When an affiliated group's members must use different apportionment formulas (trucking, airlines, financial institutions, general), how does the group compute its combined Colorado income tax?

Plain-English summary

A large affiliated group of C corporations filing a Colorado combined report had a problem: its member companies run distinctly different businesses, each forced by Colorado law to use a different apportionment formula. Some members provide trucking (Special Regulation 6A), some air transport (Special Regulation 1A), some financial-institution services (Special Regulation 7A), and others general business services apportioned under the standard rule in § 39-22-303.5. No single company uses more than one formula, but the group as a whole spans four. How do you combine them into one Colorado tax number?

The Department said the group may use the subgroup methodology it laid out in two earlier rulings, PLR-11-002 and PLR-15-005:

1. Eliminate all intercompany transactions across the whole combined group — whether between members of the same subgroup or different subgroups.
2. Split into subgroups (the rulings frame it as financial vs. non-financial) and have each subgroup separately compute its modified federal taxable income.
3. Each subgroup separately allocates and apportions its apportionable business income or loss to Colorado using its own required formula and factors.
4. Add the Colorado amounts together from each subgroup to produce one aggregated Colorado tax base, and apply the income tax rate to that.

There's an important expiration date on this answer. The Department was drafting a rule (amended 1 CCR 201-2, 39-22-303(11)(c)) to address exactly this issue. The ruling says that for returns due on or after that rule's effective date, the group must use the rule's methodology — even if it differs from PLR-11-002/15-005. So this PLR is a stopgap that the later rule supersedes. As a private letter ruling, it binds the Department only for this group and these facts.

What this means for you

Multistate affiliated groups with mixed-industry members

If your combined group includes members in industries with their own special apportionment regs (trucking, airlines, financial institutions, etc.), Colorado doesn't make you force everyone into one formula. The accepted approach is subgroup-by-subgroup: eliminate intercompany items, apportion each subgroup with its own formula, then sum the Colorado results. But check whether a later Department rule now governs — this ruling expressly defers to 39-22-303(11)(c) once that rule took effect.

Accountants and tax professionals

Watch the rule-effective-date caveat: a PLR resting on prior PLRs (here, 11-002 and 15-005) can be overtaken by a rule the Department was actively drafting. Confirm the current state of 1 CCR 201-2, 39-22-303(11)(c) before relying on the subgroup approach for a return due after its effective date. Note that intercompany eliminations run across the entire group, not just within a subgroup.

Common questions

Q: Does an affiliated group have to pick one apportionment formula for everyone?
A: No. Where members are required by Colorado law to use different formulas, the group apportions each subgroup with its own formula and then aggregates the Colorado amounts.

Q: What are the steps?
A: Eliminate all intercompany transactions, have each subgroup separately compute modified federal taxable income, separately allocate and apportion using its own formula and factors, and add the Colorado amounts together into one tax base.

Q: Is this methodology permanent?
A: No. The ruling says that for returns due on or after the effective date of the Department's amended rule (1 CCR 201-2, 39-22-303(11)(c)), the group must follow that rule instead.

Q: Can my group rely on this ruling?
A: No. A private letter ruling binds the Department only for the taxpayer and facts it was issued to and cannot be relied upon by anyone else.

Citations and references

Statutes, rules, and prior rulings:
- § 39-22-303.5, C.R.S. (corporate apportionment); § 39-22-303.5(7)(a) (special industry rules)
- 1 CCR 201-3, Special Regulation 6A (trucking), 1A (airlines), 7A (financial institutions)
- 1 CCR 201-2, Rule 39-22-303(11)(c) (forthcoming combined-report apportionment rule)
- PLR-11-002; PLR-15-005 (subgroup methodology)
- 1 CCR 201-1, Rule 24-35-103.5 (private letter ruling procedure)

Source

• Landing page: https://tax.colorado.gov/all-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/PLR-17-001.pdf

