Opinion ID: 2230378
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Heading: Iowa's Income Tax Scheme.

Text: We believe that a brief description of Iowa's income tax scheme is helpful to understand the issues in this case. Iowa's income tax scheme for corporations that derive income from Iowa and other states was explained in Kraft, Inc. v. Iowa Department of Revenue & Finance, 465 N.W.2d 664, 666 (Iowa 1991), reversed on other grounds by 505 U.S. 71, 112 S.Ct. 2365, 120 L.Ed.2d 59 (1992): Iowa income tax is imposed upon the portion of a taxpayer's net income attributable to its trade or business within Iowa. Iowa Code § 422.33. Section 422.35 defines net income as the taxable income before the net operating loss deduction, as properly computed for federal income tax purposes. . . . If a corporation has income sources from several states, Iowa splits the items comprising its net income into two types: business income and nonbusiness income. [1] The distinction between business and nonbusiness income is important because it determines whether an item of income is allocated to one specific state or apportioned among several states. See Iowa Code § 422.33(2)( a )-( b ) (1993). When income is allocated, it is attributed to the particular state or states that are considered to be the source of the income, often on the basis of the location of the property that gave rise to the income or on the basis of the taxpayer's commercial domicile. . . . When income is apportioned, on the other hand, it is divided among the various states in which the taxpayer derives such apportionable income. The mechanism for apportioning income among the states [is an apportionment formula]. Jerome R. Hellerstein & Walter Hellerstein, State Taxation ¶ 9.02 (3d ed.1999) (footnotes omitted). In general all `business income' is apportioned; all `nonbusiness income' is allocated. Id.; accord Iowa Code § 422.33(2).