Missouri AHC Holds Capital Gains And Interest Constituted Nonbusiness Income

The Missouri Administrative Hearing Commission has determined that capital gains from the sale of a taxpayer's interest in a commercial explosives business that was considered a one-time extraordinary event and the interest earned on those capital gains were considered nonbusiness income for Missouri corporate income tax purposes.1 As nonbusiness income, the capital gains and interest were allocable to Connecticut, the state of the taxpayer's commercial domicile, instead of Missouri.

Background

Ensign-Bickford Industries, Inc. ("EBI"), a corporation headquartered and domiciled in Connecticut, owned several subsidiaries, including Applied Food Biotechnology, Inc. (AFB) and Ensign-Bickford Company ("EBCo"). AFB was a Missouri-based company engaged in the manufacture and sale of pet food flavor enhancers, while EBCo was a Connecticut-based company engaged in the commercial explosives business with no facilities, employees, or property in Missouri. Other subsidiaries of EBI were engaged in business activities that generally supported the commercial explosives business, with none of their facilities, employees or property located in Missouri.

During 2000, EBI's board decided to sell EBCo's commercial explosives business. In 2003, EBI and the shareholders of a Norwegian company (Dyno Nobel) entered into an agreement under which EBI contributed substantially all of its commercial explosives assets in exchange for approximately 26 percent of the ownership of Dyno Nobel. EBI did not participate in the management of Dyno Nobel, and only had the right to name two of the nine members of Dyno Nobel's board of directors. Following a change in business structure from a corporation to a limited liability company (LLC) in 2005, Dyno Nobel was sold to a third party for cash. The sale resulted in a long-term capital gain to EBI of $247,243,200.

On the 2005 Missouri consolidated corporation income return, AFB (the reporting taxpayer at the time) elected three-factor apportionment pursuant to the Multistate Tax Compact (Compact) and reported the long-term capital gain of $247,243,200 and associated interest of $958,006 as nonbusiness income. AFB allocated these items to Connecticut and therefore did not pay tax to Missouri on such amounts. In 2007, the Missouri Director of Revenue issued a notice of deficiency, which showed a tax due of $2,543,264 due to the inclusion of the gain and associated interest in taxable income. EBI filed amended returns for 2005 and...