Administrative Rules of Montana › Department 42 - REVENUE › Chapter 42.26 - CORPORATE MULTISTATE ACTIVITIES › Subchapter 42.26.2 - Income Allocation and Apportionment › Rule 42.26.206 - APPORTIONABLE AND NONAPPORTIONABLE INCOME DEFINED

Current through Register Vol. 13, July 5, 2024
(1) Section
				15-31-301, MCA, requires that
				every item of income be classified either as apportionable or nonapportionable
				income. Income for purposes of classification as apportionable or
				nonapportionable includes gains and losses. Apportionable income is apportioned
				among jurisdictions by use of a formula. Nonapportionable income is
				specifically assigned or allocated to one or more specific jurisdictions
				pursuant to express rules. An item of income is classified as apportionable
				income if it falls within the definition of apportionable income. In essence,
				all income which arises from the conduct of trade or business operations of a
				taxpayer is apportionable income. An item of income is nonapportionable income
				only if it does not meet the definitional requirements for being classified as
				apportionable income. For purposes of administration, the income of the
				taxpayer is apportionable income unless clearly classifiable as
				nonapportionable income.
(2)
				Apportionable income means income of any type or class, and from any activity,
				that meets the relationship described either in (3), the "transactional test,"
				or (4), the "functional test." The classification of income by the labels
				occasionally used, such as manufacturing income, compensation for services,
				sales income, interest, dividends, rents, royalties, gains, operating income,
				nonoperating income is of no assistance in determining whether income is
				apportionable or nonapportionable income. Accordingly, the critical element in
				determining whether income is "apportionable income" or "nonapportionable
				income" is the identification of the transactions and activities 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 activities arising in
				the regular course of and will constitute integral parts of a trade or
				business. See ARM
				42.26.207 for more specific
				examples of the classification of income as apportionable or nonapportionable
				income; see ARM
				42.26.202 and
				42.26.205 for further explanation
				of what constitutes a trade or business.
(3) Under the transactional test,
				apportionable income includes income arising from transactions and activity in
				the regular course of the taxpayer's trade or business.
(a) If the transaction or activity is in the
				regular course of the taxpayer's trade or business, part of which trade or
				business is conducted within this state, the resulting income of the
				transaction or activity is apportionable income for this state. Income may be
				apportionable income even though the actual transaction or activity that gives
				rise to the income does not occur in this state.
(b) For a transaction or activity to be in
				the regular course of the taxpayer's trade or business, the transaction or
				activity need not be one that frequently occurs in the trade or business. Most,
				but not all, frequently occurring transactions or activities will be in the
				regular course of that trade or business and will, therefore, satisfy the
				transactional test. It is sufficient to classify a transaction or activity as
				being in the regular course of a trade or business, if it is reasonable to
				conclude transactions of that type are customary in the kind of trade or
				business being conducted or are within the scope of what that kind of trade or
				business does. The transactional test includes, but is not limited to:
(i) income from sales of inventory;
(ii) property held for sale to customers;
				and
(iii) services which are
				commonly sold by the trade or business.
(c) The transactional test also includes, but
				is not limited to: income from the sale of property used in the production of
				apportionable income of a kind that is sold and replaced with some regularity,
				even if replaced less frequently than once a year.