as business income, relying on §59-7-302(2) of Utah's Corporate
Franchise and Income Tax Act, which provides:
"Business
income" means income arising from transactions and activity in the regular
course of the taxpayer's trade or business and includes income from tangible
and intangible property if the acquisition, management and disposition of the
property constitutes integral parts of the taxpayer's regular trade or business
operations.
Petitioner
contends that the foregoing provision of law establishes a two-part test; the
first part requiring that the transaction occur in the regular course of the
taxpayer's business, while the second part requires that the property be an
integral part of the taxpayer's operations.
The Petitioner further argues that both elements of the foregoing test
must be met before the income in question is "business income". However, in the Commission's view, the
foregoing statutory definition only requires that either portion of the
definition be met. Petitioner concedes
that the personal property in question is integral and a part of its business
operations. The Commission therefore
concludes that gain on sale of such property is business income for purposes of
Utah's Corporate Franchise and Tax Act.
The
second issue before the Commission is the propriety of Respondent having
classified certain interest income as business income. That interest, in the amount of $$$$$, was
earned from investments made with business profits or short-term working
capital, and was used by Petitioner in its business. The interest-producing investments were made from Petitioner's
XXXXX headquarters.
As
in the preceding issue, the taxability of Petitioner's interest income depends
upon the definition of "business income" previously given. The Commission's RuleR865-6F-8(A)(3)(c)
explains the scope of §59-7-302's definition of business income as follows:
Interest
income is business income where the intangible with respect to which the
interest was received arises out of or was created in the regular course of the
taxpayer's trade or business operations or where the purpose for acquiring and
holding the intangible is related to or incidental to such trade or business
operations.
In
this case, the intangible arose out of profits created in Petitioner's regular
course of business, and the purpose for acquiring and holding the intangible is
related to Petitioner's business operations. Petitioner's interest income
therefore falls within the statute's definition of business income and is
subject to apportionment and taxation by Utah.
The
Commission has considered Petitioner's argument that this case is controlled by
the United States Supreme Court's decision in ASARCO Inc. v. Idaho State Tax
Commission, 458 U.S. 307 (1982).
For the reasons set forth in Respondent's brief, the Commission
concludes that the ASARCO case is not controlling, and that imposition of tax
by Utah under the circumstances of Petitioner's business activity does not
violate the ASARCO precedent.
Based
on the foregoing, the Commission affirms Respondent's conclusion that
Petitioner's gain on sale of tangible property and its interest income are
business income within the meaning of §59-7-302, and are therefore subject to
apportionment and taxation by the State of Utah. It is so ordered.
DATED
this 30 day of April, 1992.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
ABSENT
R. H. Hansen Roger
O. Tew
Chairman Commissioner
Joe B.
Pacheco S.
Blaine Willes
Commissioner Commissioner