In a recent Administrative Law Judge (ALJ) decision from Alabama, it was concluded that the gain from the sale of a 1/3 stock interest in a European company, by an Illinois-based company, was not apportionable to the state, despite the company having nexus in Alabama. The ALJ determined that there was no functional integration, centralized management, or economies of scale between the two companies. The ALJ further held that taxing the gain from the sale of stock would violate the Commerce and Due Process Clauses of the U.S. Constitution, as the stock sale had no operational relation to the taxpayer’s business in Alabama. Finally, the ALJ determined the capital gain did not meet the state’s definition of business income under Ala. Code § 40-27-1.1.
The companies in the instant case manufactured and sold their products on different continents, had separate management, and did not share any corporate overhead expenses. While the companies did purchase much of their supplies and equipment from the same vendors under a global purchasing agreement, this did not demonstrate a unitary relationship and was only a result of the companies having a common parent. In reaching their decision, the ALJ followed the principles of the U.S. Supreme Court cases Mobil Oil Corp. v. Comm. Of Taxes of Vermont, 445 U.S. 425 (1980) and Allied Signal Inc. v. Director, Division of Taxation, 504 U.S. 768 (1992), which maintained that a state could not tax out-of-state income of a non-domiciliary corporation without some minimal connection to the corporation’s activities in the state, as well as a rational relationship between the income attributed to the state and the interstate value of the enterprise. Clearly, neither existed in this case, as the taxpayer and the company whose stock that it sold had no functional integration, no centralized management, and no economies of scale. Moreover, because the foreign company had no sales or business in the state of Alabama, taxing this extraterritorial gain would be outside the limits of the Commerce and Due Process Clauses of the U.S. Constitution.
Additionally, whether a unitary relationship existed or not, the gain from the stock sale was found to be from an investment transaction, not an operational function, and completely unrelated to the company’s business in Alabama. The ALJ adopted the reasoning in the Alabama Supreme Court case Ex Parte Uniroyal Tire Co., 779 So. 2d 227 (Ala. 2000), which regarded the sale of a partnership interest, an infrequent transaction, as not being in the regular course of a taxpayer’s business, and thus not business income. The Alabama Legislature amended the law defining business income in response to the Uniroyal decision, adding functional (integral part of regular business) and operationally related (related to the taxpayer’s trade or business carried on in Alabama) tests in addition to the transactional test for determining business income. Applying this logic in the present case, because the taxpayer had previously held the stock for 45 years and had not made any similar transactions since then, it was clearly not in the regular course of business. Therefore, the ALJ held that the gain could not be apportioned to Alabama under Ala. Code § 40-27-1.1, as the transactional, functional, and operationally related tests were not satisfied.
Ryan will closely monitor this important state case (Tate & Lyle Ingredients America, Inc. Corp. 07-162) as it proceeds through the Alabama judicial system.