Transcript State and Local Tax Aspects of Acquisitions — A Colorado

SALT Aspects of Acquisitions—
A Colorado Perspective
Presentation by Peter Rose to the
Tax Executives Institute
Denver Chapter
May 23, 2007
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Colorado Taxes
• Income tax
• Sales and use tax
– State imposed
– State collected
– Home-rule imposed and collected
• Ad valorem (property) tax
• Other taxes
– Severance tax
– Gasoline and special fuel tax
– Tobacco tax
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Colorado Income Tax
• State-level only
• Flat tax of 4.63%
• No general capital gains or dividend preference
– Certain long-term Colorado-source capital gains
may be non-taxable
– Individual exclusion for interest, dividends, and
capital gain is currently suspended
• Not a detailed code but supplemented by regulations
and FYIs
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Statutory Structure
C.R.S. § 39-22-101 et seq.
•
•
•
•
•
Part 1—General rules and individual tax
Part 2—Partners and partnerships
Part 3—Corporations (C and S)
Part 5—Special Rules (mainly credits)
Part 6—Procedure and Administration
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Conformity
• “Moving conformity”
– Taxable income generally computed from
federal taxable income
– Colorado income tax code is “synched”
with federal tax code
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Colorado Adjustments
• General conformity bows to Colorado
adjustments
– Individual adjustments—C.R.S. § 39-22104
– Corporate adjustments—C.R.S. § 39-22304
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Examples of Colorado
Adjustments
• Colorado NOL
– Portion of federal NOL allocated to
Colorado
– Colorado corporate NOL cannot be carried
back
• Colorado-source Capital Gains
Exclusion
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Colorado Capital Gains Exclusion
Eligible Property
• Real or tangible property located in Colorado
at time of sale
• Interests in Colorado entities
– 50% or more of property and payroll sourced to
Colorado in every year of 5-year holding period
• Does not apply to intangible personal
property held outside of an entity
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Colorado Capital Gains Exclusion
Holding Period
• Acquired after May 9, 1994
• Held for 5 years or more
• Transfers in and out of FTEs may tack—see
FYI Income 15 and DD-588
• Expanded holding period rules apply only if
Colorado has a qualified surplus
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
FTEs and Disregarded Entities
• Colorado follows federal treatment
• Flow-through entities (FTEs)
– Any federal tax partnership including
partnerships and LLCs
– S corporations
• Disregarded entities
– Not a taxable entity in Colorado
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Colorado Income Tax Planning
• In general federal tax planning will have
similar Colorado consequences
because of conformity
• But always check Colorado adjustments
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Example—Making a § 338
Election
I.R.C. § 338 allows the purchaser of stock to treat the stock
purchase as an asset purchase
• OldCorp is deemed to have sold all its assets for fair market
value
• NewCorp is deemed to have purchased all of OldCorp’s assets
for fair market value
• OldCorp recognizes gain on sale and NewCorp has stepped-up
basis
• May be beneficial if OldCorp has historic NOLs or if target is an
S corporation
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Example—Making a § 338(g)
Election
Colorado Treatment
• § 338 gain is included in federal taxable income and
thus must be included in Colorado taxable income
(DD-480)
Colorado NOL Trap
• Colorado NOL might not be same as federal NOL
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Related Transactions
• Colorado has not directly adopted substanceover-form or step-transaction doctrines
• Conformity effectively piggybacks Colorado
onto federal tax law regarding related
transactions
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Multistate Aspects
Colorado taxable income is increased or
decreased by:
• Allocation of non-business income away from
or to Colorado based on sourcing rules
• Apportionment of business income away from
or to Colorado based on multifactor tests
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Business Income
• Taxpayer position—gain on sale of out-ofstate business is non-business income not
taxable in Colorado
• DOR position—“regular course” of business
includes strategic acquisitions and divestment
(DD-507)
• Consider advantages of applying Colorado
capital gains exception, if applicable
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Colorado Income Tax Recap
• Federal income tax planning generally has
same effect at Colorado level
• Be aware that Colorado adjustments may
affect tax consequences
• Colorado capital gains exclusion is a
significant Colorado benefit
• DOR’s broad definition of “business income”
may create taxable gains in Colorado
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Colorado Sales and Use Tax
• State imposes and collects tax of 2.91%
• State also collects on behalf of special districts
• Statutory cities/towns/counties impose their own tax
on the state tax base, but state collects their tax
• Home rule cities impose and collect sales and use
tax pursuant to their own ordinances
• Use tax is a “soak-up” tax—imposing tax on
purchases that escaped tax in the jurisdiction
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Sources of Sales and Use Tax Law
•
•
•
•
•
•
C.R.S. § 39-26-101 et seq.
