Date: Apr 21, 2026

Under Pre-2026 Arkansas UDITPA, One-Time Sale of an Entire Business (Including Intangibles) Is Nonbusiness Income Unless Regular Disposition Is Integral to Operations

I. Introduction

Jim Hudson, in His Official Capacity as Secretary, Arkansas Department of Finance and Administration v. United States Beef Corporation (2026 Ark. 63) is a multistate corporate income-tax apportionment dispute under Arkansas’s pre-2026 version of the Uniform Division of Income for Tax Purposes Act (UDITPA), Ark. Code Ann. § 26-51-701 (Repl. 2020). The Arkansas Department of Finance and Administration (DFA), led by Secretary Jim Hudson, sought to treat gain realized by United States Beef Corporation (US Beef) from selling substantially all assets and ending its business as business income apportionable to Arkansas. US Beef, commercially domiciled in Oklahoma, treated most of the gain— especially gain on intangible assets (brands/franchise rights)—as nonbusiness income allocable to Oklahoma.

The case presented a narrow legal question: under the pre-2026 statutory definition of “business income,” does a one-time complete liquidation of a franchised restaurant business (including sale of core intangible assets) satisfy the functional test, where the taxpayer regularly acquired and managed the assets but did not regularly dispose of them?

II. Summary of the Opinion

The Arkansas Supreme Court affirmed summary judgment for US Beef. Because the material facts were undisputed, the issue was purely legal. The Court held that under the unambiguous text of Ark. Code Ann. § 26-51-701(a) (Repl. 2020), US Beef’s gain from selling its entire business— including approximately $176.7 million of intangible gain—was nonbusiness income. The decisive point was that the statute’s functional-test clause is conjunctive: “acquisition, management, and disposition” must each be integral parts of the taxpayer’s “regular” trade or business. US Beef may have regularly acquired and managed franchise assets, but it did not regularly dispose of them; the sales were a business-ending event.

Accordingly, the intangible gain was allocable to US Beef’s commercial domicile (Oklahoma) under Ark. Code Ann. § 26-51-706(c), and DFA’s denial of the refund was improper.

III. Analysis

A. Precedents Cited

1. Pledger v. Getty Oil Exploration Co., 309 Ark. 257, 831 S.W.2d 121 (1992)

The majority treated Getty Oil as foundational for interpreting § 26-51-701(a)’s two-part structure (transactional and functional tests) and for emphasizing that classification turns on “the nature of the taxpayer’s business.” In Getty Oil, accrued interest on a promissory note was nonbusiness income because the taxpayer was “not in the business of acquiring, managing, or disposing of this type of property.” The majority imported that framing here: US Beef was in the business of operating franchise restaurants, not in the business of disposing of entire franchise systems as a regular, integral operational activity.

2. American Honda Motor Co. v. Walther, 2020 Ark. 349, 610 S.W.3d 633

The majority used American Honda as a contrast case. There, proceeds from repeated sales of environmental credits were business income because the transactions recurred and the credits were integrated into ongoing operations. The opinion relies on American Honda for two points: (i) where the statute is unambiguous, courts apply the plain text rather than agency gloss; and (ii) repetition/integration can show that disposition activity is part of regular operations.

3. Hudson v. Murphy Oil USA, Inc., 2024 Ark. 179, 700 S.W.3d 891

Murphy Oil reinforced the majority’s “regularity/integration” approach to the functional test by distinguishing regular operating activity from atypical corporate events. The majority analogized US Beef’s complete exit from the business to the “one-time” nature of the event at issue in Murphy Oil, concluding that a business-ending sale is not integral to regular franchise operations.

4. Other authorities mentioned in the opinion

Gates v. Hudson, 2025 Ark. 48, 711 S.W.3d 142 (cited for the de novo standard of review of summary judgment).
Myers v. Yamato Kogyo Co., 2020 Ark. 135, 597 S.W.3d 613 (cited regarding de novo statutory interpretation and, in the dissent, on when agency interpretations may be persuasive).
The dissent cited out-of-state authority supporting a broader functional test: Jim Beam Brands Co. v. Franchise Tax Bd., 133 Cal. App. 4th 514 (Cal. Ct. App. 2005), and Harris Corp. v. Ariz. Dep't of Revenue, 312 P.3d 1143 (Ariz. Ct. App. 2013), both treating certain disposition gains as apportionable where assets were integral to the business (even if the disposition was not routine). The majority did not adopt these approaches, instead adhering to Arkansas precedent and the specific pre-2026 statutory text.

