Today I want to talk about a multistate company selling a 49% subsidiary. State income taxation of the gain would be taxed to your home state if the company owned the subsidiary as an investment. On the other hand, in many cases, the gain would be shared among the states in your market if the subsidiary performs important functions for your company’s business.
In state and local tax jargon, gain from sale of an investment is called nonbusiness income and the gain is allocated to your domicile (generally your headquarters or home office). Gain from the sale of an interest in a company that provides important products or services to or for your company is business income and is apportioned (shared) among the states in your market.
The story today involves a Louisiana company (“Agman”), that produced and distributed food products. Agman owned a terminal subsidiary and a feed products subsidiary which it sold to a company we will call WGI. WGI was a public company and Agman owned about 49% of WGI. Agman also by contract controlled 3 of the 7 members of the board of directors and had, by contract, preferential terms for WGI’s terminal storage services and food supplies. There was a great deal of intercompany transactions between Agman and WGI.
Agman allocated the WGI gain to Louisiana as nonbusiness income. The New Mexico Taxation and Revenue Department (“Department”) audited the return and proposed to tax part of the gain by including it in New Mexico’s apportioned share of Agman’s multistate net income, as business income. Agman protested and a hearing was held before a New Mexico Administrative Hearing Officer. The Hearing Officer agreed with the Department holding essentially that Agman held the WGI stock because WGI’s storage services and food supplies were critical to Agman’s operations.
The decision of the Hearing officer is called 21 Matter of Agman Louisiana Inc. v. N.M. Taxn. and Rev. Dept., No. 17-47 (N.M. Admin. Hearing Off. December 5, 2017), and can be found at: https://us.eversheds-sutherland.com/portalresource/Agman_Louisiana_Inc
Comment. State income taxation of gain from the sale of a subsidiary as either nonbusiness income or business income depends upon the facts. Large gains can lead taxpayers and taxing agencies into disputes where both positions have merit.
By John McCauley: By John McCauley: I help people manage their tax risk when buying or selling a business.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
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