Sep 07, 2015
From KPMG TaxWatch
The California Board of Equalization (the Board) recently addressed whether income derived after a taxpayer sold various business segments constituted apportionable business income or allocable nonbusiness income. The taxpayer, a large food company, sold its beef and pork operations as well as a chicken processing business in two separate transactions. The chicken processing business was sold to a large publicly-traded poultry company in exchange for cash and shares of stock representing 7 percent of the public company. The taxpayer later sold the stock for a substantial gain. The beef and pork business (as well as a related feedlot company) was sold to a joint venture made up of the taxpayer and a private equity firm. The taxpayer received cash, a 46 percent equity interest in the joint venture, and notes (including a note and line of credit from the feedlot company the taxpayer had sold). Later, the stock in the joint venture was sold to the private equity firm for a gain. Also, the feedlot company later defaulted on its debt obligations, and the taxpayer recognized gain when it reacquired the stock that was pledged as security. There was no dispute that the cash the taxpayer received directly from the sale of its operations constituted business income. However, the issue before the Board was the treatment of gains, and interest and dividend income that the taxpayer later earned from the stock and notes associated with those transactions.
The Board ruled that under the functional test for business income, the relevant inquiry was whether the stock and debt received by the taxpayer was income-producing property that was an integral part of its regular trade or business. The Board first determined that the stock received as part of the disposition of the taxpayer’s chicken processing business was not integral to the taxpayer’s trade or business. The taxpayer had exited the chicken processing business when it sold its business, and the Board found no evidence suggesting that, with only 7 percent ownership in the public company, the taxpayer could exercise control over any of the assets it formerly owned. Moreover, the Board noted that the buyer was a large company with substantial operating assets apart from what was formerly the taxpayer’s chicken processing business. Therefore, the dividend income and gain related to the sale of the stock was nonbusiness income.
On the other hand, the Board ruled that the income from the stock and debt received by the taxpayer in connection with the joint venture constituted an integral part of its regular trade or business. The joint venture was formed solely to hold the taxpayer’s former beef and pork operations, which made up all or substantially all of the joint venture’s assets. The Board noted that the taxpayer provided debt financing for the new venture, continued to use beef and pork products from the joint venture’s operations in its packaged food business, and continued to fund the feed lot operations through a line of credit. In short, the Board concluded that the taxpayer remained in the beef and pork business albeit as part of the joint venture. Therefore, the Board determined the taxpayer had not met its burden of proving that the income from the debt and equity received in connection with the joint venture was clearly nonbusiness income. For more information on ConAgra Foods, Inc., please contact Doug Bramhall at 480-495-3491.
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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.