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In the Matter of Product of Conagra Foods Ingredient Co., New Mexico Administrative Hearing Office, Dkt. No. 17-39, September 15, 2017

The New Mexico Office of Administrative Hearings granted Conagra Foods' Motion for Summary Judgment concluding the interest earned on notes was properly characterized as non-business income.

Conagra is a packaged food corporation headquartered in Omaha.  The company in March 2008 entered into an agreement to sell its Food Trading and Merchandise business.  The purchaser issued PIK Notes to Conagra as part of the sale proceeds.  Upon completion of the sale and receipt of the proceeds, Conagra totally exiled the Trading Merchandise business and grain storage operations.  The gain recognized on the disposition was reported to New Mexico as apportionable business income.

The issue before the Administrative Hearing Office was whether the interest income subsequently earned by Conagra on the PIK Notes was allocable or apportionable income.  In holding for Conagra, the Hearing Office analyzed both the constitution and statutory requirements for characterizing income.

The Hearing Officer determined that New Mexico could only tax the interest income earned on the PIK Notes if:

  1. Conagra and the purchaser were engaged in a unitary business or

  2. The PIK Notes were used in Conagra's unitary business operations in New Mexico.

Apply these principles to the facts the Hearing Office concluded the interest income did not arise from transactional activity which occurred in Conagra's regular business operations and were not the proceeds from the disposition of a line of business.  Although, the PIK Notes were part of the purchase financing mechanism of the business the interest income was not proceeds from the disposition because Conagra had fully reported the disposition gain in the year of sale.  Further, Conagra and the purchaser were not unity in nature.  Thus, the neither statutory nor constitutional tests for characterizing the interest income as business income were met. 

© Horwood Marcus & Berk Chartered 2020. All Rights Reserved.


About this Author

Marilyn A. Wethekam, Tax Attorney, Horwood Marcus & Berk Law Firm, Chicago, Illinois

MARILYN A. WETHEKAM is a partner at Horwood Marcus & Berk, Chartered in Chicago. Marilyn co-chairs the firm's nationally recognized multistate State and Local Tax practice. She has a national SALT practice representing multistate and multinational corporations in all areas of state tax. In 2010 she was named as the second recipient of the Council on State Taxation's Paul Frankel Excellence in State Taxation Award. She received the 2012 Bloomberg BNA, Frank Latcham Award for Distinguished Service in State and Local Tax Law and was named one of the 2016 Outstanding...

Fred Marcus, Horwood Marcus Law Firm, Chicago, Tax Law Attorney

FRED O. MARCUS is a principal of the firm and co-chairs the state and local tax practice group. Mr. Marcus concentrates his practice in state and local tax planning and the resolution of state and local tax disputes on a nationwide basis for multistate and multinational corporations. He has appeared before the United States Supreme Court, the California Supreme Court, and the California Appellate Court; has argued before the Illinois and Missouri Supreme Courts and the Illinois, Maryland and New Jersey Appellate Courts; and has tried cases before the courts and administrative tribunals of numerous other states. He is a frequent lecturer before such groups as the Council on State Taxation, the Tax Executives Institute, the Chicago Tax Club, New York University's Conference on State and Local Taxation, Vanderbilt University School of Law's Paul J. Hartman State and Local Tax Forum and Georgetown University School of Law's Institute on State and Local Taxation. He is also an adjunct professor of law at Northwestern University's Pritzker School of Law's Graduate Tax Program where he teaches state and local taxation.  

Fred is a member of the American Bar Association's Section of Taxation's State and Local Tax Committee; a member of the Illinois Taxpayers' Federation Board of Trustees and Advisory Board; a member of Bloomberg BNA's State Tax Advisory Board; and a member of New York University's School of Continuing Legal Education's State and Local Tax Advisory Board, and a member of the Illinois Department of Revenue's Director's Practitioner Advisory Group. He is the author of a Bloomberg BNA Multistate Tax Portfolio, entitled "Limitations on the States' Jurisdiction to Impose Net Income Based Taxes," has co-authored three additional Bloomberg BNA portfolios entitled "Sales and Use Taxes:  The Machinery and Equipment Exemption," "Illinois Net Income Taxes," and "Illinois Sales and Use Taxes" and is a Contributing Editor to Commerce Clearing House's State Tax Report. He is also the author of a chapter on Illinois Franchise Taxes for the Illinois Institute of Continuing Legal Education and numerous other articles on various aspects of state and local taxation. Fred received his B.S. degree (Accounting) from the University of Illinois at Chicago (1970) and his J.D. degree from DePaul University's College of Law (1974).