Was Agman Louisiana's gain from selling its WGI interest business income apportionable to New Mexico rather than nonbusiness income allocable to Louisiana?

Plain-English summary

Agman Louisiana's gain from selling its interest in Westway Group Incorporated (WGI) was business income apportionable to New Mexico. The AHO rejected Agman's treatment of the gain as nonbusiness income allocable only to its commercial domicile.

The Department's initial assessment was $156,440 corporate income tax, $31,288 penalty, and $12,712.66 interest. By the hearing, interest had increased to $17,385.88, making the total liability $205,113.88.

Agman had separated two operating businesses into WGI

Agman, a New Orleans company within the ED&F Man group, had owned Westway Terminal Company and Westway Feed Products.

It sold the two subsidiaries to WGI between 2006 and 2009 and retained approximately 48% to 49.5% of WGI. WGI operated liquid-storage terminals and manufactured liquid animal-feed supplements, including at two New Mexico facilities.

Agman could name three of WGI's seven board members. WGI's first CEO came from the ED&F Man group, and the group initially provided administrative services and insurance connections.

The WGI relationship continued to serve Agman's operations

The companies maintained a long-term Storage Strategic Alliance. ED&F Man received first-offer or reservation rights for terminal capacity and price protection tied to the lowest rate offered to third parties.

ED&F Man also supplied WGI's feed-products subsidiary with most of its molasses needs and was its exclusive molasses provider under a long-term agreement.

Those arrangements protected storage capacity and pricing for ED&F Man's products and provided a continuing market for its molasses. WGI's own public filings described operational benefits and ED&F Man's ability to exert significant influence.

The AHO found that the stock interest therefore provided business and operational benefits rather than functioning as a passive investment.

The 2013 sale met two UDITPA tests

On January 7, 2013, WGI sold Feed Products back to Agman. On January 30, Agman sold its WGI stock to an unrelated private-equity buyer.

Under Section 7-4-2(A), the gain met the disposition test because it arose from disposing of a business or segment of a business. The Legislature had added that test after an earlier New Mexico case treated a one-time business liquidation as nonbusiness income.

It also met the functional test because Agman's acquisition, management, and disposition of the WGI interest were integral to its regular business operations.

New Mexico apportionment was constitutional

Agman emphasized that it owned less than half of WGI and argued the two companies were not a unitary business.

The AHO held that even without deciding that the entities themselves formed one unitary business, the WGI asset served an operational rather than investment function within Agman's business. Under the cited United States Supreme Court cases, that operational role allowed apportionment without taxing impermissible extraterritorial value.

Agman did not meet its burden to prove by clear and cogent evidence that New Mexico was taxing value outside its constitutional reach.

Result: protest DENIED. Tax, penalty, and interest totaling $205,113.88 remained due at the hearing.

Text note: Finding 44 says Agman reported a $170 million gain. The discussion and operative analysis repeatedly call it a $140 million gain. This summary preserves that inconsistency rather than selecting an amount not consistently stated in the decision.

What this means for you

Multistate corporations selling an affiliate interest

Minority ownership does not automatically make stock a passive investment. Governance rights, supply agreements, service arrangements, pricing protections, and other operational benefits can make the asset part of the taxpayer's business.

Corporate tax departments

Document why an asset was acquired, how it was managed, and how it supported operations throughout the holding period. Labels on the return do not control the business-income analysis.

Businesses disposing of a segment

New Mexico's UDITPA definition expressly includes income from disposing or liquidating a business or segment of a business. A one-time sale can still produce business income.

Taxpayers raising constitutional apportionment arguments

The relevant inquiry can extend beyond whether the payor and payee are a unitary business. An asset that performs an operational function in the taxpayer's unitary operations may support apportionment.

Common questions

Q: What did Agman sell in 2013?
A: Its stock interest in WGI after WGI had sold the Feed Products business back to Agman earlier that month.

