(1)
Investment business
income. The classification of investment income by the labels
customarily given them, such as interest, dividends, rents, and royalties, is
of no aid in determining whether that income is business or nonbusiness income.
Interest, dividends, rents, royalties, and other investment income shall be
apportioned as business income to the extent the income was earned as a part of
a corporation's unitary business, a portion of which is conducted in Iowa.
Mobil Oil Corp. v. Commissioner of Taxes, 455 U.S.
425 (1980);
ASARCO, Inc. v. Idaho State Tax Commission, 458 U.S.
307, 73
L.Ed.2d 787, 102 S.Ct. 310 3 (1982);
F. W. Woolworth Co. v. Taxation
and Revenue Dept., 458 U.S.
354, 73 L.Ed.2d 819, 102 S.Ct. 312 8
(1982);
Container Corporation of America v. Franchise Tax
Board, 463 U.S.
159,77 L.Ed.2d 545, 103 S.Ct. 2933 (1983). Whether
investment income is part of a corporation's unitary business income depends
upon the facts and circumstances in the particular situation. The burden of
proof is upon the taxpayer to show that the treatment of investment income on
the return as filed is proper. There is a rebuttable presumption that an
affiliated group of corporations in the same line of business have a unitary
relationship, although that is not the only element used in determining
unitariness.
(2)
Inclusion
in the apportionment factor.
a.
Income which must be included. All investment business income
described in subrule 503.2(3), including capital gains or losses, shall be
included in the computation of the denominator of the business activity formula
if the income is derived from intangible property that has become an integral
part of some business activity occurring regularly in or outside of Iowa. See
701-subrule 501.1(4).
b.
Income included by election. All other investment business
income, including capital gains or losses, described in subrule 503.2(3) may at
the taxpayer's election be included in the computation of the denominator of
the business activity formula provided, however, that a taxpayer cannot elect
to exclude or include investment business income where the election would
result in an understatement of net income reasonably attributable to Iowa. A
taxpayer cannot elect to include some investment business income in and exclude
other investment business income from the business activity formula. The
election applies to all investment business income of the taxpayer subject to
the election.
(1) Written election. If the
taxpayer has investment income which is deemed to be business income under the
provisions of this rule, a written election shall be made with the taxpayer's
income tax return in the first year in which the taxpayer has such income. The
election must state whether the taxpayer wishes to include or exclude
investment income which is deemed to be business income under the provisions of
this rule in the computation of the business activity formula. The election
shall be signed by a duly authorized officer of the corporation. The election
is binding on all future tax years unless the taxpayer is granted permission by
the department to change the election. If the taxpayer fails to make a written
election, the fact that investment business income was or was not included in
the computation of the business activity formula shall be deemed to be the
taxpayer's election for all future tax years.
(2) Changing the election. If a taxpayer
wishes to change the taxpayer's election to include or exclude investment
business income in the taxpayer's Iowa apportionment factor, the taxpayer must
request the department's permission to change the election not less than 90
days prior to the due date of the return for the tax year in which the taxpayer
wishes the change to take effect. Permission to make a change in this election
shall only be granted if the department determines that the change will more
accurately reflect the net income reasonably attributable to Iowa.
(3)
Apportionment method by category of investment income. The
computation of the business activity formula associated with investment
business income is as follows where the investment business income is required
to be included in the business activity formula or where an election for
inclusion has been made:
a.
Interest
income from accounts receivable. If an inclusion election is made,
accounts receivable interest income is included in the numerator of the
business activity formula if the taxpayer receives accounts receivable interest
income from customers located in Iowa. Accounts receivable interest income
which cannot be segregated by geographical source shall be included in the
numerator of the business activity ratio applying the same ratio as gross
receipts within Iowa bear to total gross receipts.
EXAMPLE: The taxpayer operates a multistate chain of gasoline
service stations, selling for cash and on credit. Interest is charged on credit
sales, but the interest income cannot be segregated by geographical source.
