McVean & Barlow, Inc. v. New Mexico Bureau of Revenue , 88 N.M. 521 ( 1975 )

LOPEZ, Judge

(dissenting).

I dissent.

The majority’s opinion rests on the rationale that this was an unusual transaction for the taxpayer. I do not think that the question of novelty has anything to do with the question of whether the property sold formed an integral part of the taxpayer’s business.

The taxpayer presented his appeal by two alternative modes of argument. The first was the proposition that the sale of property that was “equipment” to the taxpayer (not held for the purpose of sale) could never result in business income. The majority rejects this thesis, apparently on the basis that if equipment were sold with regularity, the proceeds would constitute business income. The taxpayer’s second theory, which met with approval by the court, was that this ■ particular sale produced business income because it was extraordinary, both in its size and in that it ended the taxpayer’s involvement in big-inch work.

The “unusual” criterion established by the majority lacks support in case law and the statute. I submit that the issue is whether the property was used to produce business income — that is, whether it formed, in its “acquisition, management, and disposition” part of the taxpayer’s business.

Sperry and Hutchinson Co. v. Department of Revenue, supra, is helpful in elucidating this test. The issue there was whether various types of investment income were business income of a trading stamp company. The court held, with respect to two of the types of investments, that the taxpayer was engaged in the separate business of making investments and that income from these investments was business income of this separate business. With regard to other investments held for us in the stamp business, the court did not find that this income came from a separate business of the taxpayer’s, but rather found the contrary — that the investments were held as part of the stamp business and the interest was therefore business income.

Sperry and Hutchinson supplies the framework with which we should look at sales of equipment. The issue is not how frequent the sales are, nor how substantial the income from them may be, but rather what the relationship of the property sold is to the business.

Western Natural Gas Company v. McDonald, supra, is not to the contrary. This case may be understood as being concerned with the meaning of “disposition”; in the peculiar context of a liquidation there is no business which the sale of the property can benefit. The “partial liquidation” involved in our case is not encompassed by this rationale because there was an ongoing business after the sale. The Commissioner found that, “[t]axpayer was a single entity engaging in two related types of a single activity.” The evidence supporting this finding included the common management, purchasing, accounting, payroll, record-keeping, and supervision of the two activities. See, Butler Brothers v. McColgan, 315 U.S. 501, 62 S.Ct. 701, 86 L.Ed. 991 (1942). This evidence is not affected by the corporate reorganization because the taxpayer stipulated at the hearing below that it was the same entity before the reorganization as after. The “partial liquidation” raised by the taxpayer is no different in this context than if the taxpayer had sold half their big-inch and half their little-inch equipment.

Finally, the statute itself negates any requirement that the transaction must be regular to produce business income. The statement in Western Natural that the “transaction and activity must have been in the regular course of taxpayer’s business operations” I consider to be a critically inaccurate paraphrase of the statutory requirement that the transaction involving the property be “an integral part of the taxpayer’s regular trade or business”. By pulling income from tangible and intangible property into business income, the legislature has shown its intent to include more than income from inventory within the term. Once it is conceded that nonin-ventory items are to be included, the frequency and regularity with which a business produces income from these collateral sources is irrelevant.

Under the test of whether the equipment’s use and sale benefited the taxpayer, it is clear that these proceeds were business income. The taxpayer had used this equipment in his business. It sold the equipment for a business purpose, which was to enable it to maintain the corporation after the withdrawal of the principal shareholder. The income it received should have been included in the income which was apportioned as business income.