Q: How large was Agman's WGI ownership interest?
A: Approximately 48% to 49.5%.

Q: Why was the interest operational rather than passive?
A: It carried board influence and supported storage access, lowest-price protection, molasses supply and sales, administrative ties, and other business benefits.

Q: Which UDITPA tests did the gain satisfy?
A: The disposition test and the functional test under Section 7-4-2(A).

Q: Did Agman's minority ownership defeat apportionment?
A: No. The AHO focused on the asset's operational role, even if the two entities were not themselves treated as one unitary business.

Q: How much remained due at the hearing?
A: $156,440 tax, $31,288 penalty, and $17,385.88 interest, totaling $205,113.88.

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 and 3.5.1.9(A) NMAC — assessment presumption and business-income guidance

Cases cited:

• Allied-Signal, Inc. v. Director, Division of Taxation, 504 U.S. 768 (1992) — unitary-business and operational-function principles
• MeadWestvaco Corp. v. Illinois Department of Revenue, 553 U.S. 16 (2008) — operational function as part of the unitary-business inquiry
• Container Corp. v. Franchise Tax Board, 463 U.S. 159 (1983) — operational and investment functions
• Exxon Corp. v. Wisconsin, 447 U.S. 207 (1980) — burden to show taxation of extraterritorial value
• McVean & Barlow, Inc. v. Bureau of Revenue, 1975-NMCA-128 — earlier liquidation holding addressed by the later statutory disposition test

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Agman Louisiana Inc.
• Decision PDF: D&O 17-47

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
AGMAN LOUISIANA INC.
TO ASSESSMENT ISSUED UNDER LETTER
ID NO. L0801590832

v. No. 17-47

TAXATION AND REVENUE DEPARTMENT

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on May 1, 2017 before Brian

VanDenzen, Esq., Chief Hearing Officer, in Santa Fe. At the hearing, Nicholas Palmos, CPA,

appeared representing Agman Louisiana, Inc. (“Taxpayer”). Dana Calmusa of Taxpayer also

appeared as a Taxpayer witness in this matter. Staff Attorney Peter Breen appeared representing

the State of New Mexico Taxation and Revenue Department (“Department”). Protest Auditor Tom

Dillon appeared as a witness for the Department. Taxpayers Exhibits #1-#5 were admitted into the

record. Department Exhibits A-K were admitted into the record. Although there was some

discussion at the conclusion of the hearing about reviewing complete corporate filings with the

Securities and Exchange Commission in the interest of completeness, no review occurred in this

matter as upon a more detailed review the record presented was adequate to decide the protest.

Based on the evidence and arguments presented, IT IS DECIDED AND ORDERED AS

FOLLOWS:

FINDINGS OF FACT

1. On August 1, 2016, under letter id. no. L0801590832, the Department assessed

Taxpayer $156,440.00 in Corporate Income Tax, $31,288.00 in penalty, and $12,712.66 in interest
for a combined total assessment of $200,440.66 for the reporting period ending on September 30,

2013.

2. On September 22, 2016, Taxpayer timely protested the Department’s assessment, a

protest received by the Department on September 28, 2016.

3. On October 7, 2016, the Department acknowledged receipt of Taxpayer’s protest.

4. On November 18, 2016, the Department requested a hearing in this matter with the

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

Administrative Hearings Office Act, NMSA 1978, Section 7-1B-1 through 9 (2015).

5. On November 21, 2016, the Administrative Hearings Office issued a Notice of

Telephonic Scheduling Conference, setting a scheduling hearing on December 2, 2016.

6. On December 2, 2016, a scheduling hearing occurred in this matter. The parties did

not object that conducting the scheduling hearing within 90-days of the protest met the statutory

90-day hearing requirement while also allowing meaningful time to complete the statutory fair

hearing requirements identified under the NMSA 1978, Section 7-1B-6 (D) (2015).

