United States

Oregon: Sale of Subsidiary Stock Generates Nonbusiness Income

Jan 25, 2016
From KPMG TaxWatch

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The Oregon Tax Court recently addressed whether gain from the sale of stock and income from an investment in a holding company was properly classified as nonbusiness income. In 2006 the taxpayer, the nation’s largest title insurance writer and operator, acquired a forty percent interest in a subsidiary engaged in the business of administering workers compensation claims.  The taxpayer sold part of its interest in the subsidiary in 2008, which generated business income, and sold the remaining interest in 2010. The taxpayer treated the 2010 gain as nonbusiness income on its Oregon tax return. In addition, through partially and wholly-owned subsidiaries, the taxpayer owned an interest in a holding company. The holding company owned casual restaurants and a pie manufacturing business. The taxpayer treated the income from the restaurant/pie business holding company as nonbusiness income on its 2010 and 2011 Oregon tax returns. Following an audit, the Department of Revenue reclassified the gain and income as business income. The taxpayer protested the adjustment and the matter went before the tax court.

Under Oregon law, business income includes income arising from transactions and activity in the regular course of the taxpayer's trade or business (i.e., the so-called transactional test). Business income also includes income from tangible and intangible property if the acquisition, the management, use or rental, and the disposition of the property constitute integral parts of the taxpayer's regular trade or business operations (i.e., the functional test). The court first addressed the gain from the sale of the workers’ compensation claims administration business. Relying on an earlier Oregon case, Sperry & Hutchinson Co., the court noted that for a transaction to be considered in the regular course of a taxpayer’s trade or business, it must be “inextricably mixed” with the taxpayer’s business conducted in Oregon. The Department argued that because the taxpayer regularly acquired and sold stock in various enterprises and because these acquisitions and dispositions constituted a second business activity, the transactional test was met. The parties agreed that the claims administration operations and the taxpayer’s title insurance operations were not part of the same unitary business. It was also not disputed that the taxpayer bought, and at times sold, interests in other businesses.

However, the court ultimately concluded that the connection between the stock sale and the taxpayer’s Oregon activities was absent. The acquisition and sale of the stock was not “inextricably mixed” with the taxpayer’s title insurance business conducted in Oregon. The ownership of the subsidiary, the court concluded, was akin to a passive investment, rather than serving an operational function.  Thus, the court held that the taxpayer properly classified the gain from the subsidiary stock as nonbusiness income.  Because the court had determined that the gain was not business income under the transactional test, the Department had agreed that the gain would not be business income under the functional test. Next the court addressed the characterization of the income from the restaurant/pie business. Finding that the same analysis applied to the investment in the restaurant/pie business holding company, the court likewise concluded that this income was nonbusiness income because the restaurant interests were not inextricably mixed with the in-state title insurance business.   For more information on Fidelity National Financial Inc. v. Department of Revenue please contact Robert Passmore at 503-820-6844. 

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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.