United States: Georgia Tax Tribunal Allows Deduction For Income Subject To Revised Texas Franchise Tax

The Georgia Tax Tribunal has held that a Georgia resident taxpayer was entitled to deduct pass-through income which was subject to the Revised Texas Franchise Tax (RTFT) in computing his Georgia taxable income.1 At issue was whether the amount subject to the Texas tax qualified for the deduction with respect to taxes imposed "on or measured by income."2

Flow-Through Entity Taxation

To reduce the impact of taxation by multiple states on the same income earned by flowthrough entities, Georgia, like many states, allows specific credits or adjustments in the computation of taxable income. For example, Georgia allows resident individuals to take a credit for taxes paid in other states on the same income.3 While this straightforward credit alleviates double taxation for taxpayers who reside in the same jurisdiction as a wholly-owned flow-through entity, complexities arise for taxpayers who own interests in an entity which does business in multiple jurisdictions, especially because some states (like Texas) treat flow-through entities as separate taxpayers and impose entity-level taxes.4 To address this potential double taxation, Georgia statutes allow resident taxpayers an adjustment in computing taxable income for a flow-through entity's income taxed in another state which imposes on the entity a tax on or measured by income.5

An individual's Georgia taxable net income generally consists of federal adjusted gross income subject to prescribed adjustments,6 including the adjustment at issue. Notably, the language in the adjustment for income taxed by another state contained in the Georgia statute includes the unique phrase "on or measured by income."


In this matter, in 2008, a Georgia resident taxpayer held ownership interests in both: (i) a Georgia limited liability company treated as a partnership for federal and Georgia income tax purposes (Georgia LLC); and (ii) a Georgia S corporation treated as an S corporation for both federal and Georgia income tax purposes (Georgia S Corporation). Both Georgia LLC and Georgia S Corporation owned interests in a Texas limited liability company (Texas LLC). Georgia LLC and S Corporation, through their direct and indirect ownership of various pass-through entities, participated in the wholesale and distribution of alcoholic beverages.

Texas LLC was the reporting entity for a group of entities on a 2009 RTFT Report (covering Texas LLC's activities during the 2008 calendar year). In determining its "taxable margin" for purposes of computing the RTFT, Texas LLC used the "cost of goods sold" deduction method.7

The taxpayer filed a 2008 Georgia income tax return and reported income including his distributive shares of pass-through income from Georgia LLC and Georgia S Corporation. No adjustments related to the payment of the RTFT by Texas LLC were included in taxable income. Further, as Texas does not impose personal income tax, the taxpayer did not file a personal income tax return or pay personal income taxes to Texas for the 2008 calendar year (or any other year).

On May 1, 2012, Georgia LLC and Georgia S Corporation filed a request with the Georgia Department of Revenue for a letter ruling concerning application of the adjustment for income from pass-through entities subject to the RTFT. The Department denied the ruling request on July 13, 2012 based in part upon its belief that because Georgia does not consider the RTFT to be an "income tax," the adjustment was not applicable to passthrough income taxed by Texas.

In response, the taxpayer filed an amended 2008 Georgia income tax return dated September 12, 2012 that included a deduction for income from the flow-through entities which was subject to the RTFT and claimed a tax refund. Additionally, the taxpayer amended the return to claim a similar deduction with respect to income subject to tax by the District of Columbia and to claim income tax credits which stemmed from an amended 2008 Georgia income tax return filed by Georgia S Corporation.8 The Department denied the claim for refund on September 13, 2013 and the taxpayer filed a petition with the Georgia Tax Tribunal.

RTFT Based "On or Measured by Income"

To determine whether the income subject to the RTFT qualified for the adjustment at issue, the Tribunal relied heavily upon analysis of statutory language. Specifically, in making its determination, the Tribunal focused on the plain language of the statute, the policy underlying its enactment, the applicable rules of statutory construction and the substantial weight of judicial, administrative and other authorities both in Georgia and other jurisdictions.

Statutory Language

Noting that the term "income" remains undefined in both the Internal Revenue Code and the Georgia Tax Code, the Tribunal relied upon consistent judicial interpretations of the term "income" as well as the definitions included in Black's Law Dictionary and the Georgia regulations to conclude that income is an aggregate of "all income" with no reference to any deduction for expenditures.9 Further, for purposes of the RTFT, the cost of goods sold must be deducted from gross receipts to arrive at gross income.10 The Tribunal noted the differences between the terms "income" and "gross income" used in the Georgia statutes, as well as the more restrictive definition of "gross income" found in the Treasury Regulation and other authorities while acknowledging that the precise differences were irrelevant to the determination of whether the RTFT is "on or measured by income." Instead, the Tribunal focused on whether the "taxable margin" base used to compute the RTFT is "on or measured by income."

