First, taxpayers argue that the administrative rule that the Tax Court used in its analysis expands the meaning of business income beyond the scope of the statutory definition. ORS 314.605 to 314.675, which is a uniform statute that several states, including Oregon, have adopted. Accordingly, the critical element in determining whether income is 'business income' or 'nonbusiness income' is the identification of the transactions and activity which are the elements of a particular trade or business. In general, all transactions and activities of the taxpayer which are dependent upon or contribute to the operations of the taxpayer's economic enterprise as a whole constitute the taxpayer's trade or business and will be transactions and activity arising in the regular course of, and will constitute integral parts of, a trade or business. The following are rules and examples for determining whether particular income is businesses or nonbusiness income.
Taxpayers contend that that rule is overly broad.
Under the rule, practically all the property of a taxpayer might qualify as a source of business income, because all the property of a business helps produce income for the business at least to an incidental degree. However, the statute requires the property from which the taxpayer derives income to constitute an integral part of the taxpayer's business. The rule is an improper exercise of agency rulemaking authority. The transactional test posits that business income arises from transactions in the regular course of the taxpayer's business. By contrast, the functional test dictates that acquisition, management, use or rental, and disposition of property must constitute integral parts of regular business operations.