During the tax year, the taxpayer had gross receipts within Iowa of $300,000,
total gross receipts everywhere of $1,000,000, and accounts receivable interest
income everywhere of $10,000. $10,000 would be included in the denominator of
the business activity formula, and 30 percent of $10,000, or $3,000, would be
included in the numerator of the business activity formula.
b.
Interest income other than
accounts receivable. All other interest income determined to be
business income, except nontaxable interest income, shall be included in the
numerator of the business activity formula to the extent that the
interest-bearing asset is an integral part of some business activity occurring
regularly in Iowa. If the interestbearing asset is not an integral part of some
business activity occurring regularly in or outside of Iowa and if an election
of inclusion is made, the interest therefrom (except nontaxable interest
income) shall be included in the numerator of the business activity formula if
the taxpayer's commercial domicile is in Iowa.
EXAMPLE: The taxpayer earns interest income from loans to
affiliated corporations, commercial paper, bonds issued by multistate
corporations, and federal income tax refunds. The interest income is business
income. None of these interest-bearing assets are an integral part of some
business activity occurring regularly within or without Iowa. Accordingly, the
interest income produced by such assets is subject to an election of inclusion
in or exclusion from the business activity formula.
c.
Dividend income. All
dividend income (net of special deductions) determined to be business income
shall be included in the numerator of the business activity formula to the
extent that the dividend asset is an integral part of some business activity
occurring regularly in Iowa. If the dividend asset is not an integral part of
some business activity occurring regularly in or outside of Iowa and if an
election of inclusion is made, the dividends shall be included in the numerator
of the business activity formula if the taxpayer's commercial domicile is in
Iowa.
EXAMPLE: The taxpayer earns dividend income from dividends
payable from a mutual fund. The dividend income is business income. The
dividends are not an integral part of some business activity occurring
regularly within or without Iowa. Assume that the taxpayer had also earned
interest income which was business income and which was not an integral part of
some business activity occurring regularly within or without Iowa and that the
taxpayer had included that interest income in the business activity formula.
Under these circumstances, the taxpayer must also include the dividend income
in the business activity formula. If no inclusion of investment business income
had been made in the business activity formula, the taxpayer would exclude the
dividend income from the formula.
d.
Rental income. If an
inclusion election is made, all rental income determined to be business income
shall be included in the numerator of the business activity formula to the
extent that property is utilized in Iowa or in its entirety if the taxpayer's
commercial domicile is in Iowa and the taxpayer is not taxable in the state in
which the property is utilized. The extent of utilization of tangible personal
property in a state is determined by multiplying the rent by a fraction, the
numerator of which is the number of days of physical location of the property
in the state during the rental period in the taxable year and the denominator
of which is the number of days of physical location of the property everywhere
during all rental periods in the taxable year. If the physical location of the
property during the rental period is unknown or not ascertainable by the
taxpayer, tangible personal property is utilized in the state in which the
property was located at the time the rental payer obtained
possession.
e.
Royalty
income and licensing fees. All royalty income and licensing fees from
intangible personal property determined to be business income shall be included
in the numerator of the business activity formula to the extent that the
royalty or licensing asset is an integral part of some business activity
occurring regularly in Iowa. If the royalty or licensing asset is not an
integral part of some business activity occurring regularly in or outside of
Iowa and if an election of inclusion is made, the royalties or licensing fees
shall be included in the numerator of the business activity formula if the
taxpayer's commercial domicile is in Iowa.
EXAMPLE: A, a corporation with a commercial domicile outside
of Iowa, derives royalties from a trade name that is used by other corporations
doing business in Iowa in their Iowa businesses. Since the royalty asset is an
integral part of an Iowa business activity, A must include the royalties
associated with Iowa business activity in the numerator of A's business
activity formula.
