On May 22, 2020, the Idaho Supreme Court held that the gain realized by a corporate holding company on the sale of its 78.54 percent ownership interest in an LLC was nonbusiness income and therefore not subject to apportionment in Idaho. The LLC was formed in 2003 and manufactured and sold tangible personal property. The LLC had operations in most states, including a factory located in Idaho. The LLC and the corporate holding company shared the same founder, who also served as president and CEO of the LLC, but the LLC maintained its own human resource department and the shared President and CEO did not manage the day-to-day operations, marketing decisions, and other ordinary business and sales decisions of the LLC. After 2003, when the manufacturing business was transferred to the LLC, the corporate holding company’s activities were limited to ownership of the LLC as well as another business that leased real property to the LLC in Virginia. Almost all of the corporate holding company’s income came directly from the LLC. The corporate holding company did not have any employees, did not share any expenses or assets with the LLC, and did not provide financing or other services to the LLC. The two entities did use the same professional firms for legal and accounting services.
The Idaho Supreme Court held that the gain did not constitute business income under the transactional test or functional test, which includes the unitary business test. The court held that the transactional test was not satisfied because the holding company was not in the business of buying and selling such interests. The court noted that the sale of its interest in the LLC was the only such sale the company had made in the seven-year period from 2003 to 2010. As to the functional test, the court held this test was not satisfied because the taxpayer’s sale of its interest in the LLC did not serve an operational function but was instead a passive investment. The court further held that the functional test was not satisfied because the LLC was not unitary with the holding company. Specifically, the court held that the three hallmarks of a unitary relationship, functional integration, centralized management, and economies of scale, were not present. The court found that the fact that the same individual had founded both companies and served as president and CEO of the LLC was not sufficient to support a finding of unity, as he was a “high level executive” who did not manage the LLC’s day-to-day operations.