United States

Oklahoma corporate income tax capital gains deduction

TAX ALERT  | 

UPDATE: Just prior to the deadline to file a petition for certiorari with the U.S. Supreme Court, CDR Systems settled this dispute with the Oklahoma Tax Commission. This settlement leaves in place the Supreme Court of Oklahoma's controversial decision that the state's "three-year" requirement to utilize the capital gains deduction does not violate the dormant commerce clause or discriminate against interstate commerce because the requirement does not penalize a company for out-of-state activities, but rather operates to encourage investment in Oklahoma.

Taxpayers that have filed protective refund claims held in abeyance for a final decision in this case now have the choice to either: (1) withdraw their claims, (2) enter into settlement negotiations with the state, or (3) prepare for lengthy litigation.


UPDATE:  On April 22, 2014, the Oklahoma Supreme Court issued its decision in CDR Systems, overruling the Oklahoma Court of Appeals unpublished decision that held that the corporate income tax capital gains deduction provided under O.S. Sec. 3258(D) was facially discriminatory and unconstitutional under the Commerce Clause of the U.S. Constitution. The taxpayer has petitioned the Oklahoma Supreme Court for a rehearing and, if that is denied, will likely file a petition for certiorari with the U.S. Supreme Court. Oklahoma taxpayers that are not headquartered in Oklahoma and that sold Oklahoma real or tangible property as part of a liquidation should not give up on refund claims on this issue at this time.


On Jan. 17, 2013, the Oklahoma Court of Appeals issued an unpublished decision in CDR Systems Corporation v OTC, Case No. 109,886, holding that the corporate income tax capital gains deduction provided under O.S. Sec. 3258(D) was facially discriminatory and unconstitutional under the Commerce Clause of the U.S. Constitution.

Under O.S. Sec. 3258(D), an entity subject to Oklahoma corporate income tax can deduct capital gains derived from the following transactions:

  • The sale of Oklahoma real or tangible property owned by a corporation for at least five years prior to the date of the transaction from which the net capital gains arose
  • The sale of an ownership interest in an Oklahoma company owned by a corporation for at least three years prior to the date of the transaction from which the net capital gains arose
  • The sale of Oklahoma real, tangible or intangible property as part of the sale of all, or substantially all, of the assets of an Oklahoma company where the property was owned for at least three years prior to the date of the transaction from which the net capital gains arose

For purposes of this deduction, the term “Oklahoma company” is defined as an entity headquartered in Oklahoma for at least three uninterrupted years prior to the date of the transaction from which the net capital gains arose. Accordingly, under this statury scheme, an Oklahoma headquartered company could deduct gains from the sale of Oklahoma real and tangible property held for three years and sold as part of the liquidation of all, or substantially all, of its assets. However, in similar circumstances, a non-Oklahoma headquartered company could only deduct gains from the sale of Oklahoma real and tangible property that was held for five years.

The Court of Appeals found that Oklahoma companies were granted preferential treatment over non-Oklahoma companies in violation of the Commerce Clause prohibition against state taxes that favor in-state businesses over out-of-state businesses merely because of their location in the state. The court did not address the appropriate remedy to correct this constitutional defect, but one possible remedy would be to allow non-Oklahoma headquartered companies to claim the deduction in the same manner as Oklahoma headquartered companies. Accordingly, Oklahoma taxpayers that are not headquartered in Oklahoma and that sold Oklahoma real or tangible property as part of a liquidation may be eligible for refunds and may wish to file protective refund claims pending the final outcome of this litigation.

Mike Williams, partner, Dallas, TX
Brian Kirkell, director, Washington National Tax

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