Jan 26, 2015
From KPMG TaxWatch
Recently, the Missouri Supreme Court reversed an Administrative Hearing Commission (AHC) decision and in doing so held that the corporate owner of a limited partnership doing business in Missouri was subject to Missouri franchise tax. Under Missouri law for the 2003-2005 tax years at issue, Missouri’s corporate franchise tax was imposed on corporations engaged in business in the state. The tax was based on a taxpayer’s “outstanding shares and surplus” employed in the state. The taxpayer, a corporate entity, did business in Missouri through a Texas limited partnership (Texas LP) in which it owned a 99 percent limited partnership interest. A single-member LLC wholly owned by the taxpayer held the 1 percent general partnership interest in the Texas LP. Pursuant to the limited partnership agreement, neither the taxpayer nor the LLC owned an interest in the Texas LP’s assets. During the tax periods at issue, the taxpayer itself conducted no business in Missouri, had no property or payroll in Missouri, and was not authorized to conduct business in the state. All of the taxpayer’s business decisions were made in Texas where its officers and directors were located. Following an audit, the taxpayer was assessed franchise tax for the tax years at issue on the basis that it was employing its outstanding shares and surplus in Missouri through its interest in the Texas LP.
Missouri case law construes the franchise tax as being imposed on the property and assets a corporation employs—not holds—in the state. Because the franchise tax is imposed only on corporations, the question before the Commission was whether the assets of the Texas LP could be imputed to the taxpayer. The Commission had concluded that the franchise tax imposition language did not capture corporations that employed assets owned through an interest in a limited partnership. As such, the taxpayer prevailed before the Commission; however, the Department of Revenue subsequently appealed. In the high court’s view, the Commission was conflating the question of nexus with the amount of franchise tax owed. Rather, the relevant question was whether the taxpayer was engaged business in Missouri. The court concluded that the taxpayer was doing business in the state through its own assets (the direct and indirect ownership interests in the LP). Having made that determination, it was not necessary to address whether the LP’s assets could be imputed to the taxpayer. The court therefore concluded that the taxpayer was subject to franchise tax for the tax years at issue and the case was remanded to the Commission to determine the amount of tax owed. For more information about Southwestern Bell Telephone Co. v. Director of Revenue, please contact Derek Love at 816-802-5220.
For more information about TWIST or to view archived episodes, please visit our TWIST homepage.
To receive TWIST e-mails each Monday morning, make sure that state, local and indirect is checked off as one of your topics of interest on the KPMG TaxWatch registration site.
The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.