State regulations and FYIs
Municipal ordinances
Municipal regulations and FYIs
Departmental decisions
Case law
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Taxable Sale
• Sale is an exchange of property or
services for consideration
• Taxable sales are
– Retail sales of tangible personal property
not otherwise exempted or excluded
– Retail sales of specified services
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Non-Taxable Sale
• Wholesale sale—sales for resale
• Sale of intangible personal property
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Sales of Stock
• Stock sales are excluded from sales and use
tax because stock is intangible personal
property
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Reorganizations
• Reorganizations qualifying under I.R.C. §
368(a)(1) are generally excluded from
definition of “sale”
– Always check home rule ordinances
– Denver does not exclude reorganizations per se
• Other grounds for exclusion
– B reorganizations should be excluded because
transferred stock is intangible property
– E and F reorganizations should be excluded
because there is no exchange of tangible personal
property
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
Davis Graham & Stubbs
www.dgslaw.com
LLP
Sales of Partnership and LLC
Interests
• Transfers of partnership and LLC interests are
excluded by state statute
• Generally, home rule ordinances exclude transfers of
partnership, but not LLC, interests
• Are LLC interests excludible as intangible personal
property?
– Probably yes
– Exclusions for partnerships are surplusage reflecting preRUPA view of partnership interests
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Non-Corporate Mergers
Mergers involving partnerships and LLCs
pursuant to state law should be excluded
• Transfer is of entity interests, which should
not be tangible personal property
• Assets transfer by operation of law pursuant
to state law merger or “junction box” statute
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Asset Sale
• Colorado does not have a casual sale
exemption
• Asset sales are generally taxable to the
extent that tangible personal property (not
otherwise exempt or excluded) is transferred
• In these respects, home rule jurisdictions
generally are in accord with state treatment
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Useful Exclusions or Exemptions
from Sales and Use Tax
• Real property
• Inventory
• Machinery and equipment
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Real Property Exclusion
• Real property is excluded because it is, by
definition, not personal property
• Personal property becomes real property
when it is affixed to real property
• Generally applicable to state and home rule
jurisdictions
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Inventory Exclusion
• Applies only to property that is inventory in
the hands of the seller and inventory in the
hands of the buyer
• Buyer should have a resale certificate to
perfect exclusion
• Generally applicable to state and home rule
jurisdictions
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Machinery and Equipment Exemption—
C.R.S. § 39-26-709
Qualifying machinery
• Used in Colorado
• Directly and predominantly to manufacture tangible personal
property for sale or profit
• Cost more than $500
• Capitalized
• Qualify as creditable property under I.R.C. § 38
– Tangible personal property with useful life of one year or
more
– $150,000 per year limit for used equipment
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Machinery and Equipment Exemption—
C.R.S. § 39-26-709
Scope of exemption is broadened in
“Enterprise Zones”
• Need not be capitalized
• Construction or repair material is exempt
• Mining equipment is eligible
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Machinery and Equipment Exemption—
Local Aspects
• M&E exemption is an exception to the
general rule that state tax base applies
in statutory jurisdictions
• Most statutory and home rule
jurisdictions do not have an M&E
exemption
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Related Transactions
• Colorado excludes certain transactions from
the definition of a “sale”:
– Certain corporate, partnership, and LLC
formations
– Certain corporate, partnership, and LLC
liquidations
– See C.R.S. § 39-26-102(10) (next slide)
• These exclusions are not uniform across
home rule jurisdictions
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
C.R.S. § 39-16-102(10) Exclusions
(a) A division of partnership or limited liability company assets among the partners or limited
liability company members according to their interests in the partnership or limited liability
company;
(b) The formation of a corporation by the owners of a business and the transfer of their business
assets to the corporation in exchange for all the corporation's outstanding stock, except
qualifying shares, in proportion to the assets contributed;
(c) The transfer of assets of shareholders in the formation or dissolution of professional
corporations;
(d) The dissolution and the pro rata distribution of the corporation's assets to its stockholders;
(e) The transfer of assets from a parent corporation to a subsidiary corporation or corporations
which are owned at least eighty percent by the parent corporation, which transfer is solely in
exchange for stock or securities of the subsidiary corporation;
(f) The transfer of assets from a subsidiary corporation or corporations which are owned at least
eighty percent by the parent corporation to a parent corporation or to another subsidiary
which is owned at least eighty percent by the parent corporation, which transfer is solely in
exchange for stock or securities of the parent corporation or the subsidiary which received
the assets;
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
C.R.S. § 39-26-102(10) Exclusions (cont.)