7. On December 2, 2016, the Administrative Hearings Office issued its Scheduling

Order and Notice of Administrative Hearing, setting this matter for a merits hearing on March 1,

2017.

8. On January 24, 2017, Taxpayer moved, with concurrence of the Department, to

continue the March 1, 2017 hearing until May 1, 2017.

9. On January 25, 2017, the Administrative Hearings Office issued a Continuance

Order, Amended Scheduling Order, and Amended Notice of Administrative Hearing, rescheduling

the hearing on May 1, 2017.

In the Matter of the Protest of Agman Louisiana, Inc. v. TRD, page 2 of 20.

10. On April 14, 2017, the parties filed their joint prehearing statement, providing a

narrative of joint stipulated facts incorporated into the evidentiary record in this matter.

11. Taxpayer, Agman Louisiana, Inc., is an indirect, wholly-owned subsidiary of

ED&F Man and its group of subsidiary and affiliated entities 1, an agricultural commodities

merchant headquarted in the United Kingdom. [Joint Stipulated Facts, Joint Prehearing

Statement].

12. Taxpayer is headquarted in New Orleans, Louisiana. [Joint Stipulated Facts, Joint

Prehearing Statement].

13. Taxpayer files a separate corporate income tax return in New Mexico. [Joint

Stipulated Facts, Joint Prehearing Statement].

14. Taxpayer had two subsidiaries, Westway Terminal Company, Inc. (“Terminal”)

and Westway Feed Products, Inc. (“Feed Products”). [Joint Stipulated Facts, Joint Prehearing

Statement].

15. Taxpayer sold off these two subsidiaries between 2006 and 2009, Terminal and

Feed Products, to Westway Group Incorporated (“WGI”). [Joint Stipulated Facts, Joint Prehearing

Statement; Department Ex. B-3 and Department Ex. E-006 (for time period of sale not otherwise

specified or addressed by the parties)].

16. WGI was a publicly traded company, with Taxpayer owning between 48% and

49.5% of the publicly traded entity. [Joint Stipulated Facts, Joint Prehearing Statement].

17. Taxpayer had the authority to name three of the seven board members of WGI.

[Joint Stipulated Facts, Joint Prehearing Statement].

1
Referred to repeatedly on the record, in exhibits, and in this decision and order as “ED&F Man group”
In the Matter of the Protest of Agman Louisiana, Inc. v. TRD, page 3 of 20.

18. When WGI went public, a number of ED&F Man management employees took

some positions of leadership at WGI. A majority of WGI’s directors came from ED&F Man group

and some of WGI’s officers. A former manager at ED&F Man group became CEO of WGI in

2009 for a year. [Dept. Ex D-6; 05-01-17 CD 1:02:00-19:50].

19. WGI had two subsidiaries, Westway Feed Products LLC and Westway Terminal

Company LLC, that were operated separately, with separate presidents, operations, and accounting

departments. [05-01-17 CD 19:50-20:17].

20. WGI, through its subsidiary Westway Terminal Company, LLC, provided bulk

liquid storage and related services in North America and across the globe with bulk storage

capacity at 25 different terminals. [Taxpayer Ex. #1 & #2.5].

21. WGI, through its subsidiary Westway Feed Products, LLC, also was a leading

manufacturer and distributor of liquid animal feed supplements, producing 1.8 million tons of

liquid feed supplements annually in 35 facilities located in North America and eastern Australia.

[Taxpayer Ex. #1 & #2.5].

22. WGI had two liquid feed supplement facilities in New Mexico. [Taxpayer Ex.

2.6].

23. WGI had a broad customer base, including a diverse group of multi-national,

national, and regional corporations, for its liquid storage business, storing a wide range of

products. [Taxpayer Ex. #2.8-11].

24. According to WGI’s Form 10-K for fiscal year endings on December 31, 2011,

“[i]n 2011, ED&F Man group, a related party, accounted for 17% of the revenues of our liquid

storage business.” ED&F was WGI’s principal supplier of storage requirements. [Taxpayer Ex.

