Must a Colorado combined report include both financial-institution and non-financial affiliates, and how is the group's income calculated when the two use different apportionment rules?

Plain-English summary

A holding company's affiliated group mixed two kinds of corporations: financial institutions (FIs, as defined in Special Regulation 7A) and non-financial institutions (non-FIs). The problem is that Colorado makes FIs apportion income using special market-based rules (Special Reg 7A), while everyone else uses the standard apportionment method — so what happens when both kinds of company belong to the same combined report? The taxpayer asked (1) whether the combined report must include both, and (2) how to calculate the group's income.

Issue 1 — yes, include both. Colorado requires affiliated C corporations to file a combined report when they meet three of the six criteria in § 39-22-303(11)(a), the point being to treat a unitary enterprise as a single taxpayer. There's no exception for members that happen to use different apportionment methodologies. So FIs and non-FIs that meet the combination criteria all go into the one combined report.

Issue 2 — calculate by subgroup, then aggregate. The Department approved a method (authorized by its equitable-apportionment power, § 39-22-303.5(7)(b)(III)):
1. The FI subgroup and the non-FI subgroup each separately compute modified federal taxable income, as if each subgroup were its own federal consolidated pro-forma return — eliminating intercompany transactions within and between the subgroups.
2. Each subgroup separately allocates its allocable income/loss — FI subgroup under Special Reg 7A, non-FI subgroup under standard allocation rules.
3. Each subgroup separately computes its Colorado apportionment factor(s) and applies them to its business income — again, FI under Special Reg 7A, non-FI under standard rules.
4. The Colorado-allocated and Colorado-apportioned amounts from both subgroups are added together into one aggregated Colorado tax base.
5. Colorado's tax rate is applied to that base.

The ruling adds detailed rules for assets transferred between the subgroups (the income generally stays with the originating subgroup, with exceptions based on where the value was created or how a working asset is used, and the burden is on the party asserting an exception) and preserves § 39-22-303(6) authority to reallocate income/deductions between subgroups. It applies to tax years 2008 forward until superseded.

This "apportion each specialized subgroup under its own rules, then aggregate" approach is the foundation the Department later built on in [[plr-17-001-apportionment-of-income-on-a-combined-report]] (a combined group with trucking, airline, financial-institution, and general members).

What this means for you

Corporate groups with both a financial-institution arm and ordinary operating companies

You can't keep your bank/finance affiliates out of the combined report just because they apportion differently. If the affiliates meet the three-of-six combination test, they're in. But you don't blend the methods either: you run two parallel computations — Special Reg 7A for the FI members, standard rules for the rest — and add the Colorado results together.

Why the subgroup mechanics matter

Because intercompany transactions are eliminated and asset-transfer income is traced to its originating subgroup, how value moves between your financial and non-financial members affects which apportionment method captures it. Document asset transfers carefully; the burden of claiming an exception is on you.

Accountants and tax professionals

This is the template for mixed-method combined groups. Steps: (1) test combination under § 39-22-303(11)(a); (2) split into method-based subgroups; (3) compute modified federal taxable income per subgroup on a pro-forma basis with intercompany eliminations; (4) allocate and apportion each subgroup under its own regime; (5) aggregate Colorado amounts. Note the equitable-apportionment hook (§ 39-22-303.5(7)(b)(III)) and the post-2009 single-sales-factor backdrop. Pair with [[plr-17-001-apportionment-of-income-on-a-combined-report]].

Common questions

Q: Do financial-institution affiliates have to be in the same combined report as ordinary corporations?
A: Yes, if they meet the three-of-six combination criteria in § 39-22-303(11)(a). There is no exception for members that use different apportionment methods.

Q: How is the income calculated when members apportion differently?
A: By subgroup. The financial-institution members apply Special Regulation 7A and the others apply standard rules; each subgroup computes its own income, allocation, and Colorado factor, and the Colorado results are added together into one tax base.

Q: What happens to assets transferred between the financial and non-financial members?
A: The income generally stays with the subgroup the asset came from, with exceptions based on where the asset's value was created or how a working asset generates income; the party claiming an exception bears the burden.

Q: Can other taxpayers rely on this ruling?
A: No. A private letter ruling binds the Department only as to the specific taxpayer and facts. It applies to tax years 2008 forward until superseded by Department guidance.