(g) A transfer of a limited liability company or partnership interest;
(h) The transfer in a reorganization qualifying under section 368(a)(1) of the "Internal Revenue
Code of 1986", as amended;
(i) The formation of a limited liability company or partnership by the transfer of assets to the
limited liability company or partnership or transfers to a limited liability company or
partnership in exchange for proportionate interests in the limited liability company or
partnership;
(j) The repossession of personal property by a chattel mortgage holder or foreclosure by a
lienholder;
(k) The transfer of assets between parent and closely held subsidiary corporations, or between
subsidiary corporations closely held by the same parent corporation, or between
corporations which are owned by the same shareholders in identical percentage of stock
ownership amounts, computed on a share-by-share basis, when a tax imposed by this
article was paid by the transferor corporation at the time it acquired such assets, except to
the extent provided by subsection (12) of this section. For the purposes of this paragraph
(k), a closely held subsidiary corporation is one in which the parent corporation owns stock
possessing at least eighty percent of the total combined voting power of all classes of stock
entitled to vote and owns at least eighty percent of the total number of shares of all other
classes of stock.
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
D.R.M.C. § 53-24(19) Exclusions
a.
b.
c.
d.
e.
f.
A division of partnership assets among the partners according to
their interests in the partnership;
The transfer of assets of shareholders in the formation or dissolution
of professional corporations if no consideration including, but not
limited to, the assumption of a liability is paid for the transfer of
assets;
The pro rata distribution of a corporation's assets to its stockholders
upon dissolution of the corporation if no consideration including, but
not limited to, the assumption of a liability is paid for the transfer of
assets;
A transfer of a partnership interest;
The transfer of assets to a commencing or existing partnership if no
consideration including, but not limited to, the assumption of a
liability is paid for the transfer of assets;
The repossession of personal property by a chattel mortgage holder
or foreclosure by a lienholder.
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
The Drop-Kick Transaction
• The dropkick combines two excluded
transactions:
– Seller transfers assets to a newly formed
partnership or LLC, an excluded transfer
under C.R.S. § 39-26-106(10)(i).
– Seller transfers the partnership or LLC
interest to Buyer, an excluded transfer
under C.R.S. § 39-26-106(10)(g).
• Does this work?
