On June 13, 2018, an Arkansas Administrative Law Judge concluded that a taxpayer’s proceeds from dispositions of tax credits were apportionable business income. In Arkansas, business income arises from either: (1) transactions and activity in the regular course of the taxpayer’s business (the transactional test); or (2) income from the acquisition, management and disposition of property that constitutes integral parts of the taxpayer’s regular business (the functional test). The ALJ followed the Commissioner’s interpretation of the term “integral” and concluded that the taxpayer’s sales of credits “contributed to and were identifiable with (i.e. ‘integral parts of’) the Taxpayer’s trade or business operations.” The taxpayer routinely sold tax credits and had previously lost an appeal on the same issue because its tax credit depositions generated the majority of its federal taxable income. The taxpayer argued that the years at issue in this appeal were different because tax credits no longer constituted the majority of the taxpayer’s federal taxable income. The ALJ rejected this argument, concluding that the proceeds from the dispositions of the credits were integral and business income under the functional test. Dkt. Nos. 18-232, 18-405, Ark. Dep’t of Fin. & Admin., Office of Hearings & Appeals (Jun. 13, 2018).
