Current through Register Vol. 6, March 22, 2024
(1) Section
15-31-301, MCA, requires that
every item of income be classified either as apportionable 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 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. In essence,
all income which arises from the conduct of trade or business operations of a
taxpayer is apportionable income. An item of income is nonapportionable income
only if it does not meet the definitional requirements for being classified as
apportionable income. For purposes of administration, the income of the
taxpayer is apportionable income unless clearly classifiable as
nonapportionable income.
(2)
Apportionable income means income of any type or class, and from any activity,
that meets the relationship described either in (3), the "transactional test,"
or (4), the "functional test." 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,
nonoperating income is of no assistance in determining whether income is
apportionable or nonapportionable income. Accordingly, the critical element in
determining whether income is "apportionable income" or "nonapportionable
income" is the identification of the transactions and activities which are the
elements of a particular trade or business. In general, all transactions and
activities of the taxpayer which are dependent upon or contribute to the
operations of the taxpayer's economic enterprise as a whole constitute the
taxpayer's trade or business and will be transactions and activities arising in
the regular course of and will constitute integral parts of a trade or
business. See ARM
42.26.207 for more specific
examples of the classification of income as apportionable or nonapportionable
income; see ARM
42.26.202 and
42.26.205 for further explanation
of what constitutes a trade or business.
(3) Under the transactional test,
apportionable income includes income arising from transactions and activity in
the regular course of the taxpayer's trade or business.
(a) 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 this state, the resulting income of the
transaction or activity is apportionable income for this state. Income may be
apportionable income even though the actual transaction or activity that gives
rise to the income does not occur in this state.
(b) For a transaction or activity to be in
the 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. The transactional test includes, but is not limited to:
(i) income from sales of inventory;
(ii) property held for sale to customers;
and
(iii) services which are
commonly sold by the trade or business.
(c) 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 and replaced with some regularity,
even if replaced less frequently than once a year.
(4) Under the functional test, apportionable
income includes income from tangible and intangible property, if the
acquisition, management, and disposition of the property constitute integral
parts of the taxpayer's regular trade or business operations.
(a) 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 this state. Property that has been converted to nonapportionable use
through the passage of a sufficiently lengthy period of time, generally, five
years is sufficient, has lost its character as a business asset and is not
subject to the rule of the preceding sentence.
(b) 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, including complete or partial liquidations,
or the winding-up of business, is apportionable income, if the property is or
was used in the taxpayer's trade or business operations.
(i) Property that has been converted to
nonapportionable use has lost its character as a business asset and is not
subject to (4)(b).
(ii) 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 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.
(c) Under the functional test, income from
intangible property is apportionable income when the intangible property serves
an operational 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.
(d) If the property is or was held in
furtherance of the taxpayer's trade or business 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 this
state.
(e) If, with respect to an
item of property, a taxpayer takes a deduction from apportionable income that
is apportioned to this state 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.
(f)
Application of the functional test is generally unaffected by the form of the
property (e.g., tangible or intangible property, real or personal property).
Income arising from an intangible interest, as, 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.
(g) Property that has been converted to
nonapportionable use has lost its character as a business asset and is not
subject to (4)(f).
AUTH:
15-1-201,
15-31-313,
15-31-501, MCA; IMP:
15-1-601,
15-31-302,
MCA