United States

Colorado: Gain from Sale of LLC was Business Income Excluded from Colorado Sales Factor

Mar 05, 2018
From KPMG TaxWatch

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The Colorado Department of Revenue recently issued a Private Letter Ruling or PLR addressing the state corporate income tax treatment of gain from the sale of an interest in an LLC. The taxpayer at issue recognized gain from the sale of the 50 percent partnership interest in an LLC and planned to report the gain as apportionable business income in all states where it filed income tax returns. The specific rulings requested in Colorado were whether the gain was treated as business or nonbusiness income, whether the taxpayer should include its distributive share of the LLC’s gross sales in its Colorado apportionment factor, and whether the gain from the sale of the LLC should be excluded from the Colorado apportionment factor.

With respect to the business/nonbusiness income question, a Colorado regulation provides that gain or loss from the sale of intangible personal property constitutes business income if the property, while owned by the taxpayer, was used in the taxpayer's trade or business. The taxpayer’s interest in the LLC was intangible personal property that was formed to further its regular business of manufacturing aerospace products. Therefore, the Department concluded that the gain was business income for Colorado purposes. The next question presented was whether the LLC’s sales should be included in the taxpayer’s Colorado apportionment factor. The Department concluded that because the pass-through income was business income, the distributive share of the LLC’s gross sales should be treated as the taxpayer’s gross sales and included in its Colorado apportionment factor. Finally, the ruling addressed whether the gain from the sale of the LLC should be excluded from the sales factor. Under Colorado law, gains from sales of intangible property are sourced to the taxpayer’s commercial domicile. The Department, presuming that the taxpayer was commercially domiciled in Colorado, noted that all of the business activities associated with the gain occurred in Illinois. As such, in the Department’s view, sourcing the gain to Colorado would not fairly represent the taxpayer's activity in Colorado. In order to effectuate equitable apportionment, the gain should be excluded from the taxpayer’s Colorado apportionment factor. Please contact Mark Kaye at 303-382-7855 with questions on this Private Letter Ruling.

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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.