Was ConAgra's interest income from payment-in-kind notes received in a completed business divestiture apportionable business income in New Mexico?

Plain-English summary

Interest on payment-in-kind (PIK) notes received when ConAgra divested its grain-storage business was nonbusiness income allocable to Nebraska, not business income apportionable to New Mexico.

ConAgra had already apportioned and paid New Mexico tax on the original sale proceeds, including the notes' full face value. The later interest was passive investment income with no operational role in its continuing business.

The Department initially assessed $259,407 corporate income tax, $51,881.40 penalty, and $24,182.47 interest, totaling $335,470.87. ConAgra conceded and paid $41,254 of the assessment; the rest was abated.

ConAgra completely divested a noncore business

ConAgra Foods decided to focus on its core food business and sell its Trading and Merchandising operations, which included grain merchandising and storage, fertilizer distribution, and agricultural and energy commodities trading.

The buyer paid approximately $2.2 billion cash, $550 million of PIK notes, a $37.2 million short-term receivable, and a warrant that later expired unexercised.

Taxpayer ConAgra Foods Food Ingredients transferred its grain-storage operations to Gavilon Grain LLC and sold that entity as part of the June 23, 2008 transaction.

The sale gain, including the PIK notes' face value, was approximately $645 million. It was reported as apportionable business income and included on the relevant New Mexico corporate income tax returns for the fiscal year ending May 2009.

The companies had no continuing unitary relationship

After closing, ConAgra no longer owned or controlled the sold operations or any interest in the buyer's group.

There were no overlapping officers, directors, employees, ownership interests, shared benefit plans, joint borrowing, debt guarantees, or continuing control. The buyer independently set policy and made business decisions.

Several limited post-sale agreements were priced at arm's length, and a transition-services agreement lasted one year with charges based on actual use.

The parties agreed that ConAgra and the buyer were not engaged in a unitary business.

The notes did not serve ConAgra's continuing operations

ConAgra's continuing New Mexico business sold milled grain products, dehydrated vegetables, and spices.

The PIK note principal and interest were not earmarked for operations, pledged as collateral, or used for any other business purpose. The notes appeared as “Other Assets” on consolidated books.

ConAgra was not in the business of holding, trading, or exchanging PIK notes or similar financial instruments. The notes did not hedge commodity pricing or provide another operational benefit.

None of UDITPA's business-income tests covered the later interest

The interest failed the transactional test because it did not arise in the regular course of ConAgra's continuing trade or business.

It failed the functional test because holding the notes was not integral to continuing operations.

The disposition test covered the 2008 business sale, but ConAgra had already apportioned the entire sale value, including the notes' face value. The later interest itself was not another disposition of a business segment.

The critical question was the interest-bearing investment's relationship to the taxpayer's existing business, not merely how the investment originated.

New Mexico could not apportion passive interest merely because both companies operated there

The Department argued that the physical presence of both businesses in New Mexico supported tax.

The AHO held that physical presence established jurisdiction but did not determine how much income could constitutionally be apportioned. The Due Process and Commerce Clauses required a unitary relationship or an operational asset connected to the taxpayer's unitary business.

Neither existed. The notes were passive investments unrelated to ConAgra's continuing New Mexico operations.

Result: summary judgment and protest GRANTED. The PIK note interest was nonbusiness income properly allocated to Nebraska. Other than the $41,254 ConAgra conceded and had paid, the tax, penalty, and interest were abated.

What this means for you

Corporations financing a business sale

Separate the tax treatment of sale consideration from later earnings on a financing instrument. Taxing the note's value as sale proceeds does not automatically make later interest business income.

Multistate tax departments

Document how a note or intangible is held and used after closing. Operational use, collateralization, working-capital function, and relationship to continuing business can determine apportionability.

Companies completing a full divestiture

Evidence of terminated control, separate management, no shared employees, arm's-length contracts, and no operational integration supported nonbusiness treatment here.

Taxpayers seeking summary judgment

Undisputed operational facts can resolve UDITPA classification as a matter of law. The Department did not dispute ConAgra's material facts in this proceeding.

Common questions

Q: What were PIK notes?
A: Payment-in-kind notes used as part of the buyer's financing for the business acquisition.

Q: Did ConAgra pay New Mexico tax on the original sale?
A: Yes. It apportioned the sale gain, including the notes' face value, as business income.

Q: Why was the later interest different?
A: The notes had no operational role in ConAgra's continuing business and were held as passive investments after a complete divestiture.

Q: Were ConAgra and the buyer a unitary business?
A: No. That fact was undisputed.

Q: Did arm's-length post-sale contracts create a unitary relationship?
A: No. The limited contracts did not establish common ownership, control, management, or operational integration.

Q: Where was the interest allocated?
A: Nebraska, ConAgra's commercial domicile.

Q: What portion of the assessment remained?
A: The $41,254 ConAgra conceded and had already paid; the remaining assessed tax, penalty, and interest were abated.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-2A-2(D) and 7-2A-3 — corporations and corporate income tax
• NMSA 1978, §§ 7-4-1 through 7-4-21 — UDITPA
• NMSA 1978, § 7-4-2(A) and (E) — business and nonbusiness income
• NMSA 1978, § 7-4-10(A) — apportionment of business income
• NMSA 1978, §§ 7-1-3(X) and 7-1-17(C) — tax definition and assessment presumption
• Regulations 3.1.6.13, 3.5.1.9(A), and 3.5.1.10(D) NMAC — presumption, business income, and interest income

Cases cited:

• Allied-Signal, Inc. v. Director, Division of Taxation, 504 U.S. 768 (1992) — unitary-business and operational-function limits
• MeadWestvaco Corp. v. Illinois Department of Revenue, 553 U.S. 16 (2008) — operational function within the unitary-business inquiry
• Container Corp. v. Franchise Tax Board, 463 U.S. 159 (1983) — operational and investment functions
• McVean & Barlow, Inc. v. Bureau of Revenue, 1975-NMCA-128 — liquidation holding addressed by the later UDITPA disposition test
• Koenig v. Perez, 1986-NMSC-066 — summary judgment when material facts are undisputed

