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Navigating Multi-State Tax Issues With Pass-Through Entities Reconciling State Recognition Rules and Overcoming Complexities With the Taxation of S Corps and Partnerships WEDNESDAY, DECEMBER 10, 2014

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Today’s faculty features: Mary C. Alexander, Attorney, Sutherland Asbill & Brennan, Washington, D.C. Madison J. Barnett, Attorney, Sutherland Asbill & Brennan, Atlanta Ted W. Friedman, Attorney, Sutherland Asbill & Brennan, Washington, D.C. J. Sims Rhyne, III, Esq., Bradley Arant Boult Cummings, Birmingham, Ala.

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NAVIGATING MULTI-STATE TAX ISSUES WITH PASS-THROUGH ENTITIES MARY C. AL MADI SON J. TED W. F J. SI MS RHY

EXANDER, BARNETT, RI EDMAN, NE, I II, BR

SUTH SUTH SUTH ADLE

5

ERLA ERLA ERLA Y AR

N N N A

D ASBI LL & BRENNAN D ASBI LL & BRENNAN D ASBI LL & BRENNAN NT BOULT CUMMINGS

L L L L

L L L L

P P P P

OUTLINE • Introduction and overview • State conformity to federal treatment of passthrough entities (“PTEs”) • Jurisdiction to tax (nexus) PTEs and their owners • Mechanisms for reaching income of nonresident owners of PTEs • Apportionment of PTE income

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STATE CONFORMITY TO FEDERAL TREATMENT OF PTEs

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STATE CONFORMITY TO FEDERAL TREATMENT OF PTEs Check-the-box (CTB) regulations overview CTB application to state income taxes CTB application to other state taxes State conformity, partial conformity and nonconformity • S corp. elections • • • •

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CTB REGULATIONS OVERVIEW • IRS issued regs. in 1996 that took effect on Jan. 1, 1997 • Default classifications • Domestic eligible entity: • Single owner: Disregarded as an entity separate from its owner (“DRE”); treated as a division of its owner • Two or more members: Partnership

• Foreign eligible entity: • A partnership if it has two or more members and at least one member does not have limited liability • An association if all members have limited liability • Disregarded as an entity separate from its owner if it has a single owner that does not have limited liability

• Default classification retained until election to change is made 9

CTB REGULATIONS OVERVIEW • CTB election necessary when an eligible entity chooses to be classified as something other than its default classification (or wants to change its classification) • CTB election options: • Single owner: Corporation or DRE • Two or more members: Corporation or partnership

• File Federal Form 8832, Entity Classification Election

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CTB APPLICATION TO STATE INCOME TAXES • State adoption of CTB regulations • Intended to simplify tax compliance and administration • 25 or so states conformed in 1997; almost all comply now… but there are exceptions (discussed later)

• State conformity is not as straight forward as it seems • States have conformed in a variety of ways: • Conformity statutes • Bulletins

• States have varied in addressing the application of the CTB classification for all entities (some only address for certain entities, i.e., LLCs) 11

CTB APPLICATION TO OTHER STATE TAXES • CTB regulations formulated for federal income tax purposes • Some states apply CTB to non-income taxes • Varying treatment of CTB for sales and use tax purposes

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STATE CONFORMITY, PARTIAL CONFORMITY AND NON-CONFORMITY • Conformity

• Alaska. Instructions for Forms 6000 and 6020, 2013 Alaska Corporation Net Income Tax Return • Arkansas. Ark. Code §§ 4-32-1313, 26-51-802(a)

• Partial conformity and non-conformity

• Pennsylvania. 72 Pa. Stat. Ann. § 7601(a) • Rhode Island. R.I. Gen. Laws §§ 7-16-73(b), 44-11-2.2(a)(1); see Bulletin, “Q & A on Rhode Island Income Tax Changes Affecting Pass-through Entities Including: Partnerships and Limited Liability Companies (LLCs) with Nonresident Partners or Members; Trusts with Nonresident Beneficiaries; and S Corporations with Nonresident Shareholders,” (R.I. Div. of Taxation Dec. 28, 2004) • Tennessee. Notice No. 13-16 (Tenn. Dep’t of Revenue Nov. 2013)