B. Legal Reasoning

1. The statutory hinge: the functional test’s conjunctive verbs

Ark. Code Ann. § 26-51-701(a) (Repl. 2020) defined “business income” to include income from property if “the acquisition, management, and disposition of the property constitute integral parts of the taxpayer’s regular trade or business.” The Court emphasized that “and” makes the clause conjunctive; a taxpayer must show not merely that property was important to operations, but that acquiring, managing, and disposing of that property were each integral to the taxpayer’s regular operations.

2. “Used in the business” is not the pre-2026 Arkansas test

DFA argued (and the dissent agreed) that because the brands and franchise rights were central to US Beef’s business, their sale should yield business income. The majority rejected that framing as inconsistent with the statute’s text and Arkansas precedent. The Court also rejected DFA’s reliance on its regulation stating that gain from disposition is business income if the property “was used in the taxpayer’s trade or business,” holding that agency rules cannot rewrite an unambiguous statute.

3. One-time liquidation vs. regular operations (and the majority’s answer to “conflation”)

The parties agreed the transactional test was not at issue (DFA conceded the sale was not in the regular course of business). The dissent argued that the majority nonetheless imported transactional-test considerations (uniqueness/nonrecurrence) into the functional test. The majority responded that “regular trade or business” is itself part of the functional-test text; determining whether “disposition” is integral necessarily requires identifying what the taxpayer regularly does. Here, US Beef regularly operated franchises; it did not regularly dispose of entire franchise systems.

4. Legislative amendment as confirmation of change

The Court found interpretive significance in Act 719 of 2025, which amended the definition to include income from property if its “acquisition, management, employment, development, or disposition . . . is or was related to the operation of the taxpayer’s trade or business,” applying prospectively to tax years beginning on or after January 1, 2026. The majority reasoned that if DFA’s “used in the business” view were already correct under the prior statute, the amendment would have been largely redundant; amendments are presumed to do work.

C. Impact

Clear pre-2026 rule for liquidation gains: For tax years governed by the pre-2026 text, Arkansas cannot treat a one-time complete liquidation gain as business income under the functional test unless the taxpayer’s business model regularly includes disposition of the relevant property as an integral operational component (e.g., trading/reselling as a routine part of business).
Constrains agency “used in the business” regulations: The opinion signals that DFA regulations expanding the functional test beyond the conjunctive statutory language will not be applied where the statute is deemed unambiguous.
Strengthens allocation to commercial domicile for intangibles: When liquidation gain is nonbusiness income, intangible gain will be allocated to the taxpayer’s commercial domicile (here, Oklahoma), potentially reducing Arkansas receipts for exit events.
Prospective shift after 2026: The decision implicitly highlights that outcomes may differ under the amended statute applicable to post-2025 tax years, which more directly captures property “related to the operation” of the trade or business.

IV. Complex Concepts Simplified

Apportionment vs. Allocation: Apportionment divides a multistate corporation’s taxable business income among states by formula. Allocation assigns certain nonbusiness income to a single state (often the commercial domicile for intangibles).
Business income vs. Nonbusiness income (pre-2026 Arkansas UDITPA): “Business income” is generally tied to regular business operations and is apportionable. “Nonbusiness income” is all other income and is typically allocated rather than apportioned.
Transactional test vs. Functional test: The transactional test asks whether the income comes from transactions in the regular course of business. The functional test (as applied here) asks whether income from property arises where the property’s acquisition, management, and disposition are integral parts of the taxpayer’s regular operations.
Commercial domicile: The state where a corporation’s central management and business direction occurs. Here, Oklahoma was US Beef’s commercial domicile, driving allocation of nonbusiness intangible gain.
Intangible assets: Nonphysical assets such as brands, franchise rights, and similar legal/economic rights. The largest portion of the gain at issue was attributable to intangibles.

V. Conclusion

The Arkansas Supreme Court’s holding is text-centered and transitional: under the pre-2026 Ark. Code Ann. § 26-51-701(a), liquidation gain from selling an entire business—especially intangible franchise assets—is nonbusiness income unless the taxpayer’s regular business operations integrally include not only acquiring and managing but also disposing of such property. The Court rejected DFA’s effort to convert the functional test into a broader “used in the business” standard, underscoring that agency regulations cannot expand an unambiguous statute. The decision meaningfully limits Arkansas apportionment of exit-event gains for pre-2026 tax years, while foreshadowing a different statutory landscape for tax years beginning on or after January 1, 2026 under Act 719 of 2025.