Source

• Listing: New Mexico Decisions & Orders
• Decision post: ConAgra Foods Food Ingredients Co. Inc.
• Decision PDF: D&O 17-39

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
CONAGRA FOODS FOOD INGREDIENTS CO. INC. No 17-39
TO ASSESSMENT ISSUED UNDER
LETTER ID NO. L0446856512

DECISION AND ORDER
ON MOTIONS FOR SUMMARY JUDGMENT

A summary judgment hearing on the above-referenced protest occurred on January 20,

2017, before Brian VanDenzen, Chief Hearing Officer. At the hearing, Kyle Snedaker of ConAgra

Foods Food Ingredients Co. Inc. (“Taxpayer”) appeared, represented by attorneys Fred O. Marcus

(appearing pro hac vice) and Jennifer Zimmerman of Horwood, Marcus, & Berk and local

affiliated counsel Germaine Chappelle of Gallagher & Kennedy. Staff Attorney Peter Breen

appeared representing the Taxation and Revenue Department (“Department”). Taxpayer presented

four demonstrative exhibits during oral argument, all of which are preserved as part of the

administrative record in this matter.

The matter came before the Chief Hearing Officer on the Taxpayer’s September 19, 2016

Motion for Summary Judgment, the Department’s October 17, 2016 Response to Motion for

Summary Judgment, and Taxpayer’s November 28, 2016 Reply to Department’s Response. At the

unopposed request of Taxpayer, the merits hearing in this matter was converted to the summary

judgment motions hearing held on January 20, 2017, upon which this decision is rendered.

The parties submitted proposed findings of facts of conclusions of law on March 21, 2017

(Taxpayer) and March 24, 2017 (Department). Based on a review of the pleadings, the undisputed

material facts, review of exhibits, the arguments presented, and the proposed findings of facts and
proposed conclusions of law, IT IS DECIDED AND ORDERED AS FOLLOWS 1:

FINDINGS OF FACT

Procedural History

1. On February 25, 2013, under letter id. no. L0446856512, the Department assessed

Taxpayer $259,407.00 in Corporate Income Tax, $51,881.40 in penalty, and $24,182.47 in interest

for a combined total assessment of $335,470.87 for the reporting periods from May 31, 2008

through May 31, 2011.

2. On March 14, 2013, Taxpayer timely protested the Department’s assessment, a

protest received by the Department on March 26, 2013. As part of its protest, Taxpayer conceded

to a portion of the assessment and included payment of $41,254.00 for that conceded amount with

its protest letter.

3. On April 4, 2013, the Department acknowledged receipt of Taxpayer’s protest.

4. On October 22, 2015, the Department requested a hearing in this matter with the

Administrative Hearings Office, an agency that became independent of the Department under the

2015 Administrative Hearings Office Act 2. Before the filing of that request, the Administrative

Hearings Office had no knowledge of this matter and no statutory role in this matter.

1
Where appropriate and consistent with the undersigned hearing officer’s view of the facts and understanding of the
law, portions of Taxpayer’s proposed findings of fact, discussion, and conclusions of law were wholly or partially
incorporated into this final decision and order.
2
NMSA 1978, Section 7-1B-1 through 8 (2015). See 52nd Legislature, First Session, 2015, Senate Bill 356, Section 36
(temporary provision transferring all hearing officer personnel out of Taxation and Revenue to new, separate
Administrative Hearing Office).

In the Matter of ConAgra Foods Food Ingredients Company. Inc., page 2 of 26.

5. On October 29, 2015, the Administrative Hearings Office issued a Scheduling

Order and Notice of Administrative Hearings, setting various discovery and motion deadlines, and

scheduling a merits hearing on October 19, 2016.

6. On September 19, 2016, Taxpayer filed its motion for summary judgment in this

matter, along with attached affidavit of Scott Messel.

7. On October 17, 2016, the Department filed its Response for Motion for Summary

Judgment, with attached Exhibit A and B.

8. On October 17, 2016, Taxpayer moved to convert the merits hearing into a

summary judgment hearing and vacated the scheduled October 19, 2016 hearing date.

9. On October 19, 2016, and through amended order on October 24, 2016, the

Administrative Hearings Office continued the scheduled merits hearing and scheduled a summary

judgment hearing on December 21, 2016.

10. On November 28, 2016, Taxpayer filed its reply to the Department’s response,

along with attached Exhibit A.

11. After consulting with the parties via email, on December 20, 2016, the

Administrative Hearings Office sua sponte continued the summary judgment hearing to January

20, 2017.

12. On January 19, 2017, Taxpayer filed a Registration Certificate of Non-Admitted

Lawyer, admitting Fred O. Marcus pro hac vice with local counsel Germaine Chappelle.

13. On January 20, 2017, the summary judgment motion hearing occurred, as described

in the introductory paragraph of this decision and order.

In the Matter of ConAgra Foods Food Ingredients Company. Inc., page 3 of 26.

14. On January 24, 2017, the Administrative Hearings Office issued an order setting a

post-hearing briefing submission order.

15. On March 21, 2017, Taxpayer submitted its proposed findings of fact and

conclusions of law.

16. On March 24, 2017, the Department submitted its proposed findings of fact and

conclusions of law.

Undisputed Material Facts

17. ConAgra Foods, Inc. (“ConAgra Foods”), headquartered in Omaha, Nebraska, is a

packaged food company serving a wide variety of food customers.

18. Taxpayer, ConAgra Foods Food Ingredients, Company Inc., is a member of the

ConAgra Foods consolidated federal group.

19. Taxpayer, whose commercial domicile is in Omaha, Nebraska, is a supplier of

commercial food products including milled grain ingredients, vegetable products, seasonings,

blends and flavors.

20. Prior to its May 2009 fiscal year end, ConAgra Foods’ affiliated group operated in

three reporting segments: Consumer Foods, International Foods, and Food and Ingredients.

21. Included in the Food and Ingredients reporting segment was the Trading and

Merchandising business that included domestic and international grain merchandising, fertilizer

distribution, agricultural and energy commodities trading and services, and grain, animal, and oil

seed byproducts merchandising and distribution businesses.

22. ConAgra’s Trading and Merchandising business operated the No. 3 grain-handling

and storage system in the United States and was the No. 1 global source of fertilizer components.