Citations and references

Statutes and rules:
- § 39-22-303(11)(a), C.R.S. (combined report — three of six criteria)
- § 39-22-303(12)(a), C.R.S. (affiliated group)
- § 39-22-303.5(7), C.R.S. (special apportionment for certain businesses); § 39-22-303.5(7)(b)(III) (equitable/alternative apportionment authority)
- § 39-22-303(6), C.R.S. (allocation of income/deductions between affiliated corporations)
- § 39-22-303 and § 24-60-1301, C.R.S. (single-sales-factor from Jan. 1, 2009)
- 1 CCR 201-3, Special Regulation 7A (financial institutions)

Related rulings:
- [[plr-17-001-apportionment-of-income-on-a-combined-report]] — later mixed-method combined group (trucking/airline/financial-institution/general), apportion-by-subgroup-then-aggregate

Source

• Landing page: Colorado All Letter Rulings
• Original PDF: PLR-11-002.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

PLR-11-002

March 16, 2011
XXXXXXXXXXXXXXXXXXX
Attn: XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXX
Re: Private Letter Ruling re: XXXXXXXXXXXX.
Dear XXXXXXXXXXXXX,
You submitted on behalf of XXXXXXXXXXXXXX (“Holdings”) and its subsidiaries
(“Subsidiaries) (Holdings and Subsidiaries collectively referred to as the “Taxpayer”) a
request for a private ruling on the entities that must be included in a Colorado combined
report and the manner in which the combined group must calculate its income. This letter is
the Department’s private letter ruling.
Issue
1. Must Taxpayer include in its Colorado combined report affiliated entities that are
financial institutions with affiliated entities that are not financial institutions?
2. How must Taxpayer calculate its income in a combined report?
Conclusion
1. Taxpayer’s combined income report must include both financial and non-financial
affiliated entities that meet the criteria set forth in §39-22-303(11)(a), C.R.S.
2. Taxpayer must calculate its income as set forth in section 2 of this ruling.
Background
Holdings is the direct and indirect parent of numerous C corporations that comprise an
“affiliated group,” as defined in §39-22-303(12)(a), C.R.S. Among the members of this
affiliated group are certain “financial institutions” (“FIs”), as that term is defined in 1 Colorado
Code of Regulations 201-3, Special Regulation 7A (“Special Regulation 7A”) and certain nonfinancial institutions (“non-FIs”). Certain FIs and non-FIs included within the Holdings’
affiliated group meet the test for combination set forth in §39-22-303(11)(a), C.R.S. and
regulation 39-22-303.11(a).
Discussion

1. Taxpayer must include in a combined report FIs and non-FIs that meet the criteria set forth
in §39-22-303(11)(a), C.R.S.
This ruling requires us to address the interplay between statutory provisions that require
affiliated entities to file a combined report and statutory provisions and regulations that
require certain types of business to use apportionment and allocation methodologies that are
substantially different from the standard apportionment rules applied to most corporations.
Colorado requires affiliated C corporations to prepare and file a combined report when filing
their income tax return if they satisfy three of six criteria set forth in §39-22-303(11)(a), C.R.S.
The purpose of this provision is to treat affiliated entities as a single taxpayer because they
act as a unitary enterprise. If some of these entities have sources of income from inside and
outside Colorado, the income of the combined group must be apportioned among the
relevant states.1
Colorado recognizes that the standard apportionment methodologies may be ill suited to
certain types of businesses.2 For these specialized businesses, Colorado has adopted
special apportionment methodologies in order to reflect accurately their Colorado income.
One such class of business is financial institutions and Colorado has adopted special
apportionment rules for them.3 The issue, then, is whether entities using different
apportionment methodologies can be included in the same combined report.
Taxpayer represents that the FIs and non-FIs meet the statutory requirements of §39-22303(11)(a) for combining into a single report. Taxpayer argues that there are no statutory
provisions that expressly set forth an exception to the requirements of subsection 303(11).
We agree with Taxpayer that this subsection requires the Taxpayer include affiliated FI
entities and non-FI entities in a combined report.
2. Department approves Taxpayer’s income tax calculation methodology.
As noted above, Colorado employs standard apportionment methodologies for most
corporations, but also recognizes that certain types of businesses, such as financial
institutions, require special rules for apportionment of their income. The department may
also authorize and require a taxpayer to use alternative methodologies “to effectuate an
equitable apportionment or allocation of the taxpayer’s income, fairly calculated to