Original ruling text

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

PLR-17-001

April 27, 2017
XXXXXXXXXXXXXXXX
Attn: XXXXXXXXXXXXX
XXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXX
Re: Apportionment of Income on a Combined Report
Dear XXXXXXXXXX,
You submitted on behalf of XXXXXXXXXXXX (“Affiliated Group”) a request for a private
letter ruling to the Colorado Department of Revenue (“Department”) pursuant to
Department Rule 24-35-103.5. This letter is the Department’s private letter ruling. This
ruling is binding on the Department to the extent set forth in Department Rule 1 CCR 2011, 24-35-103.5. It cannot be relied upon by any taxpayer other than the taxpayer to whom
the ruling is made.
Issue
May Affiliated Group calculate its combined income tax liability using the methodology
outlined in Department Private Letter Ruling PLR-11-002 and Department Private Letter
Ruling PLR-15-005?
Conclusion
Affiliated Group may calculate its combined income tax liability using the methodology
outlined in Department Private Letter Ruling PLR-11-002 and Department Private Letter
Ruling PLR-15-005; however, with respect to returns due after the effective date of the
rule, Affiliated Group must calculate its combined income tax liability using the
methodology that will be adopted by the Department in amended Department Rule 1 CCR
201-2, 39-22-303(11)(c) when the rule becomes effective.
Structure of Analysis
To determine how Affiliated Group should apportion its income, the Department will
examine the following question:
1. How must an affiliated group of corporations apportion income if corporations within
the affiliated group are engaging in distinctly different commercial activities that
require the use of different apportionment methodologies under section 39-22303.5, C.R.S. and special rules promulgated under section 39-22-303.5(7)(a),
C.R.S.?

Background
Affiliated Group consists of multiple C corporation members within the larger C corporation
affiliated group that files a combined report in Colorado. Affiliated Group is engaged in
distinctly different commercial activities requiring the application of different apportionment
methodologies by Colorado law. These include the following:
•

•

•

•

Providing package delivery services by motor vehicle (trucking services). Members
of the Affiliated Group that provide this service are required to use the
apportionment methodology outlined in 1 CCR 201-3, Special Regulation 6A
(“Trucking”).
Providing transportation services of packages via aircraft. Members of the Affiliated
Group that provide this service are required to use the apportionment methodology
outlined in 1 CCR 201-3, Special Regulation 1A (“Airlines”).
Providing commercial banking, small business and sales financing, and loan
production services. Members of the Affiliated Group that provide this service are
required to use the apportionment methodology outlined in 1 CCR 201-3, Special
Regulation 7A (“Financial Institutions”).
Providing various other general business activities, including the following services:
logistics, freight forwarding, distribution, post-sales support, brokerage, and general
management services. Members of the Affiliated Group that provide this service are
required to use the apportionment methodology outlined in section 39-22-303.5,
C.R.S.

Within the C corporation structure, the separate and distinct services are performed by
different legal entities. The Affiliated Group as a whole is subject to four different
apportionment methodologies but no one legal entity is subject to more than one
methodology.
Discussion
The Department has previously ruled how an affiliated group of corporations should
apportion their income if corporations within the affiliated group are engaging in distinctly
different commercial activities that require the use of different apportionment
methodologies.
In 2011 and 2015, the Department issued a Private Letter Ruling PLR-11-002 and Private
Letter Ruling PLR-15-005, respectively outlining, in the most general terms, that the
financial and non-financial members of the combined group must eliminate all
intercompany transactions regardless of whether such transactions were among members
of the same subgroup or between members of different subgroups. Then, each subgroup
must separately calculate modified federal taxable income. The financial and non-financial
subgroups were also required to separately allocate income and loss and apportion any
apportionable business income or loss using the respective apportionment methodology
and factors for each subgroup. Next, all business income or loss allocated and
apportioned to Colorado by the financial and non-financial subgroups were added together
to produce an aggregated Colorado tax base to which the income tax rate applied.
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DR 4010A (06/11/14)

As such, Affiliated Group may use the allocation and apportionment methodology outlined
in PLR-11-002 and PLR-15-005. The Department is currently drafting a rule to address the
issues raised in this PLR. If the methodology outlined in the rule is different than that
outlined in PLR-11-002 and PLR-15-005, the Department rule would apply to Affiliated
Group with respect to returns due on or after the effective date of such rule.
Miscellaneous
This ruling is premised on the assumption that Company has completely and accurately
disclosed all material facts and that all representations are true and complete. The
Department reserves the right, among others, to independently evaluate Company’s
representations and assumptions. The ruling is null and void if any such assumption and
representation is incorrect and has a material bearing on the conclusions reached in this
ruling and is subject to modification or revocation in accordance to Department Regulation
24-35-103.5.
This ruling is binding on the Department to the extent set forth in Department Regulation
24-35-103.5. It cannot be relied upon by any taxpayer other than the taxpayer to whom the
ruling is made.
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
This ruling cannot be relied upon by any other taxpayer other than the taxpayer to
whom the ruling is made.

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DR 4010A (06/11/14)