On February 25, 2013 the Department issued an assessment for corporate income tax, penalty, and interest for the reporting periods from May 31, 2008 through May 31, 2011. On March 14, 2013, the Taxpayer submitted a timely protest to the Department. As part of its protest, Taxpayer agreed to a portion of the assessment and included payment for that amount with its protest letter. The Taxpayer is headquartered in Omaha, Nebraska and is a packaged food company. The Taxpayer owned and operated grain elevators in New Mexico. In anticipation of the sale of its grain storage operations the Taxpayer transferred its grain storage operations to a disregarded LLC and sold it. The Department conducted an audit of the Taxpayer’s New Mexico corporate income tax returns and reclassified the interest income earned on the payment in kind (PIK) notes from allocable nonbusiness income to New Mexico apportionable business income. The issue to be determined in this protest is if the interest income is business income apportionable and subject to New Mexico corporate income tax or if it is nonbusiness income, not subject to New Mexico tax under Uniform Division of Income for Tax Purposes Act (UDIPTA) and applicable commerce clause and due process clause requirements. The Taxpayer fully allocated the value of that transaction (including the cash and the value of the PIK notes) and paid the apportioned tax in New Mexico. However, after completion of that sale, Taxpayer allocated the tax on the interest income to its state of domicile, Nebraska. In contrast, the Department in audit determined that the PIK interest was business income from the sale of a line of the business and was subject to apportionment and taxation in New Mexico. The Chief Hearing Officer determined that New Mexico may only tax the interest income earned on the PIK Notes if: 1) Taxpayer and the Buying Parties were engaged in a unitary business or 2) the PIK Notes were used as part of Taxpayer’s unitary business operations in New Mexico. It was determined by the Chief Hearing Officer that the Taxpayer’s PIK income is nonbusiness income not subject to apportionment under UDIPTA. Since the Taxpayer is no longer in that line of business, has no ownership interest and the interest income received at this point it is simply investment income not related to a unitary business enterprise or Taxpayer’s line of business. Taxpayer’s subsequent interest income from PIK notes amounted to non-business income under UDIPTA because the income did not meet the transactional test, the dispositional test, or the functional test articulated under the definition of business income. The nonbusiness interest income in this protest was not apportionable to New Mexico under UDIPTA and instead was properly allocated to Nebraska, Taxpayer’s state of domicile. For the foregoing reasons, Taxpayer’s motion for summary judgment is granted and Taxpayer’s protest is granted, the remaining assessed tax, penalty and interest is ordered abated.
Conagra Foods Food Ingredients Co. Inc.