Section 21 Business/Nonbusiness Income Distinction

• Library: Tax Law 2009

Under Article IV of the Compact, items of income are categorized as either “[b]usiness income” or “[n]onbusiness income.” The significance of the distinction is that nonbusiness income is subject to direct allocation to its deemed geographical source in Missouri or another state, while business income is subject to apportionment among Missouri and other states in accordance with a three-factor formula based on property, payroll, and receipts.

Business income is “income arising from transactions and activity in the regular course of the taxpayer’s trade or business.” 12 C.S.R. § 10-2.075(4). All other income is nonbusiness income. Id. Any class of income from any source can be business income if the requisite connection to the taxpayer’s business is present. Id. Income from tangible and intangible personal property can be business income if the property is integral to the taxpayer’s business. Id. Income is presumed to be business income unless it is “clearly classifiable as nonbusiness income.” Id.

The business/nonbusiness income distinction was at issue in James v. International Telephone & Telegraph Corp., 654 S.W.2d 865 (Mo. banc 1983). In the 1960s, the taxpayer, ITT, instituted a program of corporate acquisitions. By 1977, it had 1,000 subsidiaries, 400 of which were in the United States. Each subsidiary operated independently of ITT, although ITT did perform some accounting, tax, and other services for some smaller subsidiaries. Employees of ITT sat on the board of directors of some subsidiaries, but there were no interlocking directorates. After ITT’s acquisition of the Hartford Fire Insurance Company in 1970, the United States Department of Justice instituted an antitrust suit against ITT. The suit was settled by entry of a consent decree under which ITT agreed to schedule divestiture of several subsidiaries. Central subsidiaries were sold in 1972 and 1973, resulting in long-term capital gains that ITT, on its Missouri income tax return, treated as nonbusiness income allocable to New York, the state of its commercial domicile. MoDOR contended that acquisition of subsidiaries constituted an integral part of ITT’s business operations and that the capital gain, as income connected with activities constituting part of ITT’s overall business, was apportionable business income. After noting that a state, consistent with due process, may tax income earned outside its borders “so long as the intrastate and extrastate activities [of the taxpayer form]...