By KPMG's Washington National Tax practice | Nov. 25, 2013
On November 18, 2013, legislation (S.B. 1140) was prefiled that attempts to addresses infirmities with a statute providing a deduction for certain capital gains included in federal taxable income. Specifically, under current Oklahoma law a capital gains deduction applies for gain related to the sale of stock in an Oklahoma Company and the sale of certain tangible personal property, real property, and intangible property owned directly or indirectly by Oklahoma companies and held for a three year period. An “Oklahoma company” is generally defined as an entity primarily headquartered in Oklahoma for at least three uninterrupted years prior to the date of the transaction giving rise to the capital gains. A non-Oklahoma company challenged the law on numerous grounds, including that it violated the Commerce Clause by favoring in-state companies over their out of state counterparts. In CDR Systems Corp. v. Oklahoma Tax Commission, the Oklahoma Court of Appeals held that the disparate treatment of non-Oklahoma entities versus "Oklahoma" entities violated the Commerce Clause. The court held that the taxpayer was entitled to the capital gains deduction for the gains it realized from its asset sale. The Oklahoma Supreme Court subsequently granted the Tax Commission’s petition for review.
Senate Bill 1140, if enacted, would repeal the current capital gain deduction after the 2014 tax year. For taxable years beginning on or after January 1, 2015, the bill would allow a deduction for 50 percent of the amount of qualifying capital gains. Capital gains qualifying for the deduction would include gains related to the sale of real property or tangible personal property located within Oklahoma and held for five or more uninterrupted years, and sales of stock or an ownership interest in any company held for two or more uninterrupted years. Stay tuned to TWIST for more information about S.B. 1140 and the litigation in CDR Systems Corp. v. Oklahoma Tax Commission.
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