2.10].

In the Matter of the Protest of Agman Louisiana, Inc. v. TRD, page 4 of 20.

25. WGI had a long-term contractual relationship, in form of a document titled

“Storage Strategic Alliance,” as a supplier of bulk liquid storage with ED&F Man group, an

agreement running through 2029. [Taxpayer Ex. #2.10, #2.17, #3.1].

26. ED&F Man and WGI and its subsidiaries entered into a Storage Strategic Alliance

agreement for the storage of ED&F Man’s bulk liquid products at WGI’s terminals. [Taxpayer Ex.

3.1].

27. Under the Storage Strategic Alliance agreement, WGI granted ED&F Man right of

first offer/reservation on its storage capacity. [Taxpayer Ex. #3.5].

28. Under the storage strategic alliance agreement, ED&F Man paid WGI a market rate

for the storage, provided that rate equaled the lowest rate provided to any third party customer.

Additionally, WGI was required to provide ED&F Man with notice and an amended pricing

agreement matching the lowest price if WGI entered into an underpriced agreement with any other

customer. [Taxpayer Ex. #3.5-6].

29. WGI developed other strong relationships with numerous other well-established

global customers, including companies that it or its predecessor had been doing business with for

more than 10 years. [Taxpayer Ex. #2.11].

30. In the production of liquid feed supplements, one of WGI’s primary inputs is

molasses. Under a long-term agreement, called the Molasses Supply Agreement, ED&F Man

group provided WGI with a majority of molasses needs based on a formula pricing determined in

part by prices charged by the ED&F Man group to third parties. [Taxpayer Ex. #2.14, #2.17, #4].

31. ED&F Man Liquid Products Corporation entered into the Molasses Supply

Agreement with WGI’s subsidiary Westway Feed Products, LLC, to provide molasses. [Taxpayer

Ex. #4].

In the Matter of the Protest of Agman Louisiana, Inc. v. TRD, page 5 of 20.

32. Under the Molasses Supply Agreement, ED&F Man was the exclusive provider of

molasses to Westway Feed Products, LLC. [Taxpayer Ex. #4.4].

33. Under the Molasses Supply Agreement, Westway Feed Products, LLC purchased

molasses under a market-based formula pricing, but was also granted “most favored nation”

pricing where it had the option to amend the agreement to match a lower price offered to a third

party competitor. [Taxpayer Ex. #4.9].

34. As WGI reported in its 2009 Form 10-K, WGI’s relationship with ED&F Man

group provided “a degree of certainty regarding the ongoing operational characteristic of our

business and our ability to service our customers in the future. In tandem with further investment

opportunities made possible by business combination, the relationship with ED&F Man group can

provide us with a material platform from which growth can be generated in the future.”

[Department Ex. B-6].

35. As WGI reported in its 2010 Form 10-K, WGI maintained an ongoing commercial

relationship with, and dependence on, ED&F Man that provided a degree of certainty in the

operation of WGI’s business. [Dept. Ex. F].

36. As WGI reported in its 2011 Form 10-K, ED&F Man group had significant voting

power to influence WGI’s policies, business and affairs. [Dept. Ex. D-7].

37. As WGI reported in its 2011 Form 10-K, WGI reported that “[p]rior to the business

combination in May 2009, as consequence of being owned by ED&F Man, the acquired business

maintained a commercial relationship with the ED&F Man group. After the business combination,

this relationship has continued…”. [Dept. Ex. D-8].

38. As WGI reported in its 2011 Form 10-K, WGI’s relationship with ED&F Man

group provided numerous “benefits to both our bulk liquid storage and liquid feed supplements

In the Matter of the Protest of Agman Louisiana, Inc. v. TRD, page 6 of 20.
business. In particular, the benefits of being a supplier of bulk liquid storage to the ED&F Man

group, combined with quality and quantity of molasses supplied to our liquid feed supplements

business by the ED&F Man group, provides us with a degree of certainty in the operation of our

business and our ability to service our many customers in the future.” [Taxpayer Ex. #2.16].

