Oklahoma ~ Corporate Income Tax: Taxpayer’s Sale of Assets in Pass-Through Entities Qualified for Capital Gains Deduction

A corporate income taxpayer’s sale of assets held in two S corporations (pass-through entities) qualified for the Oklahoma net capital gains deduction because the transaction amounted to the sale of an indirect ownership interest. Under the applicable statute, a sale of a “direct or indirect ownership interest” in an Oklahoma company will qualify for a net capital gains deduction if the taxpayer that makes the sale has held the stock or ownership interest in the company for at least two years prior to the date of the transaction from which the capital gains arise. In this case, the taxpayer received his proportionate share of the proceeds from the sale of the assets and reported the sum as a net capital gains on his federal individual income tax return and sought an equivalent deduction on an amended Oklahoma return. However, the Oklahoma Tax Commission (Commission) disallowed the deduction to the extent the proceeds were derived from intangible personal property (goodwill), on the grounds that the applicable statute did not allow for that deduction. However, the commission’s reasoning was rejected as the applicable statute provided capital gains deduction from selling”indirect ownership interest” in an Oklahoma pass-through entity including proceeds derived from intangible personal property (goodwill). Further, the taxpayer’s argument that the applicable statute, prior to a 2007 amendment, intended to afford a deduction for net capital gains arising from the sale of an Oklahoma company’s assets including goodwill, was affirmed. Accordingly, the commission’s denial of the net capital gain deduction was reversed.

Bill Hare, Jr. v. Oklahoma Tax Commission, Oklahoma Supreme Court, No. 114893, June 27, 2017, ¶201-234

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