Page 244 - TaxAdviser_2022

TAX CLINIC

Seller’s entity status: Who is to a single state and taxed entirely by No. 21-36 (Mar. 16, 2021)). Further,
selling the partnership? that state (for corporations, this is usu- the North Carolina Department of
When determining the applicable taxa- ally the state of commercial domicile Revenue announced in December 2020
tion rules for the sale of an interest in or the location of property sold with that due to a state statutory change in
a PTE operating in multiple states, regard to tangible or real property). the definition of “apportionable in-
the first step is to consider whether the Regarding sales of partnership come,” a previous administrative ruling
interest is being sold by a corporate interests, state taxing statutes may that held that a partnership sale gain
partner, another PTE, or an individual. provide specifically enumerated in- was allocable income is no longer ap-
Some states may provide a uniform set stances instructing where and how the plicable law (see North Carolina Dep’t
of apportionment rules that apply to all gain on these transactions is allocated. of Rev., Important Notice: Corporate
taxpayers (e.g., Alaska, Kansas, and Mas- (New Jersey and Pennsylvania provide Tax — Secretary Announces That New
sachusetts). However, many states have a instances for individual income taxpay- Statute Abrogated Prior Final Agency
separate set of applicable apportionment ers.) Outside any specifically enumer- Decision (Dec. 31, 2020)).
rules depending on whether the taxpayer ated instances, taxpayers can evaluate
is a corporation, a PTE, or an individual whether they can allocate the entire Factor representation
(e.g., Arizona, Hawaii, Louisiana, New gain to one state. If the gain on the sale is determined to
Jersey, New York, and Pennsylvania). However, taxpayers should recognize be apportionable business income, the
In states that have different rules for that states generally scrutinize allocable apportionment rules of the relevant
corporate and individual taxpayers, how income positions on transactions. states must be evaluated. The first
the gain (or loss) on the sale of a PTE Recent state case law and administra- question is whether the gain is includ-
interest is apportioned or allocated may tive rulings demonstrate the type of ed in the sales factor of the taxpayer’s
be different for a corporate taxpayer in-depth examination taxpayers may apportionment formula at all. Even
than for an individual. For example, a face when taking a position that a though the gain is included in the
state may treat the gain on the sale of gain is nonbusiness income allocated taxpayer’s base, many states’ statutes or
the interest by a corporate partner as ap- to a single state. The Massachusetts regulations exclude the gain entirely
portionable business income (i.e., based Supreme Judicial Court is currently from the apportionment factor.
on a formula dividing it among all states deciding a case on appeal in which the Some states may exclude the sale of
where the corporation does business); Massachusetts Department of Revenue a partnership interest from the factor
however, that same state may require an denied a taxpayer’s position that a through a number of means, such as
individual partner to allocate gain from large capital gain was to be allocated excluding receipts earned outside the
the sale of the interest to a specific state entirely to a jurisdiction other than regular course of business from the
(i.e., the gain is assigned and taxed en- Massachusetts. The Massachusetts sales factor, excluding certain sales of
tirely to one state). Department of Revenue instead used intangible property from the sales fac-
“investee apportionment” to source tor entirely, having specific occasional/
Apportionable vs. allocable the gain (i.e., using the apportionment isolated sale exclusions for transactions
income factors of the underlying partnership), outside the regular course of business,
Once the taxpayer and the applicable which resulted in 100% apportionment and providing bright-line rules for
apportionment/allocation rules for the to Massachusetts, since 100% of the transactions to exclude from the fac-
relevant states are identified, the next underlying partnership’s apportionment tor (e.g., California excludes from the
question to address is whether the gain was to Massachusetts (see VAS Holdings sales factor an occasional sale transac-
is apportionable business income or al- & Investments LLC v. Commissioner of tion with a “substantial amount” of
locable nonbusiness income. Generally, Revenue, Nos. C332269 and C332270 receipts, defined as those that cause
income is apportionable if it is earned (Mass. App. Tax Bd. 10/23/20)). the sales factor denominator value to
as part of the taxpayer’s regular trade Additionally, the Virginia Depart- decrease by 5% or more).
or business or is from property integral ment of Taxation denied a taxpayer’s Other states may exclude from the
to that business, including income request to correct an assessment that factor any transaction that is outside
from an entity or assets that are part disallowed the taxpayer’s claim that a the ordinary course of business (e.g.,
of the taxpayer’s unitary business, or partnership sale gain was nonbusiness Georgia, Illinois, and New York).
that serves an operational, not passive income to be allocated to a state other Taxpayers may take issue with these
investment, function. Conversely, al- than Virginia (see Virginia Dep’t of rules, however, given that the gain is
locable nonbusiness income is allocated Tax., Rulings of the Tax Commissioner included in the base without having

26 May 2022 The Tax Adviser