In the Matter of ConAgra Foods Food Ingredients Company. Inc., page 4 of 26.
The Trading and Merchandising business also had significant expertise in trading natural gas and

crude oil.

23. In the mid-2000’s, ConAgra Foods’ management made the strategic decision to focus

its business efforts on its core food business. ConAgra Foods’ Trading and Merchandising business

was viewed as a non-core business and the decision was made to completely divest that line of its

business.

24. Osparie Management (“Osparie”), a leading commodity investment management

firm, expressed interest in acquiring ConAgra Foods’ Trading and Merchandising business.

25. Originally a joint venture transaction was proposed but ConAgra Foods’

management wanted to completely divest itself of its Trading and Merchandising business.

26. Osparie originally wanted to purchase the Trading and Merchandising business for

its book value. ConAgra Foods’ management, however, thought the value of the business was

higher.

27. Osparie ultimately agreed to a purchase price equal to book value plus $550 million.

28. Because it was necessary for Osparie to obtain financing for the transaction, Osparie

required that the purchase price be paid in a combination of cash and payment-in-kind notes (“PIK

Notes”).

29. Ultimately, the purchase price agreed to by the parties and paid by Ospraie included

$2.2 billion in cash, $550 million in PIK Notes, a short-term receivable of $37.2 million (related to

payment of employee bonuses) and a four year warrant to acquire approximately 5% of the issued

common equity of the subsidiary Osparie formed to acquire the business, Gavilon Holding LLC

(this warrant expired and was never exercised).

In the Matter of ConAgra Foods Food Ingredients Company. Inc., page 5 of 26.

30. ConAgra Foods’ management would have preferred to have sold its Trading and

Merchandising business for cash, but in order to realize its desired selling price, ConAgra Foods’

management determined it would be necessary to accept the PIK Notes, short-term financing and

warrant in addition to the cash consideration.

31. On March 27, 2008, ConAgra Foods entered into a sales agreement with Osparie

Special Opportunities fund, an affiliate of Osparie Management, for the purchase of ConAgra

Foods’ Trading and Merchandising business for the agreed-upon purchase price.

32. As required by the sales agreement, but occurring prior to closing, ConAgra

reorganized its domestic Trading and Merchandising business. The reorganization included the

conversion of the C-corporation members of the Trading and Merchandising business into single

member limited liability companies which were then transferred to a newly formed entity known as

Gavilon Group LLC, and the transfer of the grain storage operations, a part of ConAgra Foods’

Trading and Merchandising business, from Taxpayer to a newly formed single member limited

liability company known as Gavilon Grain LLC.

33. To complete the acquisition of ConAgra’s Trading and Merchandising business,

Ospraie Special Opportunities Fund formed two holding companies — Gavilon Holdings LLC and its

wholly owned subsidiary, GIH LLC.

34. On June 23, 2008, ConAgra Foods’ sale of its domestic Trading and Merchandising

business was completed when the membership interests in Gavilon Group LLC and Gavilon Grain LLC

were sold to GIH LLC in a transaction treated as an asset sale.

In the Matter of ConAgra Foods Food Ingredients Company. Inc., page 6 of 26.

35. The PIK Notes were issued by GIH LLC to Taxpayer as part of the sale proceeds related

to the sale of Taxpayer’s membership interest in Gavilon Grain LLC (containing the grain storage

operations).

36. Upon receipt of the sales proceeds, ConAgra Foods’ disposition of its Trading and

Merchandising business and Taxpayer’s disposition of its grain storage operations was complete,

and their ownership and control of their respective segments of the Trading and Merchandising

business ceased. The resulting gain on the divestiture transactions was calculated, reported to both

Federal and State taxing authorities, including New Mexico, and taxed.

37. The tax gain recognized on the sale of ConAgra Foods’ and Taxpayer’s respective

segments of the Trading and Merchandising business, which included the face value of the PIK

Notes, was approximately $645 million, was reported as apportionable business income and was

included in the taxable incomes of the applicable domestic legal entities on their New Mexico

corporate income tax returns for the fiscal year ended May 2009.

38. Following the sale of the Trading and Merchandising business to GIH LLC, neither

Taxpayer, ConAgra Foods, nor any subsidiary or affiliate of ConAgra Foods, engaged in the grain

merchandising, fertilizer distribution, agricultural and energy commodities trading and services, and

grain, animal, and oil seed byproducts merchandising and distribution businesses.

39. Following the sale of the Trading and Merchandising business to GIH LLC, the

Trading and Merchandising business, including Taxpayer’s grain storage operations, were no longer

included in ConAgra Foods’ consolidated financial statements.

In the Matter of ConAgra Foods Food Ingredients Company. Inc., page 7 of 26.

40. Following the sale of the Trading and Merchandising business to GIH LLC,

Taxpayer’s continuing business in New Mexico involved the sale of milled grain products,

dehydrated vegetables and spices.

41. During the period in which the PIK Notes were held by Taxpayer, neither the

principal nor the interest earned on the principal was earmarked for any operating purpose in

Taxpayer’s or ConAgra Foods’ continuing businesses.

42. During the period in which the PIK Notes were held by Taxpayer, the PIK Notes

were not pledged as security or collateral for any financing or used for any other business purposes

in Taxpayer’s or ConAgra Foods’ continuing business operations.

43. During the period in which the PIK Notes were held by Taxpayer, they were reported on

ConAgra Food’s consolidated books and records as Other Assets. The PIK Notes were given no

consideration by rating agencies looking at the stability of ConAgra Foods’ consolidated balance sheet.

44. At no time did either Taxpayer or ConAgra Foods own any interest in Osparie, GH

LLC or GIH LLC or any other member of the Osparie affiliated group of entities.

45. Following the sale of the Trading and Merchandising business to GIH LLC, none of

the officers and directors of either ConAgra Foods, Taxpayer or any other member of the ConAgra

Foods affiliated group was an officer or director of Osparie, GH LLC, GIH LLC or any other member

of the Osparie affiliated group, and no officer or director of Osparie, GH LLC, GIH LLC or any other

member of the Osparie affiliated group was an officer or director of ConAgra Foods, Taxpayer or

any other member of the ConAgra Foods affiliated group.