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S CORPORATION ELECTIONS • State approaches vary Most states recognize federal S corp. election Some states have additional requirements Some states require a separate S corp. election Some states allow a federal S corp. to opt out for state purposes • Some states do not follow federal S. corp. scheme • • • •

• State consequences vary

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JURISDICTION TO TAX PTEs AND THEIR OWNERS

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JURISDICTION TO TAX PTEs AND THEIR OWNERS • • • •

Jurisdiction (nexus) overview Constitutional nexus Nonresident partner nexus LLC member nexus

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JURISDICTION (NEXUS) OVERVIEW • Can a state tax a nonresident partner or member? • Before a state can tax a nonresident owner of a PTE that is doing business within its borders, it must be determined whether the state has jurisdiction over the nonresident • States have varying statutory standards for determining whether a nonresident partner or member has nexus • Colorado. 1 CCR 201-2: 39-22-301.1(2)(b), (c)(v) • Kentucky. Ky. Rev. Stat. § 141.010(25)(e), (26)

• Statutory standards are subject to U.S. Constitutional limitations 17

CONSTITUTIONAL NEXUS • States are limited in their ability to tax or impose a tax collection obligation on an out-of-state person or entity • Due Process Clause nexus • Commerce Clause nexus

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NONRESIDENT PARTNER NEXUS • States generally assert that a partner in a partnership having property or personnel in the state has nexus based on its ownership interest in the partnership • Must determine whether the nonresident partner has sufficient contacts with a state • Is the partner’s activity sufficient to be considered to be doing business in the state? • Does the nonresident partner have sufficient contacts with the state to satisfy U.S. Constitutional nexus standards?

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NONRESIDENT PARTNER NEXUS • Aggregate theory v. entity theory • Aggregate theory • Activities of the partnership attributed to partners • Partners considered to be conducting the business of the partnership

• Entity theory • Partnership treated as an entity, distinct from partners • Partnership interest treated like an ownership interest in a corporation

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NONRESIDENT PARTNER NEXUS • Administrative and judicial developments • Alabama

• Lanzi v. Ala. Dep’t of Revenue, 968 So. 2d 18 (Ala. Civ. App. 2006) • Legislative response to Lanzi

• California

• Appeal of Sup, Inc., No. 571262 (Cal. State Bd. of Equal. Nov. 14, 2012)

• New Jersey

• Village Super Market of PA, Inc. v. Dir., Div. of Taxation, 27 N.J. Tax 394 (2013) • BIS LP, Inc. v. Dir. Div. of Taxation, 26 N.J. Tax 489 (2011)

• Louisiana

• Utelcom, Inc. v. Bridges, 77 So. 3d 39 (La. Ct. App. 2011)

• Pennsylvania

• Wirth v. Commonwealth, 95 A.3d 822 (Pa. 2014)

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LLC MEMBER NEXUS • Ownership in an LLC • Administrative and judicial developments • Alabama • Vogt v. Ala. Dep’t of Revenue, No. 11-660 (Dep’t of Revenue, Admin. Law Div. Jan. 3, 2013)

• Iowa • Policy Letter 10240041 (Iowa Dep’t of Revenue, Dec. 16, 2010)

• New York • In the Matter of Shell Gas Gathering Corp. #2, Nos. 821569 and 821570 (N.Y. Tax App. Tribunal Sept. 23, 2010)

• Virginia • Dutton v. Commonwealth of Virginia, No. CL06-6291, (Va. Cir. Ct., June 22, 2007) • Legislative response

