Oklahoma Court Of Appeals Holds Capital Gains Deduction Statute Violates Commerce Clause

On January 17, the Oklahoma Court of Appeals determined that the state's capital gains deduction statute impermissibly violated the Commerce Clause of the U.S. Constitution by facially discriminating against non-Oklahoma companies or companies without headquarters located in the state.1 Specifically, the statute imposed a shorter holding requirement to receive the capital gain deduction upon companies with headquarters in Oklahoma versus companies without headquarters in the state.

Background

The taxpayer, CDR Systems Corporation (CDR), an S corporation manufacturer of polymer concrete and fiberglass handholes and pads for utilities, housed its headquarters in Florida and had a manufacturing facility in Oklahoma. CDR entered into a stock purchase agreement, selling all of its assets, which it had owned for more than three years. The purchaser elected to treat the stock purchase as an asset sale under the Internal Revenue Code.

CDR filed its 2008 amended Oklahoma corporation income tax return, claiming the capital gains deduction for gains exceeding $49 million from the sale of its assets. When apportioned, this deduction ultimately resulted in the exclusion of more than $3 million from Oklahoma taxable income.2 The Oklahoma Tax Commission denied the deduction and CDR timely filed a protest. Based on the Administrative Law Judge's recommendation, the Oklahoma Tax Commission denied the protest and CDR subsequently appealed the matter directly to the Court of Appeals.

The issue before the Court was whether the longer holding period requirement for outof- state companies to take the capital gains deduction than companies with Oklahoma headquarters violated the Privileges and Immunities Clause, the Equal Protection Clause, or the Commerce Clause of the U.S. Constitution.

Oklahoma Capital Gains Deduction Violates Commerce Clause

A deduction from Oklahoma taxable income is available for taxable years beginning after December 31, 2005 to corporations for "qualifying gains" (net capital gains) which are generated in three different circumstances:

The sale of real property or tangible property located in Oklahoma owned by a corporation for at least five years prior to the date of the transaction from which the net capital gains arise.3 The sale of stock or 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 arise4 (the term "Oklahoma...