39. WGI also had an insurance agreement with a captive insurance company owned by

ED&F Man group in 2011. [Taxpayer Ex. #2.17].

40. After the initial spin-off of the terminal and liquid feed businesses, WGI and ED&F

Man group had a shared services agreement in place for the provisioning of administrative support

services, human resources, information technology services, and accounting services. Taxpayer

reimbursed the cost of these services to WGI with no markup. This agreement was terminated in

2010. [Dept. Ex. B.7; 05-01-17 CD 25:04-56].

2011. ED&F man owned preferred, convertible stock rights in WGI, but could not

execute that preferred stock if it would result in Taxpayer owning more than 49.5% of WGI’s

outstanding common stock. [Taxpayer Ex. #2.76].

42. On January 7, 2013, WGI sold its interest in Feed Products back to Taxpayer. [Joint

Stipulated Facts, Joint Prehearing Statement].

43. On January 30, 2013, Taxpayer sold its stock interest in WGI to an unrelated third

party private equity company. [Joint Stipulated Facts, Joint Prehearing Statement].

44. Taxpayer recognized and reported the gain of $170 million on the sale of its

interest in WGI on Taxpayer’s 2013 tax return as allocable non-business income, reported back to

its commercial domicile.

In the Matter of the Protest of Agman Louisiana, Inc. v. TRD, page 7 of 20.

45. Upon audit, the Department determined that the income was business income and

apportioned part of the gain on this sale of WGI stock to New Mexico. [Joint Stipulated Facts,

Joint Prehearing Statement].

46. As a result of that audit determination, the Department issued its assessment of

2013 corporate income identified in Finding of Fact #1.

47. As of the date of the hearing, Taxpayer owed $156,440.00 in tax, $31,288.00 in

penalty, and $17,385.88 in interest for a total outstanding liability of $205,113.88. [Dept. Ex. A].

DISCUSSION

At issue in this protest is whether Taxpayer’s $140 million gain on the 2013 sale of its interest

in WGI is business income apportionable and subject to New Mexico Corporate Income Tax or

whether it is allocable 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

In the Matter of the Protest of Agman Louisiana, Inc. v. TRD, page 8 of 20.
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,

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.

UDITPA, and Apportionment and Allocation of Income

For context, 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

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).

There is no dispute in this matter that Taxpayer is subject to New Mexico Corporate Income

Tax. Instead, the question in this case turns on the allocation or apportionment of Taxpayer’s gain on

the 2013 sale of WGI. Taxpayer claims that it was non-business income, allocable to its state of

domicile. Upon audit, the Department determined that it was business income that needed to be

apportioned to New Mexico. In essence, the issue in this case turns on statutory apportionment under

UDITPA and related constitutional concerns.

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

In the Matter of the Protest of Agman Louisiana, Inc. v. TRD, page 9 of 20.
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 UDITPA, 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 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
In the Matter of the Protest of Agman Louisiana, Inc. v. TRD, page 10 of 20.
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

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 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.

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
In the Matter of the Protest of Agman Louisiana, Inc. v. TRD, page 11 of 20.
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 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.

In the Matter of the Protest of Agman Louisiana, Inc. v. TRD, page 12 of 20.
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

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.