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MECHANISMS FOR REACHING INCOME OF NONRESIDENT OWNERS OF PTEs

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STATE ENTITY-LEVEL TAXES • Most states (like federal) do not tax disregarded entities, partnerships, LLCs, or S corporations • No annual net income • No net worth • No gross receipts taxes

• However, there are exceptions…

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STATE ENTITY-LEVEL TAXES • Alabama • Net worth-based Business Privilege Tax (BPT) on: • All corporations • Limited liability entities (LLEs) (e.g., LLCs, LPs) • Minimum tax of $100 up to maximum tax of $15,000 (except for financial institutions and insurance companies)

• Applies even if the entity is disregarded for income tax • But if a member of the SMLLC is also subject to the BPT, then the member counts the SMLLC’s net worth in computing its own tax, the SMLLC takes a net worth of $0.00 (but still has to pay the minimum $100 BPT)

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STATE ENTITY-LEVEL TAXES • California • LLC “tax” and LLC “fee” • Annual LLC “tax” is $800 (CA standard minimum tax) • Annual LLC “fee” is based on “total income” apportioned to California • Apportioned based on three factors • Fee was originally unapportioned but was found unconstitutional in Northwest Energetic Services, LLC (2006) • No single sales factor election • Maximum fee is $11,790 (if CA total income is greater than $6MM)

• Applies to SMLLCs (not to LLCs electing to be taxed as corporations) • LLC fee doesn’t apply to LPs • Special rules for tiered LLCs

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STATE ENTITY-LEVEL TAXES • District of Columbia • Unincorporated Business Tax (UBT) • 9.975% rate (same as corporate income tax) • Base essentially the same as if the unincorporated business were a C corporation • Exemptions: • Entities with under $12,000 in gross receipts exempt • Certain service-based partnerships are exempt

• Ballpark Fee • Funds the Nationals baseball stadium • Entities with greater than $5MM in gross receipts • Fee is between $5,500 to $16,500 per year

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STATE ENTITY-LEVEL TAXES • Illinois • Personal Property Replacement Income Tax • Funding used to eliminate the Illinois business personal property tax • Applies to partnerships and multi-members LLCs • Rate is 1.5% (C corporations pay 2.5%) • Corporations receive credit for amount of tax paid by LLC of which they are members

• Deduction allowed for distributive shares of income of partners that are themselves subject to the tax

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STATE ENTITY-LEVEL TAXES • New York City • Unincorporated Business Tax (UBT) • 4% of taxable income apportioned to NYC • Corporate SMLLCs exempt (subject to corporate tax) but SMLLCs owned by individuals are not • Residents receive credit for UBT paid by unincorporated business

• Special deductions and exemptions • Real estate entities not subject to tax • Dealing for one’s own account not taxable

• S corporations are subject to NYC’s corporation income tax

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STATE ENTITY-LEVEL TAXES • New York State • Annual filing fee • Ranging from $25 to $4,500 • Applies to LLPs and LLCs

• Exception for trading on one’s own account

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STATE ENTITY-LEVEL TAXES • Ohio • Commercial Activity Tax (CAT) • Applies to all businesses regardless of form (e.g., corporations, partnerships, LLCs, S corporations – all subject to CAT) • Rate is 0.26% of Ohio-sourced gross receipts • Minimum tax is $150 (for receipts between $150k and $1MM) • Combined v. Consolidated reporting • Advantages of consolidated reporting – elimination of intercompany gross receipts

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STATE ENTITY-LEVEL TAXES • Texas • Margin Tax • • • •

Applies to “limited liability entities,” including LLCs, LPs, and trusts General partnerships owned solely by individuals are exempt Exemption for “passive entities” Rate – 1% for most businesses (0.975% eff. 1/1/2014; 0.95% eff. 1/1/2015) • 0.5% for retailers and wholesalers (0.475% eff. 1/1/2014)

