Income/Franchise:
Utah State Tax Commission Says Lack of Unitary Relationship Prevents Taxing Gain on Entity Sale

Decision No. 16-1358, Utah State Tax Comm. (1/27/22). In a case involving an out-of-state corporation (i.e., the Utah taxpayer at issue) that served as a “blocker” between unrelated investors and an in-state oil and gas operational company in which they all invested, the Utah State Tax Commission held summary judgment for the taxpayer that while the gain associated with its flow-through interest in the in-state operational company – which it held through a tiered-partnership structure and which involved receipt of an unrelated buyer’s publicly traded partnership (PTP) units by a low-tiered entity in exchange for the low-tiered entity’s interest in the oil and gas operational company – constituted “business income” for Utah corporate franchise tax purposes, Utah could not constitutionally tax the gain because there was no unitary relationship between the taxpayer and the buyer. That is, under the facts, the taxpayer, through the lower-tiered entity, did not share centralized management or economies of scale with the buyer, nor was there functional integration between the two. Please contact us with any questions.