May Department Stores Co. v. Indiana Department of State Revenue
2001 WL 479041, 749 N.E.2d 651, 2001 Ind. Tax LEXIS 32 (2001)
Rule of Law:
Indiana's statutory definition of “business income” requires the application of both a “transactional” test and a “functional” test to determine whether gains from the disposition of property are subject to apportionment and taxation as business income.
Facts:
- Associated Dry Goods Corporation (Associated), a Virginia corporation engaged in department store retailing, operated nine retail divisions across the United States, including Joseph Horne Co. (Horne).
- Adcor Realty Corporation (Adcor), a wholly-owned subsidiary of Associated, held legal title to real estate used by Horne and other Associated divisions.
- In 1986, The May Department Stores Company (May) announced its intention to acquire all of Associated's stock.
- The City of Pittsburgh and others filed a lawsuit against May and Associated, alleging that the proposed acquisition would violate the Clayton Act by substantially lessening competition in the department store retailing business.
- On September 24, 1986, a court-ordered stipulation resolved the antitrust action, requiring May to divest all of Horne's assets and interests, maintaining Horne as a “viable competitive entity.”
- Associated sold one Horne store site on December 19, 1986, and all remaining Horne assets on December 29, 1986, realizing total gains of $66,191,088.
- Associated and Adcor were subsequently merged into May effective February 1, 1992.
Procedural Posture:
- Associated and certain subsidiaries, including Adcor, filed a consolidated Indiana adjusted gross income tax and supplemental income tax return for the tax year beginning February 1, 1986, and ending January 31, 1987, reporting gains from Horne's asset sale as nonbusiness income.
- The Indiana Department of State Revenue (Department) audited the return and, on October 5, 1990, issued a proposed assessment of additional adjusted gross income and supplemental net income tax, reclassifying the gains from nonbusiness to business income.
- On December 3, 1990, Associated protested the proposed assessment.
- The Department conducted a hearing on the protest and, on April 28, 1993, issued a letter of findings denying Associated's protest.
- On June 25, 1993, the Department issued a final assessment for the tax year.
- May, as successor in merger with Associated, paid the Department $384,424.03 in tax and interest.
- On June 14, 1996, May filed a refund claim for the tax year with the Department.
- On June 11, 1999, after the Department issued no final determination on the refund claim within the statutory timeframe, May filed an original tax appeal in the Indiana Tax Court.
- May filed a motion for summary judgment on March 1, 2000.
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Issue:
Does Indiana's statutory definition of “business income” (Ind.Code Ann. § 6-3-1-20) require the application of both a 'transactional' test and a 'functional' test to determine if gains from the sale of a corporate division constitute taxable business income?
Opinions:
Majority - Fisher, J.
No, Indiana's statutory definition of “business income” requires the application of both a 'transactional' and a 'functional' test, and the gains from the sale of Horne's assets did not satisfy either test. The Court found the language of Ind.Code Ann. § 6-3-1-20 to be ambiguous due to differing interpretations in other jurisdictions, leading to an analysis of the statutory structure and intent. The Court concluded that the General Assembly intended to provide two distinct tests for defining business income, based on the statute's use of the compound verb “means” and “includes” with equal importance, and the need to give effect to every word in the statute without rendering parts superfluous. Applying the transactional test, the Court determined that the sale of an entire division was not a regular business practice for Associated, which was in department store retailing, not buying and selling entire divisions. The transaction was an extraordinary, one-time event, thus failing the transactional test. The Department's argument that the planned nature of the divestiture made it part of May's regular business activity was rejected, as the transaction was a one-time liquidation of a distinct business division. Applying the functional test, the Court focused on whether the acquisition, management, and disposition of the property constituted integral (necessary or essential) parts of Associated’s regular trade or business operations. While Horne was an integral part of Associated's operations prior to its sale, the disposition of Horne’s assets was not a necessary or essential part of Associated’s department store retailing business. This divestiture was compelled by a court order for the benefit of a competitor, not for the benefit or as an integral component of Associated's ongoing business operations. Therefore, the gains also failed the functional test. Since neither test was met, the gains were classified as nonbusiness income, and May was entitled to a refund.
Analysis:
This decision clarifies the interpretation of Indiana's business income statute (I.C. § 6-3-1-20), establishing that both the transactional and functional tests must be applied. It provides critical guidance for multistate corporations operating in Indiana regarding the classification of income from significant asset dispositions, particularly in the context of mergers, acquisitions, or divestitures. The ruling emphasizes that even if an asset was integral to a business, its disposition must also be integral to qualify under the functional test, setting a high bar for classifying such gains as apportionable business income.
