As used in the Uniform Division of Income for Tax Purposes Act:

A. "business income" means income arising from transactions and activity in the regular course of the taxpayer's trade or business and income from the disposition or liquidation of a business or segment of a business. "Business income" includes income from tangible and intangible property if the acquisition, management or disposition of the property constitute integral parts of the taxpayer's regular trade or business operations;

B. "commercial domicile" means the principal place from which the trade or business of the taxpayer is directed or managed;

C. "compensation" means wages, salaries, commissions and any other form of remuneration paid to employees for personal services;

D. "department" means the taxation and revenue department, the secretary of taxation and revenue or any employee of the department exercising authority lawfully delegated to that employee by the secretary;

E. "nonbusiness income" means all income other than business income;

F. "sales" means all gross receipts of the taxpayer not allocated under Sections 7-4-5 through 7-4-9 NMSA 1978 of the Uniform Division of Income for Tax Purposes Act;

G. "secretary" means the secretary of taxation and revenue or a division director delegated by the secretary; and

H. "state" means any state of the United States, the District of Columbia, the commonwealth of Puerto Rico, any territory or possession of the United States, and any foreign country or political subdivision thereof.

History: 1953 Comp., § 72-15A-17, enacted by Laws 1965, ch. 203, § 2; 1986, ch. 20, § 55; 1999, ch. 47, § 7.

The 1999 amendment, effective June 18, 1999, in Subsection A inserted "income from the disposition or liquidation of a business or segment of a business. 'Business income"' and made minor stylistic changes.

I. GENERAL CONSIDERATION.

"Transactions and activity in the regular course of the taxpayer's trade or business" means business deals and the performance of a specific function in the normal, typical, customary or accustomed policy or procedure of the taxpayer's trade or business. Champion Int'l Corp. v. Bureau of Revenue, 1975-NMCA-106, 88 N.M. 411, 540 P.2d 1300, cert. denied, 89 N.M. 5, 546 P.2d 70; Tipperary Corp. v. N.M. Bureau of Revenue, 1979-NMCA-031, 93 N.M. 22, 595 P.2d 1212, cert. denied, 92 N.M. 675, 593 P.2d 1078.

II. CONSTITUTIONAL ISSUES.

Fairly apportioned tax constitutional. — When the apportioned tax is only on that portion of taxpayer's income that fairly represents the extent of taxpayer's business activities in this state, tax is not violative of the due process or commerce clauses of the federal constitution. Tipperary Corp. v. N.M. Bureau of Revenue, 1979-NMCA-031, 93 N.M. 22, 595 P.2d 1212, cert. denied, 92 N.M. 675, 593 P.2d 1078.

Taxation of dividends from foreign subsidiary. — The right of a state to tax dividends from foreign subsidiaries must be considered in relation to the due process requirements that the income attributed to a state for tax purposes be rationally related to values connected with the taxing state. F.W. Woolworth Co. v. Taxation & Revenue Dep't, 458 U.S. 354, 102 S. Ct. 3128, 73 L. Ed. 2d 819, reh'g denied, 459 U.S. 961, 103 S. Ct. 274, 74 L. Ed. 2d 213 (1982).

Taxation of income from foreign tax credit. — A foreign tax credit arising from the taxation by foreign nations of a corporation's foreign subsidiaries that had no unitary business relationship with the state, efforts by the state to tax this income "deemed received" - with respect to which the state contributed nothing - were held to contravene the due process clause. F.W. Woolworth Co. v. Taxation & Revenue Dep't, 458 U.S. 354, 102 S. Ct. 3128, 73 L. Ed. 2d 819, reh'g denied, 459 U.S. 961, 103 S. Ct. 274, 74 L. Ed. 2d 213 (1982).

III. BUSINESS INCOME.

All income of business organization is not "business income"; business income must arise from the regular course of business. Tipperary Corp. v. N.M. Bureau of Revenue, 1979-NMCA-031, 93 N.M. 22, 595 P.2d 1212, cert. denied, 92 N.M. 675, 593 P.2d 1078.

