Oklahoma Supreme Court Reverses Commission’s Disallowance of Net Capital Gain Deduction

The Oklahoma Supreme Court reversed the Oklahoma Tax Commission’s (the “Commission”) decision, finding that the taxpayer was entitled to a net capital gains tax deduction on his 2007 amended Oklahoma income tax return.

The taxpayer held stock in two Oklahoma S Corporations and sold considerably all of the corporate assets of both companies to a third party. Subsequently, the taxpayer received his proportionate share of the proceeds and reported the sum as a net capital gain on his federal individual income tax return. Later, the taxpayer sought a deduction equal to the net capital gain on his 2007 amended Oklahoma income tax return.

The Commission disallowed the deduction to the extent that it accounted for the sale of a company’s intangible personal property, specifically goodwill. Since the transaction included the sale of a companies’ assets rather than the sale of stock, the main issue at hand was whether the taxpayer’s net capital gain resulted in the sale of a direct or an indirect ownership interest in the Oklahoma companies.

Pursuant to Okla. Stat. § 2358(F)(2)(d) and Okla. Stat. § 2358(F)(2)(e), “direct means the individual taxpayer owns the asset,” while “indirect means the individual taxpayer owns an interest in a pass-through entity (or chain of pass-through entities) that sells the asset that gives rise to the qualifying gains receiving capital treatment.” Thus, selling an indirect ownership interest is synonymous with selling a pass-through entity’s assets.

Since the companies were S corporations (pass-through entities) for tax purposes, the sale of the companies’ assets amounted to the sale of an indirect ownership interest under Okla. Stat. § 2358(F)(2)(a)(2). Therefore, the Commission erred by disallowing the full net capital gain tax deduction claimed on the taxpayer’s 2007 amended Oklahoma income tax return. Accordingly, the Oklahoma Supreme Court reversed the Commission’s decision and ruled in favor of the taxpayer.

Takeaway

If you are doing business in Oklahoma or if you hold an investment in a pass-through entity that is doing business in Oklahoma, and if the assets or stock of the Oklahoma business is sold, you may be entitled to a capital gain deduction to reduce your Oklahoma tax liability. 

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