• Margin Tax base is apportioned with a single receipts factor

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NONRESIDENT WITHHOLDING • 37 states impose withholding at the source on passthrough entities and nonresident owners • Generally triggered when a pass-through entity either: • Fails to file a composite return including nonresident owners • Fails to maintain or submit nonresident owner’s written consent to state taxing jurisdiction and agrees to pay tax on that owner’s distributive share of the pass-through entity’s income

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NONRESIDENT WITHHOLDING • If a state requires withholding, the pass-through entity generally pays tax at the highest individual or corporate tax rate multiplied by that owner’s distributive share of income attributable to the state • Some states require withholding only in connection with the state’s allocable share of a distribution to a nonresident owner • Some states except corporate partners from withholding • E.g., Idaho, Nebraska, Missouri (not clear how to include on the composite return, which only applies personal income tax rates)

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NONRESIDENT WITHHOLDING • Four types of state nonresident withholding provisions: Composite return/Nonresident consent to taxation

•California, Colorado, Georgia, Idaho, Illinois, Indiana, Kentucky, Louisiana, Massachusetts, Missouri, Montana, South Carolina, West Virginia, Wisconsin

Nonresident withholding required

•Alabama, California (foreign investors), Connecticut, Michigan, Pennsylvania, Utah, Virginia

Estimated tax payments required

•Kentucky, Michigan, New Jersey, New Mexico, New York, Oregon, Vermont, Wisconsin

PTE remains contingently liable

•California, New Mexico, Utah

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NONRESIDENT WITHHOLDING • California (it’s complicated!) • 7% withholding on distributions to foreign (non-US) persons • Includes owners of a partnership • No exceptions

• Highest marginal rate (10.3%) withholding required on distributions by LLCs to nonconsenting, nonresident members • Including SMLLCs owned by individuals

• 7% withholding required on distributions of California-source income greater than $1,500 • Exemptions (FTB Form 592 waivers/exemptions) • CA FTB Publication 1017 Resident and Nonresident Withholding Guidelines (150 FAQs!!)

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NONRESIDENT WITHHOLDING • California • Since January 1, 2011: • Reduced withholding for distributions of effectively connected income to foreign partners or members • Follows Treas. Reg. § 1.1446-6 • Foreign partner or member must sign and send IRS Form 8804-C to the partnership or LLC and then also sign and send Form 589, Nonresident Reduced Withholding Request, to the FTB with a signed copy of IRS Form 8804-C • The FTB will review the request within 21 business days • If approved, the partnership or LLC should submit Form 592-A, Payment Voucher for Foreign Partner or Member Withholding, with the reduced withholding amount to the FTB

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NONRESIDENT WITHHOLDING • New Jersey

• Partnerships must pay tax on behalf of nonresident partners: • 9% for corporate partners • 6.37% for unincorporated partners

• No exception for tiered partnerships – state entitled to received “the float”: • 17. Will exceptions be allowed to the partnership withholding requirements for those nonresident partners that currently are included or elect to be included in a composite return? • No. Under the statute the state is to receive the float on these payments. As a response to the impact of the new law, a taxpayer may elect to stop filing composite returns. For purposes of withholding, the term nonresident does not include a taxpayer carrying on a trade, profession solely as a result of the purchase of certain intangible property … Questions and Answers Regarding the Business Tax Reform Act 2002, New Jersey Division of Taxation (Jan. 9, 2003). 39

NONRESIDENT WITHHOLDING • Michigan • Flow-through entity holding exemption certificate from corporate owner doesn’t have to withhold corporate income tax on distributive share • Effective Jan. 1, 2013, Department may require the member to file the exception certificate with the Department (a copy of which will be provided to the flow-through entity)

• To qualify for exemption certificate, corporate owner must agree: • File all returns required under the Corporate Income Tax and Michigan Business Tax Act; • Pay the tax on its distributive share of the business income received from any flow-through entity in which the corporation was a member or in which it had an ownership or beneficial interest, directly or indirectly through one or more other flow-through entities; and • Submit to the taxing jurisdiction of Michigan