46. Following the sale of the Trading and Merchandising business to GIH LLC, neither

Taxpayer, ConAgra Foods or any other member of the ConAgra Foods’ affiliated group had any right

In the Matter of ConAgra Foods Food Ingredients Company. Inc., page 8 of 26.
to elect any officers or directors of Osparie, GH LLC, GIH LLC or any other member of the Osparie

affiliated group.

47. There were no transfers between Taxpayer, ConAgra Foods or any affiliate or

subsidiary of ConAgra Foods and GIH LLC of personnel, know-how, intellectual property, trade

secrets, expertise or similar property other than what was acquired by GIH LLC as part of its acquisition

of ConAgra Foods’ Trading and Merchandising business.

48. Following the acquisition of ConAgra Foods’ Trading and Merchandising business,

GIH LLC established its own policies and practices and made its own business decisions regarding the

acquired Trading and Merchandising business independently from ConAgra Foods, Taxpayer, or any

affiliate or subsidiary of ConAgra Foods.

49. Following the sale of ConAgra Foods’ Trading and Merchandising business to GIH

LLC, ConAgra Foods, Taxpayer, and affiliates or subsidiaries of ConAgra Foods and GIH LLC were

each separately responsible for their own legal, environmental, contracting, tax and finance, and

insurance services, did not share pension or employee benefit plans, did not lend monies to each

other or jointly borrow money, and did not guarantee each other’s debt.

50. Following the sale of ConAgra Foods’ Trading and Merchandising business to GIH

LLC, there were no common employees between ConAgra Foods, Taxpayer, or any affiliate or

subsidiary of ConAgra Foods and GIH LLC.

51. As of the June 23, 2008 sale of ConAgra Foods’ Trading and Merchandising

Business, ConAgra Foods, Taxpayer and other members of the ConAgra Foods affiliated group

terminated all affiliate agreements with their former Trading and Merchandising business

operations, with a few exceptions. ConAgra Foods and GIH LLC entered into several agreements,

In the Matter of ConAgra Foods Food Ingredients Company. Inc., page 9 of 26.
including a Byproducts Service Agreement, a Grain Storage and Handling Agreement, a Sublease,

and a Dried Dairy Products Agreement. Pricing was at arm’s-length and no special incentives

resulted from ConAgra Foods’ former ownership of the Trading and Merchandising business.

52. ConAgra Foods and GIH LLC also entered into a Transition Services Agreement for a

one-year period, pursuant to which ConAgra Foods committed to continue providing the same

administrative support services to the Trading and Merchandising business as had been provided prior

to the sale of ConAgra Foods’ Trading and Merchandising business for consideration based on actual

usage and arm’s-length charges.

53. Neither ConAgra Foods, Taxpayer nor any affiliate or subsidiary of ConAgra Foods

engaged in a unitary business with GIH LLC.

54. The interest income earned on the PIK Notes was reported as nonbusiness income in

New Mexico, and was sourced to Nebraska, Taxpayer’s commercial domicile.

55. Taxpayer directly owned and operated the grain elevators in New Mexico. In

anticipation of the sale of its grain storage operations, Taxpayer transferred its grain storage

operations to a disregarded single member LLC ("SMLLC") and sold its SMLLC interest which it

treated as an asset sale for tax purposes.

56. Proceeds from the sale of the Trading and Merchandising Business were not used

by Taxpayer but by ConAgra Foods to (i) fund a share repurchase, (ii) pay down commercial

paper borrowings outstanding as of the beginning of ConAgra Foods' fiscal 2009 tax year and (iii)

pay income taxes on the gain recognized on the transaction.

In the Matter of ConAgra Foods Food Ingredients Company. Inc., page 10 of 26.

57. The Department conducted an audit of Taxpayer’ New Mexico corporate income tax

returns for the tax years at issue and reclassified the interest income earned on the PIK Notes from

allocable nonbusiness income to apportionable business income.

58. As a result of that audit, the Department issued the assessment detailed in finding of

fact #1.

DISCUSSION

At issue in this protest is whether interest income on Taxpayer’s PIK notes is business income

apportionable and subject to New Mexico Corporate Income Tax or whether it is nonbusiness

income, not subject to New Mexico tax under Uniform Division of Income for Tax Purposes Act

(“UDITPA”) and applicable Commerce Clause and Due Process Clause requirements.

Burden of Proof and Standard of Review.

Pursuant to NMSA 1978, Section 7-1-17 (C), the assessment issued in this case is

presumed correct. The Taxpayer has the burden to overcome the presumption of correctness that

attached to the assessment. See Archuleta v. O’Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428.

Unless otherwise specified, for the purpose of the Tax Administration Act, “tax” is defined to

include interest and civil penalty. See NMSA 1978, § 7-1-3 (X). Under Regulation 3.1.6.13

NMAC, the presumption of correctness under Section 7-1-17 (C) extends to the Department’s

assessment of penalty and interest. See Chevron U.S.A., Inc. v. State ex rel. Dep’t of Taxation &

Revenue, 2006-NMCA-50, ¶16, 139 N.M. 498, 503 (agency regulations interpreting a statute are

presumed proper and are to be given substantial weight). Moreover, “[w]here an exemption or

deduction from tax is claimed, the statute must be construed strictly in favor of the taxing authority,

the right to the exemption or deduction must be clearly and unambiguously expressed in the statute,

In the Matter of ConAgra Foods Food Ingredients Company. Inc., page 11 of 26.
and the right must be clearly established by the taxpayer.” Wing Pawn Shop v. Taxation and Revenue

Department, 1991-NMCA-024, ¶16, 111 N.M. 735 (internal citation omitted); See also TPL, Inc. v.

N.M. Taxation & Revenue Dep't, 2003-NMSC-7, ¶9, 133 N.M. 447.

