701—602.26(422) Allocation and apportionment.
	602.26(1) The classification of income by the labels customarily given, such as interest, dividends, rents, and royalties, is of no aid in determining whether that income is business or nonbusiness income. Interest, dividends, rents and royalties shall be apportioned as business income to the extent the income was earned as a part of a financial institution’s unitary business, a portion of which is conducted in Iowa. Mobil Oil Corp.	v.	Commissioner of Taxes, 455 U.S. 425 (1980); ASARCO, Inc.	v.	Idaho State Tax Commission, 458 U.S. 307, 73 L.Ed.2d 787, 102 S.Ct.	3103 (1982); F. W. Woolworth Co.	v.	Taxation and Revenue Dept., 458 U.S. 354, 73 L.Ed.2d 819, 102 S.Ct.	3128 (1982); Container Corporation of America v.	Franchise Tax Board, 463 U.S. 159, 77 L.Ed.2d 545, 103 S.Ct.	2933 (1983). Whether income is part of a financial institution’s unitary business income depends upon the facts and circumstances in the particular situation. The burden of proof is upon the taxpayer to show that the treatment of income on the return as filed is proper. There is a rebuttable presumption that an affiliated group of financial institutions in the same line of business have a unitary relationship, although that is not the only element used in determining unitariness.
	602.26(2) Application of related expense to nonbusiness income. Subrule 602.26(1) deals with the separation of “net” income, therefore, determination and application of related expenses must be made, as hereinafter directed, before allocation and apportionment within and without Iowa. Related expenses shall mean those expenses directly related.
A directly related expense shall mean an expense which can be specifically attributed to an item of income. Interest expense shall be considered directly related to a specific property which generates, has generated, or could reasonably have been expected to generate gross income if the existence of all of the facts and circumstances described below is established. Such facts and circumstances are as follows:
	a. 	The indebtedness on which the interest was paid was specifically incurred for the purpose of purchasing, maintaining, or improving the specific property;
	b. 	The proceeds of the borrowing were actually applied to the specified purpose;
	c. 	The creditor can look only to the specific property (or any lease or other interest therein) as security for the loan;
	d. 	It may be reasonably assumed that the return on or from the property will be sufficient to fulfill the terms and conditions of the loan agreement with respect to the amount and timing of payment of principal and interest; and
	e. 	There are restrictions in the loan agreement on the disposal or use of the property consistent with the assumptions described in “c” and “d” above.
A deduction for interest may not be considered definitely related solely to specific property, even though the above facts and circumstances are present in form, if any of the facts and circumstances are not present in substance. Any expense directly attributable to allocable interest, dividends, rents and royalties shall be deducted from income to arrive at net allocable income.
Example: For purposes of this example, it is assumed that the taxpayer has nonbusiness rental income. The taxpayer invests in a 20-story office building. Under the terms of the lease agreements, the taxpayer provides heat, electricity, janitorial services, and maintenance. The taxpayer also pays the property taxes. Construction of the building was funded through borrowings which meet the criteria of a direct expense under the provisions of this paragraph. The directly related expenses to the operation of the property are:

Interest expense	$1,200,000	
Property taxes	500,000	
Depreciation	500,000	
Electricity	300,000	
Heat	200,000	
Insurance	150,000	
Janitorial services	100,000	
Repairs	50,000	
Total expenses	$3,000,000	
 	 	
The directly related expense of the allocable rental income is $3,000,000.
This rule is intended to implement Iowa Code section 422.63.
[Editorial change: IAC Supplement 11/2/22; Editorial change: IAC Supplement 10/18/23]