In the Matter of the Protest of Agman Louisiana, Inc. v. TRD, page 13 of 20.
Under these general statutory and constitutional principles, Taxpayer’s $140 million gain

on the 2013 sale of WGI is business income subject to apportionment under UDITPA. Under both

the dispositional and functional tests articulated in Section 7-4-2 (A), Taxpayer’s income in this

case arose from disposition of a line of business and a functional asset integral to Taxpayer’s regular

trade or business operations. After creating the separate WGI entity in 2009, but having that separate

entity remain a critical component of Taxpayer’s business functions, it reacquired WGI in 2013 as

part of the eventual sale of the stock to the third party buyer. Thus, when Taxpayer sold its interest in

WGI, including its stock and the reacquired Feed Products entity in 2013, the income from that sale

met the dispositional test under Section 7-4-2 (A), making the proceeds of the sale business income

that needed to be apportioned to New Mexico. Moreover, as will be discussed in more detail, because

Taxpayer’s stock in WGI continued to be integral to Taxpayer’s business operations between 2009

and 2013, Taxpayer’s interests in WGI also met the functional test under Section 7-4-2 (A), making

the income gained on the sale business income that needed to be apportioned to New Mexico.

The 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. Here, as the parties stipulated in the joint prehearing statement but barely

addressed during the hearing, Taxpayer had to reacquire Feed Products from WGI in 2013 and then

sold its interests in WGI some two weeks later to an unrelated third-party. Even for a brief period,

In the Matter of the Protest of Agman Louisiana, Inc. v. TRD, page 14 of 20.
Taxpayer again owned Feed Products, an asset that had been furthering Taxpayer’s operational needs

in the entire intervening period from 2009 through 2013. When Taxpayer sold its interest in WGI

later that month, it was subject to tax as business income under the post-McVean & Barlow, Inc.

amendment to Section 7-4-2 (A) adding the dispositional test.

While Taxpayer’s argument focused almost exclusively on the fact that Taxpayer held no

more than a 49% ownership interest in WGI once it sold the terminal and liquid food products entities

in 2009, and thus could not be considered unitary with WGI, the evidence established that the stock

Taxpayer owned in WGI remained a part of Taxpayer’s core operational functions between 2009 and

2013. While Taxpayer only had a 49% ownership interest in WGI, it appointed three members of the

board, WGI’s initial CEO came from ED&F Man group, ED&F Man group provided core

administrative support services to WGI for the first year, and ED&F Man group insured WGI. All of

WGI’s 10-K forms in 2009, 2010, and 2011 presented into the record as evidence clearly demonstrate

the important role ED&F Man group played with WGI: ED&F Man group had right of first refusal

on WGI’s terminal space with a price matching guarantee ensuring that ED&F Man group would be

able to store its goods while receiving the lowest rate offered to any third-party competitor; ED&F

Man group was the exclusive provider of molasses to WGI, providing ED&F Man group with a sure

market for one its core business products. The functional integration of ED&F Man group and WGI

had a direct operational benefit to ED&F Man group’s business operations. Therefore, even if not

amounting to a unitary business between ED&F Man group and WGI, it cannot be said that

Taxpayer’s ownership of 49% stock in WGI was merely a passive investment because Taxpayer’s

interest in WGI remained a functional component of, and business benefit to, Taxpayer’s operations

even after the sale of the Feed Products and Terminal entities in 2009.

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

In the Matter of the Protest of Agman Louisiana, Inc. v. TRD, page 15 of 20.
the income in question is business income apportionable to New Mexico. Again, even if there is

no 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.

There is significant evidence that even if Taxpayer only owned a 49% interest in WGI, as

discussed above, that interest provided Taxpayer with operation benefit and function. Taxpayer

and WGI maintained functional integration with some elements of centralized management after

the 2009 transfer of Feed Products and Terminal from ED&F Man group to WGI. ED&F Man

group provided 3 of the 7 members of WGI’s corporate board. WGI’s first CEO came from ED&F

Man group. ED&F Man group and WGI had an administrative services agreement where

Taxpayer provided core administrative support services to WGI, and WGI stated in its 10-K form

that ED&F Man group had the ability to exert substantial influence and control over WGI. While

Taxpayer described the pricing agreements in place between ED&F Man group and WGI as based

on fair market pricing reached as at arm’s length, some of the components of those agreements

show that the ED&F Man group received significant business operational benefit in that ED&F

