Definitions For Purposes Of Multistate Rules (Rule 325)

Section 63-3027, Idaho Code. For purposes of computing the Idaho taxable income of a multistate corporation, the following definitions apply: (4-6-23) 01. Affiliated Corporation and Affiliated Group. An affiliated corporation is a corporation that is a member of a commonly controlled group of which the taxpayer is also a member. The commonly controlled group is referred to as an affiliated group. Although Idaho generally follows federal tax principles and terminology, Idaho’s use of the terms affiliated corporation and affiliated group means a corporation or corporations with over fifty percent (50%) of its voting stock directly or indirectly owned or controlled by a common owner or owners. For information on what constitutes common control, see Rule 344 of these rules. (4-6-23) 02. Allocation. Allocation refers to the assignment of nonapportionable income to a particular state. (4-6-23) IDAHO ADMINISTRATIVE CODE IDAPA 35.01.01 Idaho State Tax Commission Income Tax Administrative Rules Section 325 Page 49 03. Apportionment. Apportionment refers to the division of apportionable income between states in which the business is conducted by the use of a formula containing apportionment factors. (4-6-23) 04. Business Activity. Business activity refers to the transactions and activity occurring in the regular course of a particular trade or business of a taxpayer or to the acquisition, management, and disposition of property that constitute integral parts of the taxpayer’s regular trade or business operations. (4-6-23) 05. Combined Group. Combined group means the group of corporations that comprise a unitary business and are includable in a combined report pursuant to Section 63-3027(22) or 63-3027B, Idaho Code, if the water’s edge election is made. (4-6-23) 06. Combined Report. Combined report refers to the computational filing method to be used by a unitary business which is conducted by a group of corporations wherever incorporated rather than a single corporation. (4-6-23) 07. Gross Receipts. (4-6-23) a. Gross receipts are the gross amounts realized, (the sum of money and the fair market value of other property or services received) on the sale or exchange of property, the performance of services, or the use of property or capital (including rents, royalties, interest and dividends) in a transaction that produces apportionable income, in which the income or loss is recognized (or would be recognized if the transaction were in the United States) under the Internal Revenue Code. Amounts realized on the sale or exchange of property are not reduced for the cost of goods sold or the basis of property sold. Gross receipts, even if apportionable income, do not include such items as, for example: (4-6-23) i. Repayment, maturity, or redemption of the principal of a loan, bond, or mutual fund or certificate of deposit or similar marketable instrument; (4-6-23) ii. The principal amount received under a repurchase agreement or other transaction properly characterized as a loan; (4-6-23) iii. Proceeds from issuance of the taxpayer's own stock or from sale of treasury stock; (4-6-23) iv. Damages and other amounts received as the result of litigation; (4-6-23) v. Property acquired by an agent on behalf of another; (4-6-23) vi. Tax refunds and other tax benefit recoveries; (4-6-23) vii. Pension reversions; (4-6-23) viii. Contributions to capital; (4-6-23) ix. Income from forgiveness of indebtedness; or (4-6-23) x. Amounts realized from exchanges of inventory that are not recognized by the Internal Revenue Code. (4-6-23) b. Exclusion of an item from the definition of gross receipts is not determinative of its character as apportionable or nonapportionable income. Nothing in this definition is to be construed to modify, impair or supersede any provision of Rules 560 through 595 of these rules. (4-6-23) 08. Group Return. A unitary group of corporations may file one (1) Idaho corporate income tax return for all the corporations of the unitary group that are required to file an Idaho income tax return. When used in these rules, group return refers to this sole return filed by a unitary group. Use of the group return precludes the need for each corporation to file its own Idaho corporate income tax return. (4-6-23) IDAHO ADMINISTRATIVE CODE IDAPA 35.01.01 Idaho State Tax Commission Income Tax Administrative Rules Section 330 Page 50 09. MTC. The Multistate Tax Commission. (4-6-23) 10. Multistate Corporation. A multistate corporation is a corporation that operates in more than one (1) state. For purposes of this definition, state is defined in Section 63-3027(1)(j), Idaho Code. (4-6-23) 11. Unitary Business. Unitary business is a concept of constitutional law defined in decisions of the United States Supreme Court. See Rule 340 of these rules. (4-6-23) 326. -- 329. (RESERVED) 330. APPORTIONABLE AND NONAPPORTIONABLE INCOME DEFINED: APPORTIONMENT AND ALLOCATION (RULE 330). Section 63-3027(1), Idaho Code. Sections 63-3027(1)(a) and 63-3027(1)(h), Idaho Code, require that every item of income be classified either as apportionable income or nonapportionable income. Income for purposes of classification as apportionable or nonapportionable includes gains and losses. Apportionable income is apportioned among jurisdictions by use of a formula. Nonapportionable income is specifically assigned or allocated to one (1) or more specific jurisdictions pursuant to express rules. An item of income is classified as apportionable income if it falls within the definition of apportionable income. An item of income is nonapportionable income only if it does not meet the definitional