312 P.3d 1143
Ariz. Ct. App.2013Background
- Harris Corporation, a Delaware company with Florida offices, filed Arizona corporate income taxes on a consolidated basis for 1997–2001.
- Arizona returns classified Harris's gains from asset contributions to GE joint venture, Lanier Medical Transcription sale proceeds, and royalties from Harris Semiconductor patents as nonbusiness income, while other operating income was treated as business income.
- Department audited, proposed assessments; Taxpayer challenged in Arizona Tax Court, which granted summary judgment for the Department.
- Arizona’s UDIPTA-based framework apportions business income and allocates nonbusiness income, with two definitional clauses in AR.S. § 43-1131(1).
- The court analyzes whether § 43-1131(1) creates two alternative tests and whether a liquidating disposition constitutes business income.
- The court ultimately holds that the statute provides two independent definitions of business income and rejects a liquidation exception.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does AR.S. § 43-1131(1) provide two independent tests for business income? | Harris argues the second clause is merely an example, not an independent test. | Department/Amicus contend the statute has two distinct definitions; either may qualify income as business income. | Yes; § 43-1131(1) provides two alternative definitions of business income. |
| Is there a liquidation exception to the definition of business income? | Liquidation should not be treated as business income under either clause. | No liquidation exception; dispositions related to assets used in business can be business income. | No liquidation exception; liquidation gains may be business income if they relate to a prior business use. |
| Do Harris's gains from asset dispositions qualify as business income under the transactional or functional test? | Some asset dispositions are not in the regular course of business and thus nonbusiness. | Gains qualify as business income if they were associated with Harris’s regular business activities, including acquisitions/dispositions. | Gains from Harris’s asset dispositions are business income under both tests. |
| Do gains from Lanier sale and consolidated subsidiaries' assets qualify as business income? | Spin-offs and subsidiary transactions are not necessarily in Harris’s regular business. | Spin-offs and subsidiary sales were in the regular course or integral to the group’s business operations. | Yes; Lanier sale gains and subsidiary asset dispositions qualify as business income. |
Key Cases Cited
- Texaco-Cities Serv. Pipeline Co. v. McGaw, 230 Ill.Dec. 991, 695 N.E.2d 481 (Ill. 1998) (functional vs transactional definitions of business income)
- Gannett Satellite Info. Network, Inc. v. State, Dep’t of Revenue, 201 P.3d 132 (Mont. 2009) (divides tests for business income under UDIPTA)
- Hoechst Celanese Corp. v. Franchise Tax Bd., 22 P.3d 324 (Cal. 2001) (functional approach to property-based income)
- Simpson Timber Co. v. Oregon Dep’t of Revenue, 953 P.2d 366 (Or. 1998) ( UDIPPA interpretation of business income)
- Pledger v. Getty Oil Exploration Co., 831 S.W.2d 121 (Ark. 1992) (examples of business income from asset transactions)
- Dist. of Columbia v. Pierce Assocs., Inc., 462 A.2d 1129 (D.C. 1983) (functional test context for business income)
- Jim Beam Brands Co. v. Franchise Tax Bd., 133 Cal.App.4th 514, 34 Cal.Rptr.3d 874 (Cal. App. 2005) (functional vs transactional interpretation of similar statute)