Iowa Administrative Code › Agency 701 - Revenue Department › Title I - Administration › Chapter 54 - Allocation and Apportionment › Rule 701-54.2 - Allocation or Apportionment of Investment Income

Current through Register Vol. 47, No. 3, July 24, 2024
(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.3I03 (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
				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 54.2(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 52.1(4).
b.
Income included by election.
All other investment business
				income, including capital gains or losses, described in subrule 54.2(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 imder 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, accoimts 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 interest-bearing 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 I. From January
				  I to July I, 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 subj ect to an election or which is the subj ect 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.
Global
				intangible low tax income (GILTI).
The net amoimt of global intangible
				low tax income (net GILTI) shall be included in the numerator of the business
				activity formula to the extent that the income arises from the taxpayer's
				ownership of controlled foreign corporation(s) (CFCs) that are an integral part
				of some business activity occurring regularly in Iowa.
(1) If no portion of the net GILTI is part of
				some business activity occurring regularly in or outside of Iowa and if an
				election of inclusion has been made, the net GILTI shall be included in the
				numerator if the taxpayer's commercial domicile is in this state.
(2) If net GILTI is either required to be
				included in the Iowa apportionment factor or included by election, the amount
				included in the denominator shall be the taxpayer's entire net GILTI.
(3) "Net GILTI" means the amount of global
				intangible low tax income as defined in Internal Revenue Code (IRC) Section 951
				A, less the deduction allowed under IRC Section 250(a)(1)(B) (if
				any).
j.
Activity
				ratio.
Income which is not subject to Iowa tax shall not be included
				in the computation of the business activity ratio.
(4)
Grossed-up foreign
				income.
For purposes of administration of the Iowa corporation income
				tax law, gross-up (Section 78 of the Internal Revenue Code) shall be considered
				to be nonbusiness income, irrespective of the fact that the income creating the
				gross-up may be business income, and shall be allocated to the situs of the
				income payor
This rule is intended to implement Iowa Code sections
				  422.32(2)
				  and
				  422.33(1).