requirements for being classified as apportionable income. (4-6-23) 331. APPORTIONABLE AND NONAPPORTIONABLE INCOME DEFINED: APPORTIONABLE INCOME (RULE 331). Section 63-3027(a)(1), Idaho Code 01. In General. Apportionable income means income of any type or class and from any activity that meets the “transactional test” described in Rule 332 of these rules, or the “functional test” described in Rule 333 of these rules. The classification of income by the labels occasionally used, such as manufacturing income, compensation for services, sales income, interest, dividends, rents, royalties, gains, operating income, and nonoperating income, is of no aid in determining whether income is apportionable or nonapportionable income. (4-6-23) 02. Terms Used in Definition of Apportionable Income and in Application of Definition. As used in the definition of apportionable income and in the application of the definition. (4-6-23) a. “Trade or business” means the unitary business of the taxpayer, part of which is conducted within Idaho. (4-6-23) b. “To contribute materially” includes, without limitation, “to be used operationally in the taxpayer’s trade or business.” Whether property materially contributes is not determined by reference to the property’s value or percentage of use. If an item of property materially contributes to the taxpayer’s trade or business, the attributes, rights or components of that property are also operationally used in that business. However, property that is held for mere financial betterment is not operationally used in the taxpayer’s trade or business. (4-6-23) 332. APPORTIONABLE AND NONAPPORTIONABLE INCOME DEFINED: TRANSACTIONAL TEST (RULE 332). Section 63-3027(1)(a), Idaho Code 01. In General. Apportionable income includes income arising from transactions and activity in the regular course of the taxpayer’s trade or business. (4-6-23) 02. Apportionable Income for Idaho. If the transaction or activity is in the regular course of the taxpayer’s trade or business, part of which trade or business is conducted within Idaho, the resulting income of the transaction or activity is apportionable income for Idaho. Income may be apportionable income even though the actual transaction or activity that gives rise to the income does not occur in Idaho. (4-6-23) 03. Regular Course of the Taxpayer’s Trade or Business. For a transaction or activity to be in the IDAHO ADMINISTRATIVE CODE IDAPA 35.01.01 Idaho State Tax Commission Income Tax Administrative Rules Section 333 Page 51 regular course of the taxpayer’s trade or business, the transaction or activity need not be one that frequently occurs in the trade or business. Most, but not all, frequently occurring transactions or activities will be in the regular course of that trade or business and will, therefore, satisfy the transactional test. It is sufficient to classify a transaction or activity as being in the regular course of a trade or business, if it is reasonable to conclude transactions of that type are customary in the kind of trade or business being conducted or are within the scope of what that kind of trade or business does. However, even if a taxpayer frequently or customarily engages in investment activities, if those activities are for the taxpayer’s mere financial betterment rather than for the operations of the trade or business, such activities do not satisfy the transactional test. The transactional test includes, but is not limited to, income from sales of inventory, property held for sale to customers, and services that are commonly sold by the trade or business. The transactional test also includes, but is not limited to, income from the sale of property used in the production of apportionable income of a kind that is sold or replaced with some regularity, even if replaced less frequently than once a year. (4-6-23) 333. APPORTIONABLE AND NONAPPORTIONABLE INCOME DEFINED: FUNCTIONAL TEST (RULE 333). Section 63-3027(1)(a), Idaho Code 01. In General. Apportionable income also includes income from tangible and intangible property, if the acquisition, management or disposition of the property constitutes an integral or necessary part of the taxpayer’s regular trade or business operations. (4-6-23) 02. Terms. (4-6-23) a. “Property” includes any interest in, control over, or use in property (whether the interest is held directly, beneficially, by contract, or otherwise) that materially contributes to the production of apportionable income. (4-6-23) b. “Acquisition” refers to the act of obtaining an interest in property. (4-6-23) c. “Management” refers to the oversight, direction, or control (directly or by delegation) of the property for the use or benefit of the trade or business. (4-6-23) d. “Disposition” refers to the act, or the power, to relinquish or transfer an interest in or control over property to another, in whole or in part. (4-6-23) e. “Integral part” refers to property that constituted a part of the composite whole of the trade or business, each part of which gave value to every other part, in a manner that materially contributed to the production of apportionable income. (4-6-23) 03. Integral, Functional, or Operative Component of Trade or Business. Under the functional test, apportionable income need not be derived from transactions or activities that are in the regular course of the taxpayer’s own particular trade or business. It is sufficient, if the property from which the income is derived is or was an integral, functional, or operative component used in the taxpayer’s trade or business operations, or otherwise materially contributed to the production of apportionable income of the trade or business, part of which