The Colorado Department of Revenue (Department) adopted amendments to Rule 1 CCR 201-2, 39-22-303(11)(c), clarifying that an affiliated group of corporations should use the post-apportionment method for combined reporting and consolidated return purposes when group members do not use the same apportionment methodology. The amended rule takes effect September 14, 2017.

Background

The prior regulation required members to join in the same combined report and use the statutorily required apportionment method applicable to each member. The regulation, however, did not specify whether income should be computed using a pre- or post- apportionment method. Thus, the absence of specific guidance led to two possible interpretations: (1) use a pre-apportionment method (i.e., determine a single sales factor formula using each member's prescribed apportionment formula and then apply to the entire combined income); or (2) use a post-apportionment method (i.e., determine a separate apportionment formula for each industry subgroup, then apply the separate formula to the respective group's separate income, and combine the post-apportioned income/losses of each group).

In Private Letter Rulings PLR-11-002 (Financial and Non-financial Institutions File Combined Report) and PLR-15-005 (Apportionment of Combined Report's Income), the Department authorized the use of the post-apportionment method. Both PLRs dealt with groups subject to general apportionment rules with captive financial organization affiliates. In April 2017, the Department issued PLR-17-001, in which it authorized a post-apportionment method for a transportation company containing four subgroups subject to different apportionment methods (i.e., airline, trucking, financial, and general corporate members).

Amended regulation adopts post-apportionment method

Under the amended rule, the Department adopts a post-apportionment method. Members of an affiliated group filing a combined report must derive a single apportionment factor for the combined group by summing the numerator of each affiliated corporation doing business in Colorado. Intercompany transactions are eliminated before calculating income, gross sales, apportionment, or de minimis determinations under this rule.

Members of an affiliated group that are engaged in distinctly different commercial activities may be subject to multiple apportionment methodologies (i.e., regular apportionment or special apportionment rules). When different apportionment methodologies are used and the gross sales of one commercial activity is less than 1% of the taxpayer's total gross sales, the activity is conclusively de minimis. Taxpayers must apportion income from de minimis activity in the same ratio they apportion their gross sales, using the sales factor they use for the remainder of the commercial activity. If that amount is less than 5% of the taxpayer's total gross sales, the commercial activity may be de minimis depending on the facts. If it is de minimis, the taxpayer will apportion that income as described.

If the multiple activities give rise to gross sales that are not de minimis, then the taxpayers must use the apportionment methodology most applicable to each commercial activity and separately allocate and apportion Colorado income for all commercial activity. Colorado taxable income for each commercial activity is computed on a separate apportionment schedule and then combined. Net operating loss carryforwards are applied, and tax and credits are computed, on a combined basis. The rule includes examples of the application of these provisions.

Implications

These provisions apply to returns due after amendments to this rule take effect. The regulation clarifies a previously unresolved question of how to file returns for mixed-apportionment groups. For years preceding the effective date of the regulation, it remains unclear whether taxpayers are permitted or required to use the pre-apportionment or post-apportionment method. The noted PLRs are not precedent, so only the taxpayers to whom they were issued may rely on them.

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