Business income must arise from such transactions. — To constitute business income the income must arise from transactions and activity in the regular course of a trade or business. McVean & Barlow, Inc. v. N.M. Bureau of Revenue, 1975-NMCA-128, 88 N.M. 521, 543 P.2d 489, cert. denied, 89 N.M. 6, 546 P.2d 71.

Factors pertinent in determining if income is business income. — Pertinent in determining whether income arises from transactions in the regular course of business is the nature of the particular transaction and former practices of the business entity; also pertinent is how the income is used. Champion Int'l Corp. v. Bureau of Revenue, 1975-NMCA-106, 88 N.M. 411, 540 P.2d 1300, cert. denied, 89 N.M. 5, 546 P.2d 70; Tipperary Corp. v. N.M. Bureau of Revenue, 1979-NMCA-031, 93 N.M. 22, 595 P.2d 1212, cert. denied, 92 N.M. 675, 593 P.2d 1078.

Use of investment income. — The use to which a multistate corporation put its investment income was determinative of whether it was business income. Champion Int'l Corp. v. Bureau of Revenue, 1975-NMCA-106, 88 N.M. 411, 540 P.2d 1300, cert. denied, 89 N.M. 5, 546 P.2d 70.

Determination of business income. — Use to which income is put determines whether it is business income. Tipperary Corp. v. N.M. Bureau of Revenue, 1979-NMCA-031, 93 N.M. 22, 595 P.2d 1212, cert. denied, 92 N.M. 675, 593 P.2d 1078.

Short-term investment income held business income. — Since a multistate corporation derived interest income from capital earned in its business, rather than having a large cash balance in the bank, purchasing short-term investments and highly liquid assets from which the interest was derived, money from which short-term investments was needed for future business activity, such investment was a specific function of the corporation, and that it was usual and customary in the corporation's business to follow this practice, whenever there was enough money or business income that was not immediately needed in the business, and therefore the investment income was business income. Champion Int'l Corp. v. Bureau of Revenue, 1975-NMCA-106, 88 N.M. 411, 540 P.2d 1300, cert. denied, 89 N.M. 5, 546 P.2d 70.

Rent of part of office space held business income. — Although a multistate corporate taxpayer claimed that income derived from rent of 5% of its total office space was not "business income" because it was not in the business of renting real estate, the most reasonable inference to be drawn from the record is that rental of available office space was a customary procedure, done in the regular course of the taxpayer's business, and since there was no evidence in the record to contradict this inference, the rental income was held to be "business income." Champion Int'l Corp. v. Bureau of Revenue, 1975-NMCA-106, 88 N.M. 411, 540 P.2d 1300, cert. denied, 89 N.M. 5, 546 P.2d 70.

Income from sale of telephone poles by paper company held business income. — Since a multistate corporation manufactured wood and paper products from timber on land owned or leased by it, and sold some of its logs to telephone utilities for use as telephone poles and the sale of logs was a normal, customary procedure in the taxpayer's business for the year in question and had been for several years, the income arising therefrom was income arising from transactions and activity in the regular course of the taxpayer's trade or business. Champion Int'l Corp. v. Bureau of Revenue, 1975-NMCA-106, 88 N.M. 411, 540 P.2d 1300, cert. denied, 89 N.M. 5, 546 P.2d 70.

When coal lease sale in regular course of business. — Since taxpayer is in the business of exploration and development of oil, gas and minerals, the sale of the coal leases is in the regular course of this business. Tipperary Corp. v. New Mexico Bureau of Revenue, 1979-NMCA-031, 93 N.M. 22, 595 P.2d 1212, cert. denied, 92 N.M. 675, 593 P.2d 1078.

Coal lease sale taxable. — Since taxpayer's business is unitary and since a gain from the sale of its coal leases is business income under Subsection A of this section, this state can tax a percentage of this income. Tipperary Corp. v. New Mexico Bureau of Revenue, 1979-NMCA-031, 93 N.M. 22, 595 P.2d 1212, cert. denied, 92 N.M. 675, 593 P.2d 1078.

