Business Income or Nonbusiness Income? That is the Question.

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The Tennessee Court of Appeals affirmed a lower court ruling that the assessment of excise taxes on interest earned from the investment in Treasury securities owned by the taxpayer was unconstitutional because the the income constituted nonbusiness earnings for Tennessee excise tax purposes. In other words, the taxpayer was able to prove that the income from the Treasury securities was for investment purposes only and was not connected to the company's business in Tennessee.

This case provides yet another example of the controversy and difficult analysis that results from a business income versus nonbusiness income tax position. In this case, Tennessee acted like most states do in that they took the position that the income was business income and should be apportionable to their state. It is usually up to the taxpayer to prove by the preponderance of their facts that the income is nonbusiness and should be allocated to the taxpayer's home state or a different state depending on the type of income and circumstances.

Please see the case for more details, Siegel-Robert, Inc. v. Johnson, Tenn Ct. App. at Nashville, Dkt. No. M2008-02228-COA-R#-CV, 10/28/2009. After you click on the link, type "Siegel-Robert" in the search field. The case will be document #2.

Application to Your Company and Other States

If your company has some type of income that you believe is not part of your "ordinary trade or business," it could be very beneficial to have a review or analysis completed to establish the legal and business case for treating that income as nonbusiness income. The earlier the business case can be established, the better.

Even if your company has treated the income as business income for years, if your facts or operations change, an argument or position may be able to be taken to treat the income as nonbusiness. Depending on the amount of income and states involved, the resulting impact can be very material.

Impact of FIN 48

In addition to the state tax ramifications, FIN 48 most likely will create the need for companies to document their support for treating certain income as business or nonbusiness income for financial statement purposes. Therefore, a review can "kill two birds with one stone."

Please contact me at brian.strahle@bakertilly.com or 612.876.4824 for a free-initial consultation.

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