In a recent private letter ruling, the Colorado Department of Revenue held that an LLC and its members could not reduce their Colorado taxable income by the amount of net capital gain resulting from the sale of the LLC’s business assets. Colorado statutorily provides that taxpayers may reduce Colorado taxable income by the amount of income treated at the federal level as capital gain derived either from (1) the sale of real or tangible personal property located in Colorado, or (2) the sale of stock or an ownership interest in a Colorado company. However, the Department rejected the taxpayer’s argument that it should receive the reduction because goodwill, which accounted for approximately 94 percent of the purchase price, was neither “real” nor “tangible” personal property and the transaction was an asset sale rather than the sale of an LLC membership interest. Colorado Private Letter Ruling No. PLR-12-008 (Dec. 31, 2012, released April 2013).

Co-author - Patrick Smith, Director Baker Tilly Virchow Krause, LLP

Mr. Ely is a partner and Messrs. Thistle and Rhyne are associates with the multistate law firm of Bradley Arant Boult Cummings LLP in its Birmingham, Alabama office. Mr. Ely is Chair of the firm’s State & Local Tax Practice Group. Messrs. Ely, Thistle, and Rhyne co-author a chapter on the state taxation of PTEs in the treatise “Keatinge, Conaway and Ely on Choice of Business Entity” (West). Mr. Smith is the Tax Director at Baker Tilly Virchow Krause, LLP and is head of State & Local Tax Services for the firm’s Chicago office. Mr. Smith is a co-author of “State Taxation of Pass-Through Entities and Their Owners,” a treatise published by Warren Gorham and Lamont/West since 2005. Messrs. Ely and Smith have co-presented on this topic at NYU’s Institute on Federal Taxation, as have Messrs. Thistle and Smith for a webinar hosted by Strafford Publications in early June.