Summary Judgment is appropriate when there is no genuine dispute as to any material fact

and the moving party is entitled to prevail as a matter of law. See Romero v. Philip Morris, Inc.,

2010-NMSC-035, ¶7, 148 N.M. 713. In controversies involving a question of law, or application

of law where there are no disputed facts, summary judgment is appropriate. See Koenig v. Perez,

1986-NMSC-066, ¶10-11, 104 N.M. 664. If the movant for summary judgment makes a prima

facie showing that it is entitled to a judgment as a matter of law, the burden shifts to the opposing

party to show evidentiary facts that would require a trial on the merits. See Roth v. Thompson,

1992-NMSC-011, ¶17, 113 N.M. 331. Even if the nonmoving party does not file their own motion

for summary judgment, summary judgment may be granted to the nonmoving party if there is no

genuine dispute of fact, they are entitled to judgment as a matter of law, and the moving party was

generally on notice of the nonmoving party’s counter-claim in its response to the moving party’s

summary judgment pleading. See Martinez v. Logsdon, 1986-NMSC-056, ¶12, 104 N.M. 479. The

Department did not dispute any of the facts asserted in Taxpayer’s motion for summary judgment,

but did assert two additional undisputed, material facts, which have been adopted in this decision.

UDITPA, and Apportionment and Allocation of Income

Under NMSA 1978, Section 7-2A-3, New Mexico levies an income tax on the “the net

income of every domestic corporation and upon the net income of every foreign corporation

employed or engaged in the transaction of business in, into or from this state or deriving any income

from any property or employment within this state.” As used under the Corporate Income and

In the Matter of ConAgra Foods Food Ingredients Company. Inc., page 12 of 26.
Franchise Tax Act, the term “corporations” includes corporations, joint stock corporations, certain

real estate trusts, financial corporations, banks, other business associations, limited liability

companies and partnerships taxed as corporations under the Internal Revenue Code. See NMSA

1978, § 7-2A-2 (D).

Taxpayer does not dispute that it is subject to New Mexico Corporate Income Tax. Instead,

the question in this case turns on the allocation of Taxpayer’s income from the interest on the PIK

notes. There is no dispute that upon sale of the line of business, Taxpayer fully allocated the value of

that transaction (including the cash and the value of the PIK notes) and paid the apportioned tax in

New Mexico. However, after completion of that sale, Taxpayer has allocated the tax on the interest

income to its state of domicile, Nebraska. In contrast, the Department in audit determined that the

PIK interest represented business income from the sale of a line of the business, and thus was subject

to apportionment and taxation in New Mexico. In essence, the issues in this case turns on statutory

apportionment under UDITPA and related constitutional concerns.

While the statute may not extend apportionment beyond the constitutional Commerce

Clause and Due Process Clause limitations articulated by the Supreme Court, the analysis begins

with the applicable New Mexico statute. Like many states, New Mexico has adopted the UDITPA

to address apportionment and allocation of income earned by multistate or multinational entities. See

NMSA 1978, §§7-4-1 through 7-4-21; see also ASARCO Inc. v. Idaho State Tax Commission, 458

U.S. 307, 311 fn.3 (1982) (short discussion of history of UDITPA) ; see also J. Hellerstein & W.

Hellerstein, State Taxation, ¶9.01 (3rd ed. 2001-2015) (discussion of history of adoption of UPDITA,

or similar statutory regimes, by numerous states). UDITPA distinguishes between business income

and nonbusiness income with only business income being subject to apportionment. See NMSA

In the Matter of ConAgra Foods Food Ingredients Company. Inc., page 13 of 26.
1978, §7-4-10 (A) (2013) (“…all business income shall be apportioned...”).

“Business income” is defined under NMSA 1978, Section 7-4-2 (A) (1999), as

…income arising from transactions and activity in the regular course of the
taxpayer's trade or business and income from the disposition or liquidation of
a business or segment of a business. "Business income" includes income
from tangible and intangible property if the acquisition, management or
disposition of the property constitute integral parts of the taxpayer's regular
trade or business operations.

Conceptually, New Mexico’s statutory scheme under Section 7-4-2 (A) adopts three tests to

determine whether the income is business or non-business income. First, under Section 7-4-2 (A), is a

“transactional test,” where income is considered business income when the income arose from

“transactions and activity” occurring in the “regular course of the taxpayer’s trade or business.”

Second, under the “disposition test,” income is considered business income when the income arose

from the disposition of a business or segment of a business. See § 7-4-2 (A). And finally, Section 7-4-

2 (A)’s last sentence creates a “functional test,” where income is considered business income when

the income arose from “tangible and intangible property if the acquisition, management or disposition

of the property constitute an integral part of the taxpayer’s regular trade or business operations.” In

contrast, “nonbusiness income” is defined under UDITPA as “all income other than business

income.” NMSA, §7-4-2 (E).

Numerous Department regulations provide further guidance on the UDITPA distinction

between business and nonbusiness income. In addition to essentially reiterating the statutory

definition of business income, Department Regulation 3.5.1.9 (A) NMAC adds that “[i]n essence, all

income which arises from the conduct or the disposition or liquidation of trade or business operations

of a taxpayer is business income.” Regardless of the name, label, or classification used to describe

In the Matter of ConAgra Foods Food Ingredients Company. Inc., page 14 of 26.
the income, Department Regulation 3.5.1.9 (A) NMAC indicates that

[i]ncome of any type or class and from any source is business income if it
arises from transactions and activity occurring in the regular course of a trade
or business. Accordingly, the critical element in determining whether income
is "business income" or "nonbusiness income" is the identification of the
transactions and activity which are the elements of particular trade or
business. In general, all transactions and activities of the taxpayer which are
dependent upon or contribute to the operations of the taxpayer's economic
enterprise as a whole constitute the taxpayer's trade or business and will be
transactions and activity arising in the regular course of, and constitute
integral parts of, a trade or business.

In addressing whether interest income constitutes business income under UDITPA, Department

Regulation 3.5.1.10 (D) NMAC provides additional guidance:

"Interest income" is business income where the intangible with respect to
which the interest was received arises out of or was created in the regular
course of the taxpayer's trade or business operations or where the purpose for
acquiring and holding the intangible is related to or incidental to such trade
or business operations.

In concept, the broad principals of business income as defined under UDITPA and the

accompanying Department regulations are not inconsistent or incompatible with the touchstone

constitutional Due Process and Commerce Clause standard for apportionment, the unitary business

principal. See Allied-Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768, 786 (U.S. June 15, 1992)

(generally noting that UDITPA, while never expressly adopted by the Supreme Court as the

constitutional standard, is not incompatible with that standard). An overview of those constitutional

standards, as articulated by the United States Supreme Court, provides guidance on the application of

UDITPA to this matter.

