Opinion ID: 1176000
Heading Depth: 1
Heading Rank: 3

Heading: the interest income derived from a loan made by the richards to a corporation in which they are shareholders constitutes income derived from sources within the state of idaho.

Text: During the years at issue, I.C. § 63-3024 stated: A tax is hereby imposed for each taxable year commencing on and after January 1, 1987, upon every resident individual, trust or estate which shall be measured by his or its taxable income, and upon that part of the taxable income of any nonresident individual, trust or estate derived from sources within the state of Idaho.... I.C. § 63-3024 (1988) (emphasis added). Under this code section a non-resident individual must pay income tax on income derived from Idaho sources. The Richards are non-resident individuals, but they contend that the interest income from IFI is not from an Idaho source. The question then is whether interest income derived from a loan made by the Richards to a corporation in which they are shareholders constitutes income derived from sources within this state. During the years at issue in this dispute, the Idaho Income Tax Act did not define the term sources. The Idaho Supreme Court has defined the term source to include dividend income received from a corporation to the extent that the corporation's business took place in Idaho. Futura Corp. v. State Tax Comm'n, 92 Idaho 288, 442 P.2d 174 (1968). The Court stated: [I]t is our opinion that the word sources when used in statutes dealing with sources of income derived from within this state specifically, dividend income from a non-qualifying corporationhas reference not to the location of the entities issuing or receiving such dividend income, but rather to the location of the business activities wherein these earnings were derived. Id. at 290, 442 P.2d at 176. The Court further agreed with the Missouri Supreme Court which held that `in the case of income derived from the use of capital, it is the place where the capital is employed.' Id. (quoting In Union Electric Co.'s Petition, 349 Mo. 73, 161 S.W.2d 968, 970 (1942)). Therefore, the source of income from capital is the place where the capital is employed. The proceeds of the loan made by the Richards to IFI were used by the corporation as capital to finance its business operations. Applying the Futura definition of source of income from capital, the interest income received by the Richards in 1989 and 1990 was derived from an Idaho source to the extent that IFI used the capital in the state of Idaho. [1] The Richards argue that the Futura definition of source does not apply to this case because Futura dealt with corporate income tax rather than non-resident individual income tax. However, Futura speaks more broadly, encompassing non-resident individuals also: [I]t is our opinion that the word sources when used in statutes dealing with sources of income derived from within this state specifically, dividend income from a non-qualifying corporationhas reference not to the location of the entities issuing or receiving such dividend income, but rather to the location of the business activities wherein these earnings were derived. Id. (emphasis added). There is further evidence that the Futura Court intended its definition to apply to non-resident individuals. The statutory language that the Futura Court interpreted applied to both corporations and non-resident persons. The statute at issue provided: 63-3027. COMPUTING TAXABLE INCOME OF NON-RESIDENT PERSONS AND ANY CORPORATIONS. (a) In computing the taxable income of a non-resident person    with business situs in this state or any corporation with a business situs in this state   , income realized from or derived from sources within this state  includes .... 1961 Idaho Sess. Laws Ch. 328, p. 628 (emphasis added). Based on the foregoing, the interest income from IFI was Idaho source income.