The Louisiana Court of Appeal blocked the Louisiana Department of Revenue from imposing franchise tax on a corporation that had no Louisiana contacts other than owning a limited partner interest in a partnership that engaged in business in Louisiana. Utelcom, Inc. and Ucom, Inc. v. Bridges, 2010 CA 0654 (La. Ct. App. Sept. 12, 2011).
The case involved two corporations, one formed in Kansas and the other in Missouri. Neither was registered in or qualified to do business in Louisiana and neither had any business activities in Louisiana. Both corporations owned limited partner interests in Delaware limited partnerships that owned property and engaged in business in Louisiana.
Louisiana audited the companies and determined that they owed Louisiana franchise tax based on their indirect ownership and use of property in Louisiana through the Delaware partnerships. Louisiana relied on a regulation, which imposes tax on a partner of a partnership that employs capital in the state. Reversing the District Court, the Louisiana Court of Appeal explained that the regulation was an impermissible expansion of the statutory language, and that franchise tax applies only if the corporation is using Louisiana property in a corporate capacity. The court found that using capital through a partnership is not the same as using capital in a "Corporate" capacity. The court stressed that the partners' only use of property in Louisiana was the capital they contributed to the partnerships. Once the capital contribution was made, the capital was used by the partnership, not the partners. The companies therefore did not employ capital in Louisiana and were not subject to franchise tax.
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