• Not required of corporate member electing to continue to file under MBT

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NONRESIDENT WITHHOLDING • Michigan • Michigan Rev. Admin. Bulletin, No. 2010-7 (Nov. 5, 2010) • Flow-through entity must furnish nonresident owner with statement showing: • Estimated share taxable income available for distribution upon which withholding was based • Amount of taxes actually withheld

• Statement must be provided to the Dept. of Treas. • Nonresident owner must provide the flow-through entity with information to make an accurate determination of withholding tax • Flow-through entity may file a composite return for nonresident members • Withholding does not satisfy the nonresident owner’s obligation to file a return 41

NONRESIDENT WITHHOLDING • Kansas • Kan. Dept. of Revenue, Notice 13-17 (Sept. 12, 2013) • Confirms that non-resident pass-through entity owners cannot claim any personal deductions or exemptions against Kansas personal income tax by joining in a composite return • Non-resident pass-through entity owner can only claim personal income tax exemption for pass-through entity income (e.g., 100% exclusion of pass-through entity income from Kansas personal income tax) if it “opts out” of pass-through entity composite return and files its own Kansas non-resident income tax return

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NONRESIDENT WITHHOLDING • Illinois • L. 2013, H3157 (P.A. 98-0478) (eff. Jan. 1, 2014) • Eliminates composite returns for nonresident owners • Requires partnerships, S corporations, and trusts to withhold tax on both business and nonbusiness income and certain credits distributable to their respective nonresident partners, shareholders, and beneficiaries • Old law only required withholding on business income and certain credits distributable to nonresidents • The changes effect taxable years ending on or after December 31, 2014 (i.e., calendar year 2014 taxpayers are affected)

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NONRESIDENT WITHHOLDING • New York • N.Y. Tax Law § 658(c)(4) • Pass-through entities are required to make quarterly estimated tax payment on behalf of nonresident members or partners • However, estimated payments are not required if: • Any owner whose estimated tax required to be paid for the tax year by the entity is $300 or less; • Any nonresident individual owner elects to be included in the group (composite) return that the entity has been authorized to file; or • Any owner that provides the entity with an exemption certificate certifying that the owner will comply in their individual or corporate capacity with the New York State estimated tax and tax return filing requirements

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NONRESIDENT WITHHOLDING • California • CA FTB Public Service Bulletin 10-16 (May 20, 2010) • If withholding was required but pass-through entity failed to withhold, the withholding agent is liable for 100% of the amount required to be withheld, plus interest

• Utah • Utah Info. Pub. 68 (Nov. 1, 2011) • Pass-through entities can request waivers of the Utah withholding requirement • However, if a waived downstream entity or taxpayer fails to file a return and make required payments, the pass-through entity will not be eligible for the waiver and is liable for Utah withholding on the unpaid amounts, plus penalties and interest 45

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APPORTIONMENT OF PASS-THROUGH ENTITY INCOME

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APPORTIONMENT OF PASS-THROUGH ENTITY INCOME

Corp. Partner

Is the entity or individual a general partner or a limited partner?

Is the income the result of the sale of an interest in a PTE?

Indiv.

Do the factors flow up?

Is the PTE unitary with the corp. partner?

Is the individual a resident?

PTE 48

APPORTIONMENT OF PASS-THROUGH ENTITY INCOME BUSINESS/NON-BUSINESS INCOME

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CORPORATE PARTNERS – BUSINESS/NONBUSINESS INCOME • Corporate Partners • Is business/non-business income determination made at: • The partnership level? • The partner level?

• Most states have not addressed this issue • Alabama, Arizona, and Illinois have provided direct guidance on this issue

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CORPORATE PARTNERS – BUSINESS/NONBUSINESS INCOME • Alabama • Requires that the determination of business income be done at the partnership level. • See Ex Parte Uniroyal Tire Co., 779 So. 2d 227 (Ala. 2000) (Supreme Court of Alabama determined that gain on the sale of partnership assets was not business income to the corporate partners in Alabama, because the asset sales was not part of the partnership's regular course of business).