determine the net income derived from or attributable to sources in Colorado.” §39303.5(7)(b)(III), C.R.S.
After reviewing the facts provided in Taxpayer’s letter, we conclude that Taxpayer’s
combined return, including all includible FIs and non-FIs, must be calculated as
follows:
1. The sub-group of FIs and the sub-group of non-FIs must separately calculate their
modified federal taxable income. This calculation must be made as though all
members of both sub-groups are included in the same federal consolidated pro-forma
1 For

tax years beginning on or after January 1, 2009, taxpayers, including taxpayers filing a combined
report, must use a single sales factor apportionment methodology to apportion income. For tax years prior
to 2009, taxpayers have a choice of using a two or three factor apportionment methodology. §39-22-303
and §24-60-1301, C.R.S.
2 §39-22-303.5(7), C.R.S.
3 Special Regulation 7A

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return, including the elimination of all intercompany transactions, regardless of
whether between or among FIs and/or non-FIs.
2. The FI sub-group and the non-FI sub-group must separately allocate any allocable
income/loss, with the FI sub-group applying Special Regulation 7A and the non-FI
sub-group applying standard allocation rules.
3. For the business income/loss portion of the modified federal taxable income of each
sub-group, each sub-group shall separately compute its Colorado apportionment
factor(s) and then apply the factor(s) to its business income/loss. In doing so, the FI
sub-group will again apply the provisions of Special Regulation 7A, and the non-FI
sub-group will apply standard apportionment rules.
4. All income/loss allocated and apportioned to Colorado by each of the sub-groups
should be added together to produce an aggregated Colorado tax base.
5. Colorado’s income tax rate should be applied to this tax base to determine the
Colorado tax due.
In addition to the methodology set forth above, the following rules apply:
1. Assets transferred between FI members and non-FI members. Income from the use,
disposition, or otherwise of any asset that has been transferred between members of
the FI sub-group and the non-FI sub-group shall be included in the modified federal
taxable income of the sub-group from which such asset originated. Sales generating
the income or loss subject to this rule shall be included in the sales factor calculation
of the sub-group that includes the income or loss in its calculation. The following
exceptions and rules will apply in the application of this paragraph 1:
a. In the case of income or loss from the sale or disposition of an asset, if the
greater proportion of the increase in value of such asset was created while the
asset was a part of the sub-group to which the asset was transferred, the
income or loss from such sale or disposition shall be included in the
calculation of the sub-group to which the asset was transferred.
b. In the case of income or loss from the use of an asset, if the asset is a working
asset and not cash or another fungible commodity, and the asset generates
income or loss from sales to third parties, then such income or loss shall be
included in the calculation of the sub-group to which the asset was transferred.
Conversely, income or loss from the use of such working asset shall be
included in the calculation of the sub-group from which the asset was
transferred if the income or loss is generated by sales to an affiliated entity.
c. If the amount of income or sales is not material, then the taxpayer may choose
to include the income in the group to which the asset was transferred.
d. The burden of establishing that any of these exceptions apply shall be upon
the party seeking to assert the exception to the rule.

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2. Application of §39-22-303(6), C.R.S. Nothing in this ruling shall restrict application of
§39-22-303(6), including the distribution or allocation of income or deductions
between corporations in different sub-groups.
This ruling applies to tax years 2008 forward until superseded by specific guidance from the
department, which could take the form of a letter from the department withdrawing its
approval or a regulation that contradicts this ruling.
Miscellaneous
This ruling is premised on the assumption that Taxpayer has completely and accurately
disclosed all material facts. The department reserves the right, among others, to
independently evaluate Taxpayer’s representations. This ruling is null and void if any such
representation is incorrect and has a material bearing on the conclusions reached in this
ruling.
Enclosed is a redacted version of this ruling. Pursuant to statute and regulation, this
redacted version of the ruling will be made public within 60 days of the date of this letter.
Please let me know in writing within that 60 day period whether you have any suggestions or
concerns about this redacted version of the ruling.

Sincerely,

Office of Tax Policy
Colorado Department of Revenue

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