Arkansas Supreme Court Rules That Sales of Intangibles Yield Nonbusiness Income

The Arkansas Supreme Court (“Court”), on April 16, 2026, ruled that the sale of intangible assets in liquidation by an out-of-state franchisor yielded nonbusiness income.¹ In so ruling, the court concluded that the regulation relied upon by the Department of Finance and Administration (“Department”) materially departed from the law.

The taxpayer was an Oklahoma corporation that owned and operated restaurant franchises in several states, including Arkansas. Upon liquidation, the taxpayer disposed of its assets and treated the gain from its intangible holdings as nonbusiness income on its Arkansas return for 2018, sourcing the gain to its Oklahoma domicile. The Department recharacterized the gain as business income, requiring that a portion of the gain be sourced to Arkansas. A trial court ruled in favor of the taxpayer. This appeal ensued.

Under the law at the time, items of business income had to satisfy one of two separate tests: a transactional test (“income arising from transactions and activity in the regular course of the taxpayer’s trade or business”) or a functional test (“income from property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer’s regular trade or business”). At issue was whether the gain was business income under the functional test, as the parties agreed that the transactional test was not satisfied.

The Court found that the gain did not yield business income for a simple reason: the taxpayer did not regularly dispose of its franchise assets as part of its business, though it acquired and managed them. Looking at the statute, a business income finding under the functional test requires acquisition, management, AND disposition of the property. The taxpayer was not in the business of disposing its assets. The Department’s position was undercut by a law change enacted in 2025 under which business income is satisfied if the property’s “acquisition, management, employment, development, OR disposition” was related to the operation of the taxpayer’s trade or business.” This change applies prospectively to 2026 only.

In addition, the Court found that the Department’s regulation materially departs from the statute because it provides that gain from the sale of property is business income if the property was used in the taxpayer’s trade or business. According to the Court, the regulation “collapses the functional test into a broader inquiry about use,” and “agency rules cannot rewrite the statute. They must yield to it.”

Ryan’s Take and Action Steps

Companies that have apportioned income from asset sales should review how they characterized their income and whether the regulation relied upon by the Department in this case was at issue. Thus, business income under the functional test required that the acquisition, management, AND disposition of the property constitute an integral part of a taxpayer’s business. The state’s highest court was clear in its conclusion that the regulation departed from the functional test as set out in the law at the time.

The switch to the word “or” from “and” in the 2025 amendment, taking effect in 2026, would change the result in the present case. Thus, all that would be required is one of the activities (acquisition, management, disposition) to have occurred to result in a finding of business income. This law change was part of a larger enactment that also changed the wording of business income and nonbusiness income to apportionable income and nonapportionable income, respectively. The law also now provides that apportionable income is all income that is apportionable under the U.S. Constitution.

¹ Hudson v. United States Beef Corporation, Ark. Sup. Ct., No. CV-25-395 (April 16, 2026).

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