• Arizona and Illinois • Require that the determination of business income be done at the partner level. • Ariz. Corp. Tax Rul. No. 94-2 (Apr. 4, 1994); • Ill. Admin. Code tit. 86, §§ 100.3500 (a)(3), 100.3500(b)(1). 51

APPORTIONMENT OF PASS-THROUGH ENTITY INCOME ALLOCATION AND APPORTIONMENT

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CORPORATE PARTNERS – APPORTIONMENT FACTORS • Partner level approach • Partners combine their share of the pass-through entity’s apportionment factors with their own apportionment factors. • Referred to as “flow-through” or “flow-up” apportionment • Also known as “partner-level” apportionment

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CORPORATE PARTNERS – APPORTIONMENT FACTORS • Partner level approach • Example: • Assume that a corporate partner has a 40% interest in a partnership. • The corporate partner would calculate its own apportionment factor by including 40% of the partnership’s sales, property and payroll (assuming that the state uses a three-factor apportionment formula), but usually only if the partner and the partnership are unitary.

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CORPORATE PARTNERS – APPORTIONMENT FACTORS • Partnership level approach • The pass-through entity’s income is apportioned to the state using only the pass-through entity’s own apportionment factors. • Owners of the pass-through entity then allocate their distributive share of post-apportionment income to the appropriate state.

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CORPORATE PARTNERS – APPORTIONMENT FACTORS • Partnership level approach • Example: • Corporate partner has a 40% interest in a partnership, which earns $100 of income. • If apportionment is calculated at the partnership level, and the partnership computes a 50% apportionment factor in a state, then the partner would include $20 of partnership income in its tax base in that state. • $100 × 40% = $40, and $40 × 50% = $20

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CORPORATE PARTNERS – APPORTIONMENT FACTORS • California (Cal. Code Regs. tit. 18, §25137-1) • If partners are unitary with partnership, then partnership’s factors “flow through” to the partners. • If partners are NOT unitary with the partnership, then the factors do not “flow through” to the partners. • If partners and partnership are NOT unitary, but the income is considered business income, then partners must apportion partnership income separately from their other business income.

• Illinois (86 Ill. Admin. Code §100.3380(d) and 100.3500) • Follows California approach to corporate partner apportionment.

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CORPORATE PARTNERS – APPORTIONMENT FACTORS • Florida (Fla. Admin. Code Ann. r. 12C-1.015(10)) • Partnership factors flow through to the corporate partners • Apportionment occurs at the partner level

• Not an issue for individuals, because no personal income tax

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CORPORATE PARTNERS – APPORTIONMENT FACTORS • Massachusetts (Mass. Regs. Code tit. 830, § 63.38.1) • Partnership factors flow through to corporate partners, if partnership and corporate partners are engaged in “related business activities.” • If they are not engaged in related business activities, corporate partners separately account for partnership income and apportion it using only the partnership’s factors. • If corporation owns less than 50% of LP, presumed not to be doing business in Massachusetts, and apportionment is at partnership level

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CORPORATE PARTNERS – APPORTIONMENT FACTORS • New Jersey (NJ Rev. Stat.§54:10A-15.7(a); NJ Admin. Code tit.18, §18:7-7.6(g)(3)) • Partnership factors flow through to corporate partners, if the partnership and partners are unitary • Special New Jersey rules of unity for corporate partners and partnerships

• If not unitary, apportion partnership income at the partnership level and report distributive share of apportioned taxable income without regard to the partners’ separate apportionment factors

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CORPORATE PARTNERS – APPORTIONMENT FACTORS • Oklahoma (Okla. Admin. Code §710:50-1751(15)(A)) • Partnership factors do not flow through to the corporate partners. • Instead, income is apportioned at the partnership level and allocated to the state by the corporate partners.

