Utah ~ Corporate Income Tax: Income From Sale of Interest in LLC Was Apportionable Business Income

CCH Tax Day Report

A taxpayer’s interest and capital gains income from the sale of its interest in a limited liability company (LLC) was apportionable business income for Utah corporate franchise tax purpose. The income met the functional test for business income, because holding the interest in the LLC was the taxpayer’s only business activity. The taxpayer argued that the income did not meet the functional test, because it was a holding company without a trade or business and because the interest in the LLC was acquired merely as an investment. However, the taxpayer’s activities indicated that it was operating a trade or business to manage its interest in the LLC, which generated income for the taxpayer for many years. The interest in the LLC was the only asset the taxpayer acquired, managed, and ultimately disposed of and, thus, was an integral, functional, or operative component of the taxpayer’s trade or business. Also, the isolated or infrequent sale did not prevent the income generated from the sale from being classified as business income under the functional test. The taxpayer failed to meet its burden of proof to show that the business income that arose from the sale should not be apportioned 100% to Utah, as the only state in which the taxpayer was registered to do business on or prior to the sale date was Utah. Finally, even if the Tax Commission had found the income to be nonbusiness income, it would have been allocable to the taxpayer’s commercial domicile, which was in Utah.

Commission Decision, Appeal Nos. 14-329 & 14-1893, Utah State Tax Commission, March 18, 2016, released July 14, 2016, ¶401-186

Other References:

Explanations at ¶11-510

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