Man group had the right of first refusal on terminal storage space at essentially what amounted to

equal to the lowest price offered at the facility. Perhaps this is why the agreement between the

parties was titled a “Storage Strategic Alliance Agreement.” All of these continuing connections

between ED&F Man group and WGI in 2009 through 2013 provided Taxpayer with operational

In the Matter of the Protest of Agman Louisiana, Inc. v. TRD, page 16 of 20.
benefit to its line of business. And to that extent, it cannot be said that Taxpayer’s stock in WGI

was held purely for passive investment reasons.

Like in Corn Products Refining Co. case, spun-off WGI provided Taxpayer with a business

operational benefit to Taxpayer related to Taxpayer’s business, and the rights of first refusal, price

matching guarantee, and exclusive molasses purchase requirements provided a similar hedge for

Taxpayer’s business against variations in supply and demand for storage capacity. By having a

right of first refusal for storage in conjunction with what amounted to a lowest price guarantee for

storage of its products, Taxpayer avoided possible shortages in storage or increases in prices for

storage in times of short supply or high demand that would negatively impact it business

operations. Similarly, by being the exclusive supplier of molasses to WGI, ED&F Man group

ensured ability to get some of its products to market with reduced fear of market competition.

In summary, Taxpayer failed its 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. Taxpayer’s stock interests in WGI in 2009-2013, and short-term reacquisition

of Feed Products in 2013, provided Taxpayer with operational benefit integral to Taxpayer’s

business. Thus, the income from the sale of that interest in WGI met the dispositional and

functional tests under Section 7-4-2(A) for business income, as well as the guidance provided by

Regulation 3.5.1.9 (A) NMAC (“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.”). Moreover, since the stock and

interests in WGI provided Taxpayer with an operational benefit and function part of Taxpayer’s

unitary operation in New Mexico, apportionment of the gain on the sale does not offend the

In the Matter of the Protest of Agman Louisiana, Inc. v. TRD, page 17 of 20.
Commerce or Due Process Clauses of the Constitution. 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. For these reasons, Taxpayer’s $140-million in gain is business income, apportionable to New

Mexico and Taxpayer’s protest is denied.

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. Timely conducting the scheduling hearing in this matter within 90-days met the

statutory 90-day hearing requirement under NMSA 1978, Section 7-1B-8 (2015) while also allowing

meaningful time for the parties to engage in discovery, motions practice, and fair presentation of their

cases, as required by the statutory fair hearing requirements articulated under NMSA 1978, Section 7-

1B-6 (D) (2015).

C. Taxpayer’s gain on the sale of WGI in 2013 amounted to business income under

UDITPA, NMSA 1978, Section §7-4-2 (A) & (E) because the income met the dispositional test and

the functional test articulated under the definition of business income. See also Regulation 3.5.1.9

(A) NMAC.

D. After Taxpayer 2009, when Taxpayer sold off the Feed Products and Terminal

entities to WGI, Taxpayer’s interests in WGI provided Taxpayer with significant business

operational function and the resulting income earned on the 2013 sale was 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.

For the foregoing reasons, Taxpayer’s protest IS DENIED. As of the date of hearing,

In the Matter of the Protest of Agman Louisiana, Inc. v. TRD, page 18 of 20.
Taxpayer owed $156,440.00 in tax, $31,288.00 in penalty, and $17,385.88 in interest for a total

outstanding liability of $205,113.88.

DATED: December 5, 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,

which occurs within 14 days of the Administrative Hearings Office receipt of the docketing

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

In the Matter of the Protest of Agman Louisiana, Inc. v. TRD, page 19 of 20.
CERTIFICATE OF SERVICE

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

5th day of December 2017 in the following manner:

In the Matter of the Protest of Agman Louisiana, Inc. v. TRD, page 20 of 20.