Income from coal dragline leases held business income. — Oil company's income from its dragline leases was business income because the leases generated substantial capital for the company's general business purposes, and the leases were ongoing, recurring transactions constituting a regular or customary portion of company's overall business, which contributed to the company's economic enterprise as a whole. Kewanee Indus., Inc. v. Reese, 1993-NMSC-006, 114 N.M. 784, 845 P.2d 1238.

Income from liquidation of part of business held not business income. — Since the taxpayer was not in the business of buying and selling pipeline equipment and the transaction in question was a partial liquidation of taxpayer's business and a total cessation and liquidation of one facet of the business, the sale of equipment did not constitute an integral part of the regular trade or business operations of taxpayer and the proceeds thereof were not business income. McVean & Barlow, Inc. v. N.M. Bureau of Revenue, 1975-NMCA-128, 88 N.M. 521, 543 P.2d 489, cert. denied, 89 N.M. 6, 546 P.2d 71.

IV. UNITARY BUSINESS PRINCIPLE.

Underlying unitary business required. — The linchpin of apportionability for state income taxation of an interstate enterprise is the unitary-business principle. F.W. Woolworth Co. v. Taxation & Revenue Dep't, 458 U.S. 354, 102 S. Ct. 3128, 73 L. Ed. 2d 819, reh'g denied, 459 U.S. 961, 103 S. Ct. 274, 74 L. Ed. 2d 213 (1982).

Derivation of dividend income from subsidiaries. — The potential to operate a company as part of a unitary business is not dispositive when, looking at the underlying economic realities of a unitary business, the dividend income from subsidiaries in fact is derived from unrelated business activity which constitutes a discrete business enterprise. F.W. Woolworth Co. v. Taxation & Revenue Dep't, 458 U.S. 354, 102 S. Ct. 3128, 73 L. Ed. 2d 819, reh'g denied, 459 U.S. 961, 103 S. Ct. 274, 74 L. Ed. 2d 213 (1982).

Existence of underlying unitary business. — When, except for the type of occasional oversight - with respect to capital structure, major debt, and dividends - that any parent gives to an investment in a subsidiary, there is little or no integration of business activities or centralization of management of the parent company and its foreign subsidiaries, there is no underlying unitary business that would justify the state's taxing of dividends from the foreign subsidiaries. F.W. Woolworth Co. v. Taxation & Revenue Dep't, 458 U.S. 354, 102 S. Ct. 3128, 73 L. Ed. 2d 819, reh'g denied, 459 U.S. 961, 103 S. Ct. 274, 74 L. Ed. 2d 213 (1982).

Multistate business may be unitary or independent. — A multistate business is a "unitary business" for income tax purposes when operations conducted in one state benefit and are in turn benefited by operations in another state, and if its various parts are interdependent and of mutual benefit so as to form one integral business rather than several business entities, it is unitary. On the other hand, if a multistate business enterprise is conducted in a way that one, some or all of the business operations outside New Mexico are independent of and do not contribute to the business operations within this state, the factors attributable to the outside activity may be excluded. Champion Int'l Corp. v. Bureau of Revenue, 1975-NMCA-106, 88 N.M. 411, 540 P.2d 1300, cert. denied, 89 N.M. 5, 546 P.2d 70.

Taxpayer must show business independent to exclude income. — Where a multistate corporation challenged commissioner's allocation of certain interest, rent and gains to business income, but failed to produce evidence that its business activity outside of New Mexico was dependent or independent of its instate operations, or that the interest, rent and gains income was not an integral part of its business carried on in this state, no question was raised whether any of its income was nonbusiness income because there was no evidence that its activities were not part of a unitary business, and therefore the assessed additional corporate income tax was affirmed. Champion Int'l Corp. v. Bureau of Revenue, 1975-NMCA-106, 88 N.M. 411, 540 P.2d 1300, cert. denied, 89 N.M. 5, 546 P.2d 70.

Am. Jur. 2d, A.L.R. and C.J.S. references. — What constitutes trade or business under Internal Revenue Code (U.S.C.A. Title 26), 161 A.L.R. Fed. 245.