Generally, a state may not impose an income tax on the value earned outside of its border

under the Due Process and Commerce Clauses of the United States Constitution. See ASARCO Inc. v.

In the Matter of ConAgra Foods Food Ingredients Company. Inc., page 15 of 26.
Idaho State Tax Commission, 458 U.S. 307, 314 (1982). Specifically, the Commerce and Due

Process Clauses of the United States Constitution impose distinct but parallel limitations on New

Mexico’s power to tax value earned from out-of-state business activities. See Mobil Oil Corp. v.

Comm'r of Taxes, 445 U.S. 425, 454 (1980); Norfolk & Western R. Co. v. Missouri Tax Comm'n.,

390 U.S. 317, 325, n.5 (1969). However, a state may tax an apportioned share of a multistate

entity’s income earned outside of its territory if the activity that generated that income was part of

a “unitary business.” MeadWestvaco Corp. v. Ill. Dep't of Revenue, 553 U.S. 16, 19 (U.S. Apr. 15,

2008); Allied-Signal, 504 U.S. at 772; Hunt Wesson v. Franchise Tax Bd., 528 U.S. at 460; Exxon

Corp. v. Wisconsin, 447 U.S. 207, 224 (1980); Mobil Oil Corp., 454 U.S. at 442. “[T]he linchpin

of apportionability in the field of state income taxation is the unitary-business principle.” Mobil

Oil Corp., 445 U.S. 425, 439. Taxpayer bears the burden of establishing by clear and cogent

evidence that the state seeks to tax extraterritorial values. Allied-Signal, 504 U.S. 768, 782, citing

Exxon Corp. 447 U.S. 207, 224.

The United States Supreme Court has held over the years in a wide range of factual

contexts that the constitutional test for establishing whether two or more companies are unitary is

dependent on whether there is functional integration, centralization of management, and

economies of scale between the companies. See F.W. Woolworth Co. v. Taxation and Revenue

Dep’t, 458 U.S. 354 (1982); See also ASARCO, 458 U.S. 307 (1982); See also Exxon, 447 U.S.

207 (1980). Additionally, the Court, in Allied-Signal, stated that a non-domiciliary state can tax

income from intangible property even if the income payer and payee are not engaged in the same

unitary business, so long as the capital transaction serves an operational function, and not an

investment function. See Allied-Signal, 504 U.S. at 787. Hence, for example, a State may include

In the Matter of ConAgra Foods Food Ingredients Company. Inc., page 16 of 26.
in the apportionable income of a non-domiciliary corporation interest earned on short-term

deposits in a bank located in another state if the deposits form part of the working capital of the

corporation's unitary business. Id. And, in Container Corp. v. Franchise Tax Bd., the Court noted

that capital transactions can serve an investment function or an operational function, finding that

corn futures contracts in the hands of a corn refiner seeking to hedge against increases in corn

prices are operational rather than capital assets. Container Corp. v. Franchise Tax Bd., 463 U.S.

159, n.19 (1983); citing Corn Products Refining Co. v. Commissioner, 350 U.S. 46, 50-53 (1955).

In 2008, the United States Supreme Court clarified its statement in Allied-Signal in the

Mead case. See MeadWestvaco Corp. v. Illinois Department of Revenue, 553 U.S. 16 (2008). In

Mead, the Court noted that its references to operational function in Container Corp. and Allied-

Signal were not intended to modify the unitary business principle by adding a new ground for

apportionment. The Court explained that the concept of operational function simply recognized

that an asset can be part of a taxpayer’s unitary business even if the unitary business relationship

doesn’t exist between the payee and the payor. In the example given by the Court in Allied-

Signal, the taxpayer was not unitary with its banker, but the taxpayer’s short-term deposits (which

represented working capital and thus operational assets) were clearly unitary with the taxpayer’s

business. In Corn Products, the taxpayer was not unitary with the counterparty to its hedge, but

the taxpayer’s futures contracts (which served to hedge against the risk of an increase in the price

of a key cost input) were likewise clearly unitary with the taxpayer’s business. In the examples in

Allied Signal and Corn Products, the payor was not a part of the taxpayer’s unitary business but

the asset clearly was. The conclusion that the asset served an operational function was merely

instrumental to the constitutionally relevant conclusion that the asset was a part of the unitary

In the Matter of ConAgra Foods Food Ingredients Company. Inc., page 17 of 26.
business being conducted in the taxing state rather than a discrete asset to which the State had no

claim.

Distilling the Supreme Court’s constitutional jurisprudence in this area into a brief

summary, pursuant to the holdings in Allied Signal and Mead, an item of income is subject to

apportionment either if (1) the taxpayer/payee and the income payor are engaged in a unitary

business, or (2) the asset that generated the income was itself used as part of the taxpayer’s unitary

business operations in the taxing state. Thus, New Mexico may only tax the interest income

earned on the PIK Notes if: 1) Taxpayer and the Buying Parties were engaged in a unitary

business or 2) the PIK Notes were used as part of Taxpayer’s unitary business operations in New

Mexico.

Under these general statutory and constitutional principles, Taxpayer’s PIK income is

nonbusiness income not subject to apportionment under UDITPA. Beginning with the application

of Section 7-4-2 (A)’s first “transactional test,” the PIK interest income does not arise from

“transactions and activity” occurring in the “regular course of the taxpayer’s trade or business.”

Taxpayer specifically divested itself of the line of business in question in 2008 through its sale of the

grain elevator business to GIH LLC/Ospraie Management. The undisputed facts clearly indicate that

the interest income Taxpayer received on its PIK Notes did not arise from transactions and activity in

the regular course of Taxpayer’s trade or business, which consisted of the manufacture and

distribution of commercial food products including milled grain ingredients and a variety of vegetable

products, seasonings, blends and flavors. Similarly, and as discussed in more detail in the

constitutional analysis, under the third functional test articulated in Section 7-4-2 (A)’s last

sentence, the income did not arise from “tangible and intangible property if the acquisition,

In the Matter of ConAgra Foods Food Ingredients Company. Inc., page 18 of 26.
management or disposition of the property constitute an integral part of the taxpayer’s regular trade or

business operations.”