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INDIVIDUAL PARTNERS • Resident individuals generally are subject to tax on their entire distributive share of partnership income in their state of residence. • Exception – Alabama (resident individuals can be taxed only on their share of Alabama-source partnership income)

• Nonresident individuals generally are subject to tax only on their share of partnership income earned within the state.

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APPORTIONMENT OF PASS-THROUGH ENTITY INCOME SALE OF AN INTEREST

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SALE OF AN INTEREST • What is the character of the interest being sold? • Partnership • The sale of a partnership interest is generally treated as a sale of an intangible, and the gain is apportioned based on the usual rules for sales of intangibles.

• Disregarded Entity • When a disregarded entity is being sold, it is likely that the state treat the seller as if it held the assets of the disregarded entity directly (i.e., it is like selling a division of the corporate owner). • States have not provided much guidance on this issue.

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SALE OF AN INTEREST • Is it business income? • Transactional Test • If not in the business of buying and selling partnership interests, there is a strong argument that the sale of the interest generates nonbusiness income and that the gain should be sourced to its commercial domicile.

• Functional Test • If the interest were an operational asset used in the business, its sale would likely be held to generate business income.

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SALE OF AN INTEREST • California (Cal. Rev. & Tax. Code § 25125(d)) • Gain from the sale of the partnership interest to the state is allocated based on the ratio of the original cost of the partnership's tangible personal property in the state to the original cost of the partnership's property everywhere. • If more than 50 percent of the value of the partnership's assets is from intangible assets, the gain from the sale is allocated to California based on the sales factor of the partnership for the first full tax period prior to the date of the sale.

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SALE OF AN INTEREST • Idaho (Idaho Code § 63-3026A(3)(a)(vii)) • Nonresident individuals that sell an interest in a partnership or an S corporation doing business in Idaho must include the gain or loss on their Idaho returns based on the partnership's or S corporation's Idaho apportionment factor in the preceding taxable year.

• Mississippi (Miss. Code Ann. § 27-7-9(f)(10)) • Whether gain is included in apportionable income depends on whether the underlying entity is formed in Mississippi. • Domestic Limited Partnership or an LLC – gain is not taxable if the interest has been held for more than one year • Foreign entity – gain is subject to tax

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SALE OF AN INTEREST • New York (N.Y. Tax Law § 631(b)) • Defines “income derived from New York sources” to include gain from the sale of an interest in a partnership, LLC, S corporation or C corporation • with 100 or fewer shareholders; and • whose assets are comprised more than 50%, on a fair market basis, of New York real property.

• Texas (34 Tex. Admin. Code §§ 3.549(e)(30)(B), 3.557(e)(25)(B)) • Sales of intangibles are apportioned based on the “location of the payor” rule. • Gain from the sale of a partnership interest would be included in the numerator of the Texas receipts factor only if the buyer of the partnership interest were legally domiciled in Texas. 69

SALE OF AN INTEREST • Oregon (Or. Admin. R. 150-316.127-(D)) • General Partner • Aggregate theory - gain or loss on the sale of the Oregon partnership is considered attributable to a business carried on within the state and is sourced to Oregon.

• Limited Partner • Entity theory – gain or loss is not sourced to Oregon unless the limited partnership interest acquired a “business situs” within the state. • A business situs for intangibles is acquired in Oregon if they are “used in the conduct of the taxpayer's business, trade or profession” in the state.

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QUESTIONS? Mary C. Alexander Sutherland Asbill & Brennan LLP [email protected] 202.383.0881 Madison J. Barnett Sutherland Asbill & Brennan LLP [email protected] 404.853.8191 Ted W. Friedman Sutherland Asbill & Brennan LLP [email protected] 202.383.0829 J. Sims Rhyne, III Bradley Arant Boult Cummings LLP [email protected] 205.521.8271 71