Idaho Supreme Court Rules That Gain from Sale of LLC Interest is Not Idaho Income

June 26, 2020

Whether or not two companies are engaged in a unitary business is based on particular facts and circumstances, and the Idaho Supreme Court disagreed with a prior Tax Commission decision that a taxpayer and the company it sold were unitary. The court instead held that the taxpayer’s gain from its sale of the company generated nonbusiness income not taxable in Idaho.

In our April 2018 SALT Newsletter, we wrote an article summarizing an Idaho Tax Commission ruling that the gain from an S-corporation’s sale of its 78.54 interest in an LLC was classified as business income, and therefore, apportionable to Idaho. Last year, an Idaho District Court reversed that decision,[1] and on May 22, 2020, the Idaho Supreme Court issued an opinion upholding the District Court’s decision in favor of the taxpayer.[2]

In 1993, “Owner” formed “Taxpayer,” a manufacturer and seller of tactical and combat gear incorporated and commercially domiciled in Virginia. Taxpayer is an S-corporation and conducted business from 1993-2003. In 2004, Taxpayer contributed the assets of the business to “LLC,” a Virginia limited liability company treated as a partnership for federal and Idaho income tax purposes, in exchange for a 78.54 percent membership interest. Following the transaction, Owner became a “high level executive” but did not manage the day to day operations of LLC.

In 2004, LLC created a physical presence in Idaho resulting in nexus, and thus filed an Idaho income tax return. For tax years 2004-2009, LLC passed through its income to Taxpayer who paid Idaho tax on behalf of Owner. Taxpayer treated the pass-through Idaho income from LLC as business income.

In 2010, Taxpayer sold its LLC membership interest for a net gain of approximately $120 million. Taxpayer classified its gain as nonbusiness income on its Idaho income tax return, which resulted in the exclusion of the gain from Idaho taxable income. Upon audit, the state reclassified Taxpayer’s gain as business income and the Tax Commission agreed.

The Tax Commission treated the gain as business income because it found that Taxpayer’s interest in LLC served an operational function and was “an integral, functional, or operative component” to the Taxpayer’s business. Specifically, the Tax Commission relied on several facts. First, the ownership interest in LLC was not just a component of Taxpayer’s business, it was the business. Taxpayer operated the business directly until Owner required Taxpayer to contribute the business to LLC in exchange for a controlling interest in LLC.  Second, Owner was President and CEO of both Taxpayer and LLC and remained so throughout the companies’ business life. Finally, income derived from Taxpayer’s ownership interest in LLC drove Taxpayer’s net income, making the ownership more than a passive investment.

Looking at this set of facts, the Idaho Supreme Court determined that Taxpayer was merely a passive investor and that Taxpayer and LLC were not conducting a unitary business.  Despite owning a 78.54% interest in LLC, Taxpayer had no actual control over the day to day operations of LLC. Even though Owner was a “high level executive” of LLC, he was only “one voice of a six-member management team.” LLC’s officers and employees were not involved with Taxpayer, which was merely a holding company.  Other than its connection with Owner, the only other connection between Taxpayer and LLC was that they shared the same accounting and legal firms.

In a seven-year span, the only transactions involving or between Taxpayer and LLC were the transfer of the business from Taxpayer to LLC in 2003, the receipt of LLC income by Taxpayer, and Taxpayer’s 2010 sale of its interest in LLC. The Idaho Supreme Court concluded that these facts show a high-level separation of the companies indicative of independence rather than the interdependence required for a unitary business.

Since the Idaho Supreme Court ruled that Taxpayer’s gain from the sale of its interest in LLC was nonbusiness income, the gain was not apportioned to Idaho but was instead allocated outside of Idaho due to the fact that Idaho allocates nonbusiness gain from the sale of an intangible asset to the seller’s place of commercial domicile, which in this case is Virginia.[3]

This case highlights an often-frustrating aspect of state tax compliance: reasonable minds can reach different conclusions on the same set of facts. When taking a position on a state tax return, it is important to understand why that particular position is being taken as well as the potential arguments on the other side.  Aprio’s SALT team has experience researching and analyzing state tax issues, and we can assist businesses in making an informed decision that considers the potential upside and the downside of each position, the likelihood of success, as well as the taxpayer’s risk tolerance. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Kristen Mantilla, SALT Associate at or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at for more information.

This article was featured in the June 2020 SALT Newsletter.

[1] This decision does not appear to have been published.

[2] Noell Indus. Inc. v. Idaho State Tax Comm’n, Docket No. 46941 (Id. Sup. Ct., May 22, 2020)

[3] Id. Code § 63-3027(f)(3).

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About the Author

Jeff Glickman

Jeff Glickman is the partner-in-charge of Aprio, LLP’s State and Local Tax (SALT) practice. He has over 18 years of SALT consulting experience, advising domestic and international companies in all industries on minimizing their multistate liabilities and risks. He puts cash back into his clients’ businesses by identifying their eligibility for and assisting them in claiming various tax credits, including jobs/investment, retraining, and film/entertainment tax credits. Jeff also maintains a multistate administrative tax dispute and negotiations practice, including obtaining private letter rulings, preparing and negotiating voluntary disclosure agreements, pursuing refund claims, and assisting clients during audits.

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