trade or business is or was conducted within Idaho. Depending on the facts and circumstances of each case, property that has been converted to nonapportionable use through the passage of a sufficiently lengthy period of time or that has been removed as an operational asset and is instead held by the taxpayer’s trade or business exclusively for investment purposes has lost its character as a business asset and is not subject to the rule of the preceding sentence. Property that was an integral part of the trade or business is not considered converted to investment purposes merely because it is placed for sale. (4-6-23) 04. Examples of Apportionable Income Under the Functional Test. Income that is derived from isolated sales, leases, assignments, licenses, and other infrequently occurring dispositions, transfers, or transactions involving property, including transactions made in liquidation or the winding-up of business, is apportionable income, if the property is or was used in the taxpayer's trade or business operations. Income from the licensing of an intangible asset, such as a patent, copyright, trademark, service mark, know-how, trade secrets, or the like, that was developed or acquired for use by the taxpayer in its trade or business operations, constitutes apportionable income IDAHO ADMINISTRATIVE CODE IDAPA 35.01.01 Idaho State Tax Commission Income Tax Administrative Rules Section 334 Page 52 whether or not the licensing itself constituted the operation of a trade or business, and whether or not the taxpayer remains in the same trade or business from or for which the intangible asset was developed or acquired. (4-6-23) 05. Operational Function Versus Investment Function. Under the functional test, income from intangible property is apportionable income when the intangible property serves an operational function as opposed to solely an investment function. The relevant inquiry focuses on whether the property is or was held in furtherance of the taxpayer’s trade or business, that is, on the objective characteristics of the intangible property’s use or acquisition and its relation to the taxpayer and the taxpayer’s activities. The functional test is not satisfied where the holding of the property is limited to solely an investment function as is the case where the holding of the property is limited to mere financial betterment of the taxpayer in general. (4-6-23) 06. Property Held in Furtherance of Trade or Business. If the property is or was held in furtherance of the taxpayer’s trade or business beyond mere financial betterment, then income from that property may be apportionable income even though the actual transaction or activity involving the property that gives rise to the income does not occur in Idaho. (4-6-23) 07. Presumptions. If with respect to an item of property a taxpayer takes a deduction from apportionable income that is apportioned to Idaho or includes the original cost in the property factor, it is presumed that the item or property is or was integral to the taxpayer’s trade or business operations. No presumption arises from the absence of any of these actions. (4-6-23) 08. Application of the Functional Test. Application of the functional test is generally unaffected by the form of the property (for example, tangible or intangible property, real or personal property). Income arising from an intangible interest, for example, corporate stock or other intangible interest in a business or a group of assets, is apportionable income when the intangible itself or the property underlying or associated with the intangible is or was an integral, functional, or operative component to the taxpayer’s trade or business operations. Thus, while apportionment of income derived from transactions involving intangible property as apportionable income may be supported by a finding that the issuer of the intangible property and the taxpayer are engaged in the same trade or business, i.e., the same unitary business, establishment of such a relationship is not the exclusive basis for concluding that the income is subject to apportionment. It is sufficient to support the finding of apportionable income if the holding of the intangible interest served an operational rather than an investment function of mere financial betterment. (4-6-23) 334. APPORTIONABLE AND NONAPPORTIONABLE INCOME DEFINED: RELATIONSHIP OF TRANSACTIONAL AND FUNCTIONAL TESTS TO U.S. CONSTITUTION (RULE 334). Section 63-3027(1)(a), Idaho Code The Due Process Clause and the Commerce Clause of the U.S. Constitution restrict states from apportioning income as apportionable income that has no rational relationship with the taxing state. The protection against extraterritorial state taxation afforded by these Clauses is often described as the “unitary business principle.” The unitary business principle requires apportionable income to be derived from the same unitary business that is being conducted at least in part in Idaho. The unitary business that is conducted in Idaho includes both a unitary business that the taxpayer alone may be conducting and a unitary business the taxpayer may conduct with any other person or persons. Satisfaction of either the transactional test or the functional test complies with the unitary business principle, because each test requires that the transaction or activity (in the case of the transactional test) or the property (in the case of the functional test) to be tied to the same trade or business that is being conducted within Idaho. Determination of the scope of the unitary business being conducted in Idaho is without regard to the extent to which Idaho requires or permits combined reporting. (4-6-23)