Colorado ~ Personal Income Tax: Applicability of Credit for Sale of Intangible Interest in Pass-Through Entity Discussed

For personal income tax purposes, the Colorado Department of Revenue has issued a private letter ruling addressing whether a Colorado couple was eligible for credit on taxes paid in another jurisdiction. Generally, gains from the sale of an intangible, such as interest in a limited liability company (LLC), are sourced to the state where the pass-through entity operates if the taxpayer has actively participated in that pass-through entity’s business. In the case at hand, the taxpayers, a husband and wife, were owners of an LLC which provided services both inside and outside of Colorado. They sold their interests in the entity and made taxable gains. The state of Ohio taxed only the husband’s portion of the gain as the wife’s did not meet certain threshold requirements. To determine the portion of the gain sourced to Ohio, the taxpayers were required to use Colorado’s single sales factor apportionment ratio since Ohio’s sourcing rules are different to that of Colorado. The gain attributable to Ohio was more when calculated under the Colorado apportionment rules than under the Ohio apportionment rules. Accordingly, the taxpayers were permitted a credit on the amount of the Ohio tax liability associated with the sale of the husband’s membership interest.

PLR-16-006, Colorado Department of Revenue, April 12, 2016, ¶201-335

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