Iowa Administrative Code › Agency 701 - Revenue Department › Title VII - Franchise Tax › Chapter 602 - Determination of Net Income › Rule 701-602.26 - Allocation and Apportionment

Current through Register Vol. 47, No. 3, July 24, 2024
(1) The
				classification of income by the labels customarily given, such as interest,
				dividends, rents, and royalties, is of no aid in determining whether that
				income is business or nonbusiness income. Interest, dividends, rents and
				royalties shall be apportioned as business income to the extent the income was
				earned as a part of a financial institution'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. 3103
				(1982);
F. W. Woolworth Co. v. Taxation and Revenue Dept.,
458 U.S.
				354,
				73 L.Ed.2d 819, 102 S.Ct. 3128
				(1982);
Container Corporation of America v. Franchise Tax
				Board,
463 U.S.
				159,
				77 L.Ed.2d 545, 103 S.Ct. 2933
				(1983). Whether income is part of a financial institution'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 income
				on the return as filed is proper. There is a rebuttable presumption that an
				affiliated group of financial institutions in the same line of business have a
				unitary relationship, although that is not the only element used in determining
				unitariness.
(2) Application of
				related expense to nonbusiness income. Subrule 59.26(1) deals with the
				separation of "net" income, therefore, determination and application of related
				expenses must be made, as hereinafter directed, before allocation and
				apportionment within and without Iowa. Related expenses shall mean those
				expenses directly related.
A directly related expense shall mean an expense which can be
				  specifically attributed to an item of income. Interest expense shall be
				  considered directly related to a specific property which generates, has
				  generated, or could reasonably have been expected to generate gross income if
				  the existence of all of the facts and circumstances described below is
				  established. Such facts and circumstances are as follows:
a. The indebtedness on which the interest was
				paid was specifically incurred for the purpose of purchasing, maintaining, or
				improving the specific property;
b.
				The proceeds of the borrowing were actually applied to the specified
				purpose;
c. The creditor can look
				only to the specific property (or any lease or other interest therein) as
				security for the loan;
d. It may be
				reasonably assumed that the return on or from the property will be sufficient
				to fulfill the terms and conditions of the loan agreement with respect to the
				amount and timing of payment of principal and interest; and
e. There are restrictions in the loan
				agreement on the disposal or use of the property consistent with the
				assumptions described in
"c"
and
"d"
above.
A deduction for interest may not be considered definitely
				  related solely to specific property, even though the above facts and
				  circumstances are present in form, if any of the facts and circumstances are
				  not present in substance. Any expense directly attributable to allocable
				  interest, dividends, rents and royalties shall be deducted from income to
				  arrive at net allocable income.
EXAMPLE: For purposes of this example, it is assumed that the
				  taxpayer has nonbusiness rental income. The taxpayer invests in a 20-story
				  office building. Under the terms of the lease agreements, the taxpayer provides
				  heat, electricity, janitorial services, and maintenance. The taxpayer also pays
				  the property taxes. Construction of the building was funded through borrowings
				  which meet the criteria of a direct expense under the provisions of this
				  paragraph. The directly related expenses to the operation of the property
				  are:
Interest expense
$1,200,000
Property taxes
500,000
Depreciation
500,000
Electricity
300,000
Heat
200,000
Insurance
150,000
Janitorial services
100,000
Repairs
50,000
Total expenses
$3,000,000
The directly related expense of the allocable rental income
				  is $3,000,000.
This rule is intended to implement Iowa Code section
				  422.63.