The closest test, and the reason why the Department had reasonable grounds to conduct the

audit and initially issue the assessment, is Section 7-4-2 (A)’s “disposition test” where income is

considered business income when the income arose from the disposition of a business or segment of a

business. This dispositional test portion of the statue was added by the Legislature in response to the

New Mexico Court of Appeals’ decision in McVean & Barlow, Inc. v. Bureau of Revenue, 1975-

NMCA-128, 88 NM 521. In McVean & Barlow, Inc., the Court of Appeals had found that income

from the liquidation of a line of business was non-apportionable, non-business income under

UDITPA because it arose from a one-time transaction not part of that taxpayer’s line of business.

This statutory overruling of McVean & Barlow, Inc. made clear that the Legislature intended the

proceeds from the disposition of a line of business to be considered business income under UDITPA

subject to apportionment.

Against that Legislative intent, it is undeniable that Taxpayer initially received the PIK notes

as part of the sophisticated financing mechanism of the sale and disposition of its grain elevator

business, and in that sense on the surface there is some indication that the income came from the

disposition of the business segment. However, of critical importance under this test is the fact that

Taxpayer fully apportioned the proceeds from the sale of the line of business, including the full face

value of the financing instrument PIK notes, as business income in New Mexico and paid the

corresponding tax to New Mexico for that business income in the fiscal year ending in May 2009. In

other words, at the time of the disposition of its line of business, when this test was clearly met,

Taxpayer fully apportioned and paid corresponding tax on the value of the sale of that business,

In the Matter of ConAgra Foods Food Ingredients Company. Inc., page 19 of 26.
including the face value of the PIK notes, as required under Section 7-4-2 (A)’s dispositional test

added by the Legislature in response to McVean & Barlow. This is not the McVean & Barlow case

that the Legislature overruled in adopting the dispositional test because Taxpayer in fact allocated and

paid the corresponding tax on income gain from the sale and disposition of the line of the business.

The question remains whether the subsequent interest income derived from the PIK notes is

apportionable business income or is non-business income allocated solely to Taxpayer’s domiciliary

state. After surveying the landscape of cases in UDITPA and non-UDITPA states addressing

apportionment and allocation of interest income, Hellerstein and Hellerstein note in the leading

treatise on state taxation that the weight of authority finds that the origin of the investment leading to

the interest income itself is not dispositive of whether the interest income can be qualified as

apportionable business income or non-apportionable nonbusiness income. See J. Hellerstein & W.

Hellerstein, State Taxation, ¶9.09 (3) (3rd ed. 2001-2015) Instead, Hellerstein and Hellerstein suggest

that the “critical question is the relationship of the interest-bearing investment to the taxpayer’s

existing trade or business.” Id.

After already apportioning and paying the appropriate New Mexico corporate income tax

after the complete disposition of the line of business (including the face value of the PIK notes) in

2009, there remains no meaningful relationship left between the PIK notes and Taxpayer’s line of

business. Taxpayer is not in the regular business of holding, trading, exchanging PIK notes or other

sophisticated financial instruments. Nor does Taxpayer’s operational purpose benefit from possession

of such sophisticated financial instruments unrelated to Taxpayer’s core business products and

services. Taxpayer completely divested itself of the line of business in question, apportioned and paid

tax on the business income it received on the disposition. There is no evidence that Taxpayer uses the

In the Matter of ConAgra Foods Food Ingredients Company. Inc., page 20 of 26.
interest income for some operational function like as a hedge against changes in commodity pricing.

Since Taxpayer is no longer in that line of business, has no ownership interest, control of the other

company, functional integration, centralized management, or economies of scale with the other

company, the interest income received at this point is simply investment income not related to a

unitary business enterprise or Taxpayer’s line of business.

Similarly, under the constitutional analysis espoused in the Supreme Court jurisprudence,

after completion of the sale in 2008, there was no unitary relationship between Taxpayer and GIH

LLC/Ospraie Management. There is no evidence or contention that Taxpayer and GIH

LLC/Ospraie Management had functional integration, centralized management, or economies of

scale. As the Department conceded, there was no evidence that Taxpayer and GIH LLC/Ospraie

Management had a crossover of corporate officers, overlapping ownership/equity interests,

common employees, or influence/control over each other. Further, as the Department again

conceded, Taxpayer terminated all contract with the sold entity at the time of the sale and then

entered new agreements where appropriate in arm’s length negotiations. Quite simply, the

undisputed facts indicate Taxpayer and GIH LLC are unrelated business enterprises.

Despite this, the Department asserts that the unitarian analysis is not required given that

both Taxpayer and GIH LLC are physically present in the New Mexico. However, while the

physical presence certainly gives New Mexico jurisdiction to impose a tax, it does not establish

what amount New Mexico may constitutionally apportion in accord with the Commerce Clause

and Due Process Clause Supreme Court jurisprudence. The mere fact that two companies are

physically present in the same state, as the Department’s argument, falls well short of meeting the

unitary-business principle articulated by the constitutional case law and would in fact largely

In the Matter of ConAgra Foods Food Ingredients Company. Inc., page 21 of 26.
eviscerate that standard. See Allied-Signal, Inc., 504 U.S. 768, 786-787 (“it does not follow… that

apportionment of all income is permitted by the mere fact of corporate presence within the

State.”). Nor does the fact as the Department argues that Taxpayer subsequently entered into arms-

length contracts, without any other control, equity interest, or overlapping

management/employees, meet the unitary-business principle required under the applicable

jurisprudence.

Indeed, many of the Department’s arguments center around Taxpayer’s actions at the time

of the disposition of the grain elevator line of business (the Department cited ConAgra’s 10-K for

2009 to show that ConAgra used the proceeds of the disposition of the line of business to pay

down debt) in 2008. While those arguments clearly demonstrate why Taxpayer was required to

apportion the proceeds at the time of the disposition of the business to New Mexico under both the

dispositional test and the unitary business principle constitutional standard, Taxpayer in fact

already did fully apportion the proceeds of the sale of the line of business, including the face value

of the PIK notes in 2009. Thus, the Department’s written arguments are not particularly helpful on

the question of how to treat the subsequent PIK note interest income.

