Oklahoma appellate court limits effect of capital gains ruling

BY MICHAEL MCNUTT mmcnutt@opubco.com Published: June 13, 2013

Wiseman's opinion states that provisions in state law that allow “disparate treatment of non-Oklahoma versus ‘Oklahoma' entities in regard to the sale of real or personal property located in Oklahoma of the kind involved in the present controversy are unconstitutional and cannot be upheld.”

The appellate court ruled in January that the capital gains deduction, which took effect Jan. 1, 2006, violates the commerce clause of the U.S. Constitution.

The court, in a 3-0 ruling, reversed an opinion by the state Tax Commission, which denied an appeal from CDR System stating it also should have received the deduction. Capital gains include money from the sale of real estate, stocks or personal property.

Oklahoma companies may claim the capital gain deduction if they own the assets being sold at least three years before the transaction. Out-of-state companies have to own the property for at least five years to claim the deduction, according to the law.

The appellate court found that the Oklahoma capital gains deduction discriminates against out-of-state companies because it affords state companies different treatment for similar taxable events.

CDR Systems Corp., formed in California with headquarters in Florida, claimed the Oklahoma capital gains deduction on its 2008 Oklahoma small business corporation income tax return. The company, which manufactured equipment for telephone, water and electric companies, had a facility in Waynoka.

CDR sold all of its assets to another company in 2008 and reported gains of $49.8 million. CDR claimed the Oklahoma capital gains deduction, resulting in an exclusion of $3.6 million from Oklahoma taxable income. The Tax Commission disallowed the deduction and CDR appealed.

Tax Commission attorneys argued the Legislature determined that having a company's primary headquarters in Oklahoma for at least three years amounted to a significant investment in the state that was sufficient to grant the deduction.