United States

Arkansas: Sale of Tax Credits Generated Business Income

Aug 21, 2017
From KPMG TaxWatch

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Recently, an Administrative Law Judge (ALJ) for the Arkansas Department of Finance and Administration’s Office of Hearings and Appeals addressed whether a corporate taxpayer properly characterized income from the sale of tax credits as non-business income. On audit, the Department had reclassified the proceeds as business income and issued an assessment accordingly. Under Arkansas law, which incorporates UDITPA, business income arises from: (1) transactions and activity in the regular course of the taxpayer’s business (the transactional test) or (2) income from the acquisition, management, and disposition of property that constitutes integral parts of the taxpayer’s regular business (the functional test). The ALJ first addressed whether the functional test was satisfied. A regulation addressing the functional test provides that “gain or loss from the sale, exchange or other disposition of real property or of tangible or intangible personal property constitutes business income if the property, while owned by the taxpayer, was used in the taxpayer's trade or business.” The taxpayer argued that the tax credits at issue were never used in its business because the company never had need of them. Furthermore, the taxpayer argued that “integral” should mean “essential to completeness” and that under this definition, the acquisition, management and disposition of the credits was not an “integral” part of its business. The ALJ rejected the taxpayer’s restrictive interpretation of the term integral and found that the credits were an integral part of the taxpayer’s business. The credits were earned because of the discrete business in which the taxpayer was engaged. A specific office within the taxpayer’s organization had been responsible for both generating and selling the credits since 2011 and had sold credits in three tax years. The credits were also an integral part of the taxpayer’s regular trade or business operations because the proceeds derived from their sale materially contributed to the taxpayer’s production of business income. Having determined that the income from the sale of the tax credits was business income under the functional test, the ALJ did not address the transactional test. Please contact Jennifer Knickel at 214-840-2055 with questions on this ruling.


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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.