Turning back to the case law for further guidance, even without a unitary-business

relationship between the entities, it is still possible to apportion the tax on the income consistent

with the constitutional requirements if the asset resulting in the income serves an “operational

rather than investment function.” Allied-Signal, Inc., 504 U.S. 768, 787; See also Container Corp.

v. Franchise Tax Bd., 463 U.S. 159. Mead provided further clarity on this point, indicating that the

concept of operational function means that an asset can be part of a taxpayer’s unitary business

even if the unitary business relationship doesn’t exist between the payee and the payor.

In the Matter of ConAgra Foods Food Ingredients Company. Inc., page 22 of 26.
In 2008, Taxpayer divested itself of its grain storage operation line of business by selling

its assets to GIH LLC/Ospraie Management, fully apportioning the value of that transaction

(including the face value of the PIK notes) to New Mexico. Again, important to this analysis, at

the time of the sale and divesture of the grain elevators, Taxpayer apportioned the full value of the

transaction including the face value of the PIK notes used to finance that transaction to New

Mexico. After the divesture of the grain elevators, the proceeds of which were apportioned in New

Mexico, Taxpayer was no longer in that line of business. As the Supreme Court in Allied-Signal,

Inc., 788, makes clear, “the mere fact that an intangible asset was acquired pursuant to a long-term

corporate strategy of acquisitions and dispositions does not convert an otherwise passive

investment into an integral operational one.” After the divestment in the line of business in 2008,

the interest received on the PIK notes was not integral to Taxpayer’s continuing business

operations in New Mexico but rather served as an investment function. Again, Taxpayer is not in

the regular business of holding, trading, exchanging PIK notes or other sophisticated financial

instruments. And unlike in Corn Products Refining Co. case, there is no clear business operational

benefit related to the interest on the PIK notes to Taxpayer like a hedge on Taxpayer’s main

products. Taxpayer has shown that the PIK note interest income was earned in the course of

activities unrelated to its New Mexico business activities, meeting the requirements for the Due

Process and Commerce Clause limitations on apportionability. See Allied-Signal, Inc., 504 U.S.

768, 787, quoting Exxon, 447 at 223.

In sum, the undisputed material facts established that the PIK interest income is non-

business income and thus not apportionable as a matter of law in New Mexico under UDITPA and

the constitutional Due Process and Commerce Clause standards as articulated in Supreme Court

In the Matter of ConAgra Foods Food Ingredients Company. Inc., page 23 of 26.
jurisprudence. For that reason, Taxpayer’s motion for summary judgment is well-taken and should

be granted. See Koenig v. Perez, 1986-NMSC-066, ¶10-11, 104 N.M. 664.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest of the Department’s assessment and

jurisdiction lies over the parties and the subject matter of this protest.

B. There is no genuine dispute as to any material fact, summary judgment is

appropriate in this matter. See Romero v. Philip Morris, Inc., 2010-NMSC-035, ¶7, 148 NM 713.

C. At the time Taxpayer disposed of its grain elevator line of business, it fully

apportioned and paid tax on the proceeds of that sale, including the face value of the PIK notes, to

New Mexico, as required under the dispositional clause of UDITPA, NMSA 1978, Section §7-4-2

(A).

D. Taxpayer’s subsequent interest income from PIK notes amounted to non-business

income under UDITPA, NMSA 1978, Section §7-4-2 (A) & (E) because the income did not meet the

transactional test, the dispositional test, or the functional test articulated under the definition of

business income.

E. Because Taxpayer was a not a unitary-business with GIH LLC/Ospraie

Management and because the interest income on the PIK notes was not integral to Taxpayer’s line

of business, the income was not apportionable to New Mexico consistent with the Due Process

Clause and Commerce Clause. See Allied-Signal, Inc., 504 U.S. 768, 787; See also Container

Corp. v. Franchise Tax Bd., 463 U.S. 159; See also Exxon Corp. 447 U.S. 207, 224.

F. Consequently, although Taxpayer otherwise was clearly subject to New Mexico

Corporate Income Tax, the nonbusiness interest income in question in this protest was not

In the Matter of ConAgra Foods Food Ingredients Company. Inc., page 24 of 26.
apportionable to New Mexico under UDITPA and instead was properly allocated to Nebraska,

Taxpayer’s state of domicile.

For the foregoing reasons, Taxpayer’s motion for summary judgment IS GRANTED and

Taxpayer’s protest IS GRANTED. Aside from the $41,254.00 amount of the assessment that

Taxpayer conceded was due and owing (and for which Taxpayer has already submitted payment),

the remaining assessed tax, penalty and interest IS ORDERED ABATED.

DATED: September 15, 2017

Brian VanDenzen, Esq.
Chief Hearing Officer
Administrative Hearings Office
P.O. Box 6400
Santa Fe, NM 87502

NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, Section 7-1-25 (2015), the parties have the right to appeal this

decision by filing a notice of appeal with the New Mexico Court of Appeals within 30 days of the

date shown above. If an appeal is not timely filed with the Court of Appeals within 30 days, this

Decision and Order will become final. Rule of Appellate Procedure 12-601 NMRA articulates the

requirements of perfecting an appeal of an administrative decision with the Court of Appeals.

Either party filing an appeal shall file a courtesy copy of the appeal with the Administrative

Hearings Office contemporaneous with the Court of Appeals filing so that the Administrative

Hearings Office may begin preparing the record proper. The parties will each be provided with a

copy of the record proper at the time of the filing of the record proper with the Court of Appeals,

In the Matter of ConAgra Foods Food Ingredients Company. Inc., page 25 of 26.
which occurs within 14 days of the Administrative Hearings Office receipt of the docketing

statement from the appealing party. See Rule 12-209 NMRA.

CERTIFICATE OF SERVICE

I hereby certify that I mailed the foregoing Decision and Order to the parties listed below this

15th day of September 2017 in the following manner:

In the Matter of ConAgra Foods Food Ingredients Company. Inc., page 26 of 26.