A New Mexico taxpayer’s gain from sale of its interest in a public company was business income subject to apportionment. The income was subject to apportionment under both:
- the dispositional test; and
- the functional test.
Both tests applied to the taxpayer’s income because the income arose from:
- the disposition of a line of business; and
- a functional asset integral to the taxpayer’s regular trade or business operations.
The taxpayer is an indirect, wholly-owned subsidiary of an agricultural commodities merchant headquartered in the U.K. The taxpayer is headquartered in Louisiana. WGI was a publicly traded company. The taxpayer owned between 48% and 49.5% of WGI. Between 2006 and 2009 the taxpayer sold two subsidiaries to WGI.
In 2013 the taxpayer reacquired one of the subsidiaries from WGI, and then sold its interest in WGI two weeks later to an unrelated third-party. On audit, the Taxation and Revenue Department determined that the income from the sale of WGI stock was business income and apportioned part of the gain to New Mexico. The taxpayer argued that it held no more than a 49% ownership interest in WGI and could not be considered unitary with it.
The New Mexico Legislature created the dispositional test in response to a tax decision. Under the test, proceeds from the disposition of a line of business is considered business income subject to apportionment. In this case, the taxpayer reacquired the subsidiary from WGI and then sold its interest in WGI two weeks later to an unrelated third-party. The administrative hearing officer (AHO) found that the taxpayer again owned the subsidiary, an asset that had been furthering the taxpayer’s operational need between 2009 through 2013. When the taxpayer sold its interest in WGI, the gain was subject to tax as business income under the dispositional test.
Further, the AHO found that, even if the taxpayer only owned a 49% interest in WGI, that interest provided the taxpayer with operational benefit and function. The taxpayer and WGI maintained functional integration with some elements of centralized management after the 2009 transfer of the subsidiaries to WGI. The taxpayer’s parent group provided three of the seven members of WGI’s corporate board. WGI’s first CEO came from the parent group. The parent group had an administrative services agreement where the taxpayer provided core administrative support services to WGI. Some of the agreements between the parent group and WGI provided the right of first refusal on storage space at the lowest price offered.
As a result, the AHO found that all the continuing connections between the parent group and WGI in 2009 through 2013 provided the taxpayer with operational benefit to its line of business. The taxpayer’s stock in WGI was not held purely for passive investment reasons.
U.S. Commerce Clause and Due Process Clause
Further, the AHO found the taxpayer failed to establish that the state sought to tax extraterritorial values. The taxpayer received operational benefit integral to its business from the subsidiary due to:
- the taxpayer’s stock interests in WGI in 2009 to 2013; and
- short term reacquisition of the subsidiary in 2013.
The direct and indirect ownership interest in WGI provided the taxpayer with an operational benefit in New Mexico. Thus, apportionment of the gain on the sale did not violate the Commerce or Due Process Clauses of the U.S. Constitution.
In the Matter of the Protest of Agman Louisiana Inc., New Mexico Taxation and Revenue Department, No. 17-47, December 5, 2017, ¶401-816
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