United States

Louisiana: Appeals Court Addresses Franchise Tax Nexus in Light of Utelcom

May 04, 2015
From KPMG TaxWatch

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Recently, the Louisiana Court of Appeals addressed whether a foreign corporation owning an interest in a pass-through entity doing business in Louisiana was subject to the state’s corporation franchise tax. During the tax years at issue, the taxpayer owned an interest in an LLC that, in turn, was a general partner and a 99.9 percent owner of an interest in a Pennsylvania joint venture doing business in Louisiana. The other general partner in the joint venture was a corporation wholly-owned by the taxpayer. The taxpayer filed income/franchise tax returns reporting and paying tax on the income passed through from the joint venture, but did not report any franchise tax owed. Following an audit, the Department of Revenue assessed franchise tax, which the taxpayer paid under protest. After a trial court granted the Department’s motion for summary judgment, this appeal followed.

Generally, every foreign corporation “exercising its charter or qualified to do business, or doing business” in Louisiana or “using any part or all of its capital, plant or any other property” in Louisiana is subject to corporate franchise tax. The taxpayer, relying on the Utelcom decision, argued that it was not subject to franchise tax. Recall, in Utelcom, the appellate court held that two corporations were not subject to the Louisiana franchise tax by virtue of owning limited partnership interests in a partnership that was doing business in Louisiana. On appeal, the Department first argued that the taxpayer was essentially subject to franchise tax based the activities and its ownership of the other entities. However, the court noted that the Department presented no evidence as to how the taxpayer controlled or conducted business on behalf of the joint venture. Furthermore, the court noted that the entities were separate under the law and the “single business entity” doctrine the Department sought to apply was inapplicable to the matter at hand. The court next addressed the Department’s primary argument on appeal—that the taxpayer’s commercial domicile was in Louisiana and therefore it was subject to franchise tax. The Department appeared to be arguing that the taxpayer’s commercial domicile was in Louisiana because it used a Louisiana mailing address on its tax returns, used a Louisiana accounting firm to prepare its returns, and asked for an extension due to Hurricane Katrina. After reviewing the record, the appeals court concluded that genuine issues of material fact remained outstanding, which precluded the granting of summary judgment in favor of either party. Notably, there was contradictory testimony and evidence as to where the taxpayer’s principal place of business was located. As such, the case was remanded to the trial court for additional proceedings, ostensibly to determine whether the taxpayer’s principal place of business was in Louisiana. Please contact Nikki Crighton at 212-954-8696 with questions on Bridges v. Polychim, USA Inc.

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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.