United States

Colorado: Appeals Court Affirms Decision Excluding a Holding Company from the Combined Return

Nov 13, 2017
From KPMG TaxWatch

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Recently, an appeals court affirmed a decision holding that a domestic holding company was not included in a taxpayer’s Colorado combined report for the years at issue. The taxpayer at issue owned a domestic holding company that in turn owned four foreign companies. The four foreign subsidiaries, which conducted no business within the U.S., had made check-the-box elections to be disregarded as separate legal entities. Thus, for federal income tax purposes, the holding company and the four subsidiaries were treated as a single C-corporation. The holding company did not have any property or payroll of its own. From 2001 to 2007, the taxpayer excluded the holding company from its Colorado combined return. The Colorado Department of Revenue audited the taxpayer’s returns and asserted that the holding company should be included in the Colorado combined group. The matter eventually went to district court and the court concluded that the holding company was not includable in the combined report. The Department appealed.

The court first addressed the trial court’s conclusion that the holding company was excluded from the taxpayer’s combined group because it did not have any property and payroll in the U.S. A Colorado statute defines an includable corporation as any corporation with more than 20 percent of its property and payroll assigned to U.S. locations. In fact, a departmental regulation states that because companies with no property or payroll of their own cannot have twenty percent or more of their factors assigned to locations in the United States, such corporations, by definition, cannot be included in a combined report. The court agreed with the regulation and held that a company with no property or payroll cannot have 20 percent of its property and payroll in the U.S. Furthermore, the court rejected certain of the Department’s arguments that the taxpayer actually had property and payroll in the U.S.

The court next addressed one of the taxpayer’s arguments against inclusion that the trial court had rejected. Specifically, the taxpayer asserted that the holding company could not be included in the domestic combined group because, when counting the property and payroll of the four foreign disregarded subsidiaries, more than 80 percent of the holding company’s property and payroll was outside the U.S. The trial court had ruled in the Department’s favor on this argument and the appellate court agreed. In its view, the check-the-box election allowed under the federal regulations did not dictate whether the entities were included in the Colorado combined group because of where their property and payroll were located. Finally, the court also rejected a number of other arguments as to why the holding company should be included in the combined group, including that it lacked economic substance, and that the Department’s Section 482 type powers allowed it to force combination. For further information, please contact Mark Kaye at 303-382-7855.


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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.