EXAMPLE: The taxpayer, a corporation with a commercial
domicile in Iowa, derives license fees from others who do business solely
outside of Iowa. The license fees are business income. The license fees are an
integral part of some business activity carried on regularly by the others
outside of Iowa. The taxpayer must include the license fees in the business
activity formula. If the taxpayer also had other license fees which were
business income and which were not an integral part of some business activity
occurring regularly within or without Iowa, these other license fees would be
subject to an election of inclusion in or exclusion from the business activity
formula.
If an inclusion election is made, all royalty income from
tangible personal property or real property determined to be business income
shall be included in the numerator of the business activity formula if the
situs of the tangible personal property or real property is within Iowa.
f.
Gains or
losses. Gain or loss from the sale, exchange, or other disposition of
real or tangible or intangible personal property, if the property while owned
by the taxpayer was operationally related to the taxpayer's trade or business
carried on in Iowa, shall be apportioned by the business activity ratio
applicable to the return for the year the gain or loss is included in taxable
income and shall be included in the computation of the business activity ratio
as follows:
(1) Gain or loss from the sale,
exchange, or other disposition of real property shall be included in the
numerator if the property is located in this state and if an election of
inclusion has been made.
(2) Gain
or loss from the sale, exchange, or other disposition of tangible personal
property shall be included in the numerator if an election of inclusion has
been made and if the property has a situs in this state at the time of sale, or
the taxpayer's commercial domicile is in this state and the taxpayer is not
taxable in the state in which the property had a situs.
(3) Gain or loss from the sale, exchange, or
other disposition of intangible personal property shall be included in the
numerator of the business activity formula to the extent that the intangible
personal property is an integral part of some business activity occurring
regularly in Iowa in the tax year that gain or loss is recognized. If the
intangible personal property is not an integral part of some business activity
occurring regularly in or outside of Iowa in the tax year that gain or loss is
recognized and if an election of inclusion has been made, the gain or loss
shall be included in the numerator if the taxpayer's commercial domicile is in
this state.
EXAMPLE: The taxpayer carries on its trade or business within
and without Iowa. The taxpayer has patents which it licenses others to use in
activities within and without Iowa. The patents are an integral part of
business activity occurring regularly within and without Iowa. The taxpayer
receives royalty income for the use of the patents. The taxpayer sells the
patents and realizes a capital gain. The capital gain from the sale of the
patents cannot be segregated by geographical source. Assume that the taxpayer
is on a calendar tax year. Assume that the sale occurred on July 1. From
January 1 to July 1, 5 percent of the royalties were attributable to some
business activity regularly occurring in Iowa. The taxpayer should include 5
percent of the capital gain in the numerator of the business activity
formula.
(4) All gain or
loss shall be included in the denominator of the business activity ratio if an
election of inclusion has been made or if the gain or loss is required to be
included in the business activity ratio.
Nonexclusive examples of gains or losses from the sale,
exchange, or other disposition of real or tangible or intangible property,
which may not be included in the computation of the business activity ratio,
because to do so would result in an understatement of net income reasonably
attributable to Iowa, are the gain recognized under an election pursuant to
Section 338 of the Internal Revenue Code and the
gain recognized under Section
631(a) of the Internal
Revenue Code.
g.
Other miscellaneous income. All other miscellaneous income
determined to be business income which is not subject to an election or which
is the subject of a proper election of inclusion shall be included in the
computation of the business activity formula to the extent such income items do
not represent a recapture of expense. The miscellaneous income shall be
included in the numerator of the business activity formula if the income is
from an Iowa source.
h.
Other investment income. All other investment income shall be
included in the numerator of the business activity formula to the extent that
the intangible personal property which produced that income is an integral part
of some business activity occurring regularly in Iowa. If the intangible
personal property is not part of some business activity occurring regularly in
or outside of Iowa and if an election of inclusion has been made, the other
investment income shall be included in the numerator if the taxpayer's
commercial domicile is in this state.
i. Reserved.
j.
Activity ratio. Income
which is not subject to Iowa tax shall not be included in the computation of
the business activity ratio.
