The taxpayer in Laurel Pipe Line transported refined petroleum products from refinery and pipeline connections from the Philadelphia area to Pittsburgh and intermediate points. The taxpayer also operated a pipeline from Aliquippa, Pennsylvania to Cleveland, Ohio. The taxpayer discontinued thc operation of the Aliquippa to Cleveland pipeline in 1983 due to shifting distribution patterns and insufficient volume. Three years later, the idle pipeline was sold, and the taxpayer distributed the proceeds to its stockholders as a dividend.

The Commonwealth sought to classify the taxpayer's gain on the sale of the idle pipeline as apportionable business income. Business income is defined in Pennsylvania as "income arising from transactions and activity in thc 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." Nonbusiness income is defined as "all income other than business income."

The Court applied two tests in determining that the taxpayer's gain did not constitute business income, a transactional test and a functional test. Under the transactional test, the taxpayer's gain did not constitute business income because the gain did not arise from transactions and activity in the regular course of the taxpayer's trade or business. This conclusion was stipulated to by the parties in the case.

Under the functional test, the taxpayer's gain did not constitute business income because the acquisition management and disposition of the idle pipeline did not constitute an integral part of the taxpayer's regular trade or business. The Court noted that the pipeline had been idle for over three years prior to being sold, and therefore, its disposal was not an integral part of the taxpayer's regular trade or business. The Court deemed the sale to be a partial liquidation of assets, evidenced by the fact that the proceeds were distributed to stockholders and not reinvested in the operations of the business.

The treatment of income as business or nonbusiness is a significant issue throughout the country. The proper classification of income is often unclear in light of business complexities and evolving case law in the various states. Laurel Pipe Line is one of the most recent cases to provide guidance with respect to the business/nonbusiness issue. The rationale of the Court should be carefully analyzed to potentially establish the nonbusiness character of assets that may be sold in Pennsylvania and certain other states.