Section of Taxation Publications
  VOL. 60
NO. 1
FALL 2006
Contents | TTL Home


Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.

James H. Peters and Benjamin F. Miller*

*James H. Peters, former General Attorney, AT&T; Princeton University, A.B., 1948; University of Pennsylvania Law School, LL.B., 1951; Adjunct Associate Professor, N.Y.U. School of Law and the Lubin Graduate School of Business. Benjamin F. Miller, Counsel, Multistate Tax Affairs, California Franchise Tax Board; University of California, A.B., 1966; Stanford University School of Law, J.D., 1969. The opinions expressed herein are those of Mr. Miller as an individual and cannot be attributed to the California Franchise Tax Board.


In 1954 the National Conference of Commissioners on Uniform State Laws, at the request of the Section of Taxation of the American Bar Association, created a special committee to draft a uniform income tax apportionment act. The result was the Uniform Division of Income for Tax Purposes Act (UDITPA). With respect to interstate taxpayers (other than financial organizations, public utilities, and individuals rendering personal services), it provides for formula apportionment of “business income” and allocation to situs of “nonbusiness income.” It defines “business income” as “income arising from transactions and activity in the regular course of the taxpayer’s trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer’s regular trade or business operations.” All other income is classified as “nonbusiness income.”

To the extent that rents, capital gains, interest, dividends, and royalties constitute business income, they are subject to formula apportionment. Much of the controversy surrounding the interpretation of UDITPA concerns the treatment of income from property (as distinguished from manufacturing, processing, or selling) as business income. At the center of the debate is the meaning of the phrase: “if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer’s regular trade or business operations.” The differing interpretations placed on the phrase are most clearly illustrated in the treatment of capital gain or loss from the sale of business assets.

In Allied Signal, Inc. v. Director, Division of Taxation , the Supreme Court held that a state lacked the power to tax gain realized by a nondomiciliary corporation from the sale of its minority interest in another corporation. The Court firmly declared that the existence of a unitary relation between payee and payor is not the only justification for apportioning income from an investment. “What is required instead,” said the Court, “is that the capital transaction serve an operational rather than an investment function.” In regard to the definitions of business income and nonbusiness income in UDITPA, the Court acknowledged that “[i]n the abstract, these definitions may be quite compatible with the unitary business principle.”

This Article traces the history of the unitary business principle, the pre-UDITPA efforts to legislate a solution to the diverse treatment of income from interstate businesses, the origin of the business income definition in UDITPA, and its administration and judicial interpretation. It argues that the definition, properly understood, is a unitary test that is similar to the Supreme Court’s operational function test of apportionability in Allied-Signal . Throughout, California is used as the illustrative paradigm because its legislative, administrative, and decisional experience with apportionment is richer and more detailed than that of any other state.



Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


If you are an ABA member, you can receive The Tax Lawyer and the Section NewsQuarterly, both quarterly publications, when you join the Section of Taxation. Anyone can subscribe to The Tax Lawyer by contacting the ABA Service Center.