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
International Paper v. Cohen
126 P.3d 222 (Colo. App. 2006)
• Seller and Buyer agreed to an asset purchase of
Denver box plant
• Seller transferred the box plant to an LLC in
exchange for LLC interests
• Seller sold the LLC interest to Buyer
• Denver audited Seller and assessed sales tax on the
transfer of the box plant’s tangible personal property
to the LLC
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
International Paper v. Cohen
• Denver Sales Tax Code does not exclude
transfers to an LLC
• Seller argued that transfer to the LLC was not
for consideration and thus not a sale
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
International Paper v. Cohen
Court of Appeals upheld Denver
Assessment
• Seller received consideration in the form of a
membership interest for transferring the box plant to
the LLC
• The membership interest was valuable consideration
since the Buyer immediately paid $16.5 million for the
membership interest
• The transfer to the LLC was thus an exchange for
consideration and therefore a sale
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
Davis Graham & Stubbs
www.dgslaw.com
LLP
International Paper v. Cohen
• Key holding of International Paper is
that third-party consideration can
support a taxable sale
• The Court did not explicitly invoke
substance-over-form or step-transaction
doctrines
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Third-Party Consideration
Colorado’s partnership contribution exclusion
The formation of a limited liability company or partnership by the transfer of
assets to the limited liability company or partnership or transfers to a limited
liability company or partnership in exchange for proportionate interests in the
limited liability company or partnership….(C.R.S. § 39-26-102(10)(i))
Denver’s partnership contribution exclusion
The transfer of assets to a commencing or existing partnership if no consideration
including, but not limited to, the assumption of a liability is paid for the
transfer of assets…. (D.R.M.C. § 53-24(19)(e))
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Third-Party Consideration
• Denver may assert that a dropkick involving a partnership is a
transfer for consideration based on International Paper’s thirdparty consideration holding
• Outcome of a challenge is unpredictable
– International Paper did not involve an explicit statutory exclusion
– International Paper facts were favorable to Denver—will other fact
patterns favor taxpayers?
• State law does not qualify its exclusion with regard to
consideration—third-party or otherwise—so International Paper
is not directly pertinent to state sales tax
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Step-Transaction Doctrine
• Primarily an income tax concept
• Sometimes applied to ad valorem taxes, for example, in
California
• Rarely applied in sales and use tax cases
– Compare Hutton v. Johnson (Tenn. App. Ct. 1996) (applying steptransaction doctrine) with TJX Companies (N.Y. Div. Tax App. 1995)
(refusing to apply step-transaction doctrine)
– International Paper was not decided on step-transaction grounds
• Denver and other jurisdictions will continue to press the issue in
audits, hearings, and appeals
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Sales Tax Liability—Entity Sale
• Historic sales and use tax liability remains an entity
liability
• In general, no transactional sales tax liability should
be incurred
• Conventional for sales agreement to include
– Covenants that sales and use taxes are paid and/or properly
accrued
– Indemnification extending past statute of limitations on
assessment of sales tax for unpaid or unaccrued sales and
use tax
– Seller rights in an audit, hearing, or appeal
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Sales Tax Liability—Asset Sale
Historic and transactional sales tax liability attaches to
assets transferred unless buyer complies with the
procedure of C.R.S. § 39-26-117(d) and (e):
• Buyer must withhold sufficient funds to cover sales
tax liability of seller
• Seller’s final return is due within 10 days
• Buyer cannot release withheld funds without a
clearance certificate from DOR
• Home rule jurisdictions have similar provisions that
must also be complied with
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Sales Tax Liability—Asset Sale
Clearance certificate procedure is rarely used
by buyers and sellers. Instead, parties
provide in agreement for:
• Allocation of transactional sales taxes by contract—
all to seller, all to buyer, or shared
• Indemnification for historic tax liability of business
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Sales Tax Liability—Asset Sale
Allocations in sales agreement are not binding on DOR
• Seller is liable if withholding/clearance certificate
procedure is followed
• Seller and buyer are liable if withholding/clearance
certificate procedure is not followed
• Buyer is potentially liable for use tax
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Ad Valorem Tax Basics
• Property is assessed on January 1 of the
taxable year
• Inchoate lien is created on the assessment
date
• Mill levy and thus actual tax is determined
during the taxable year
• Tax becomes due and payable on the
subsequent January 1
• Tax is delinquent on June 16
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Liability for Ad Valorem Tax
Default rule—C.R.S. § 39-1-108
• Seller pays if conveyance is after June 30
• Buyer pays if conveyance is before July 1
• No allocation—default rule is all or nothing
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com
Contractual Allocation of
Ad Valorem Tax
• Default rule only applies if “instrument of
conveyance” does not contain express
agreement otherwise
• To avoid all or nothing default allocation,
allocate ad valorem tax in the sales contract
based on date of conveyance
• Include method to true-up based on actual
levy
Davis Graham & Stubbs
LLP
1550 Seventeenth Street, Suite 500, Denver, CO 80202
Tel: 303.892.9400
www.dgslaw.com