Today I want to talk about a multistate business that grows by joint venturing with another business. Specifically, let’s look at when the company exits from the joint venture with a sizable profit.
Most states would tax the profit (or gain) as part of your company’s multistate income, which would be shared by the states where your company operates. In the trade the joint venture gain would be considered business income. In contrast nonbusiness income would be allocated by most states entirely to the state of your headquarters. Could joint venture gain be nonbusiness income? Yes. An example would be an investment in a real estate joint venture that has nothing to do with your business.
An example of a joint venture gain that was apportioned as business income among the states where the company operated in, is illustrated in a recent private letter ruling issued by the Colorado Department of Revenue. In that example a company which it referred to as Company A had an Illinois manufacturing division that served the aerospace industry.
Part of Company A’s business was supplying fuel component systems for its customers engines. One of its engine manufacturing customers (referred to in the ruling as “Company B”) entered into a joint venture with Company A. The joint venture was formed to provide “varying support for the fuel system requirements on Company B’s engines. After the establishment of the joint venture, Company A and the joint venture entered into a supply agreement pursuant to which Company A provides the joint venture with fuel system components at its direct product cost plus an overhead rate.”
The ruling noted that the gain from the sale of the interest in a joint venture is gain from the sale of intangible personal property. Colorado’s tax regulations treat gain from the sale of intangible personal property as business income if the joint venture “while owned by the taxpayer was used in the taxpayer’s trade or business.”
The Colorado Department of Revenue had no problem finding the joint venture gain as business income: “Company A’s ownership interest in … (the joint venture) is intangible personal property. Company A manufactures and sells products in the aerospace industry. Company A formed … (the joint venture) …in furtherance of this purpose and contributed to … (the joint venture) … contracts created in the regular course of Company A’s business. Therefore, the Gain Company A realized from the sale is business income.”
The Colorado Department of Revenue Private Letter Ruling is PLR-17-009 (December 29, 2017), and can be found at: https://www.colorado.gov/pacific/sites/default/files/Treatment%20of%20Gain%20Private%20Letter%20Ruling%20PLR-17-009.pdf
Comment. No question that this joint venture was part of the company’s business and apportioned as business income. Sometimes it is not the clear.
By John McCauley: I help people buy and sell businesses.
Email: jmccauley@mk-law.com
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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