90-1607 - Corporation Franchise

 

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