Texas imposes the RTFT on the "taxable margin" of each taxable entity, including partnerships, S corporations, and other flow-through entities doing business in Texas.11 To compute the taxable margin, a taxpayer begins with its total revenue from its entire business.12 The taxable margin is further defined as the least of the following three options: (i) 70 percent of the taxable entity's total revenue; (ii) total revenue less cost of goods sold; or (iii) total revenue less compensation.13 Relying upon the instructions to the RTFT Report, as well as the analysis above, the Tribunal likened the starting point for computing the RTFT to gross income for federal income tax purposes. A comparison of the specific items of "income" included in the calculation of "total revenue" for RTFT purposes with the line items used to compute the federal gross income of a partnership or an S corporation revealed that "total revenue" for the RTFT and the federal gross income tax base are essentially identical. Thus, the Tribunal concluded that the RTFT is generally a tax based on or measured by "income" or "gross income" regardless of which definition is applied in the analysis. Further, the term "taxable margin" used in computing the RTFT is also based on or measured by "income." Because the taxpayer received pass-through income that was subject to the RTFT, the Tribunal determined that the taxpayer was entitled to an adjustment for the "portion of the income on which such tax was actually paid."14

Statutory Intent

The Tribunal noted that its conclusion that the RTFT is a tax "on or measured by income" is strongly supported in the policy underlying the statute at issue: that is, to allow shareholders or members of a pass-through entity to avoid the double taxation that could otherwise occur if the shareholder paid taxes on a portion of the passed-through income on which the corporation had already paid income taxes.15

The Tribunal rejected the Department's argument that the RTFT does not qualify for the adjustment because it is not a "net income" tax, noting that the restriction to net income simply does not exist in the statute. While the term "net income" is statutorily defined,16 the terms "income" and "gross income" are often used interchangeably.

Statutory Construction

In rejecting the argument made by the Department in its initial ruling request, the Tribunal found that interpreting the statute as only applying to taxes on or measured by net income contravenes at least four rules of statutory construction: (i) that statutes are to be interpreted "according to the natural and most obvious import of the language, without resorting to subtle and forced constructions;"17 (ii) that "a statute must be construed in relation to other statutes of which it is a part, and all statutes relating to the same subjectmatter must be construed together, and harmonized whenever possible;"18 (iii) that statutes be interpreted to "avoid a construction that makes some language mere surplusage;"19 and (iv) that statutes are "enacted with full knowledge of existing law."20

Furthermore, the Tribunal also rejected the Department's arguments that: (i) it is unreasonable not to construe the statute as being limited to taxes imposed on net income, mirroring the addback provision for taxes on or measured by net income;21 (ii) the difference between the Georgia and Texas tax bases requires the conclusion that the RTFT is not "on or measured with respect to income;" and (iii) the RTFT is a privilege tax or gross receipts tax.22

Other Authority Finally, the Tribunal cited a number of decisions from other jurisdictions in which the RTFT was found to be a tax "on or measured by income" or an "income tax." Specifically, the Court cited determinations by state tax authorities in Indiana,23 Missouri,24 Kansas (as long as the compensation or cost of goods sold deductions are used)25 and California (at a minimum, when the cost of goods sold deduction is used)26 as support for classification of the RTFT as an income tax. The Tribunal also cited to the Financial Accounting Standards Board's conclusion that the RTFT should be treated as an income tax.27

Where other jurisdictions have ruled that individuals cannot take a credit or adjustment with respect to the RTFT, the Tribunal noted that without fail the credits or adjustments at issue applied solely to taxes on net income, rather than taxes on income.28


Georgia residents holding interests in flow-through entities which have paid RTFT should consider whether they have deducted income subject to that tax in computing Georgia taxable income. Based on the Tribunal's decision, a refund opportunity might be available for those who have not previously made this adjustment. This determination should be made on an individual basis based on consultation with a tax advisor.

Similarly, based on the decisions highlighted in the discussion by the Tribunal, an opportunity may be available to resident taxpayers in several states that hold interests in flow-through entities. Specifically, an available credit or deduction could be available in these states (and others that reference the deduction to income taxes, rather than net income taxes imposed by other states) with respect to RTFT paid, depending upon individual circumstances.

Conversely, the rationale in this decision potentially requires Georgia corporate income taxpayers to add back RTFT in computing Georgia taxable income. Generally, Georgia requires an addition to federal taxable income for any taxes on, or measured by, net income, to the extent such taxes were deducted in determining federal taxable income.29 As the Tribunal has now determined that the RTFT is a tax "on or measured by income," an appropriate adjustment may need to be included in the computation of Georgia corporate taxable income.

It is interesting that in one of the Tribunal's first reported decisions since its recent creation touching upon a material multistate tax issue, the Tribunal engaged in such a lengthy analysis in this case, particularly in its examination of how other states have treated the RTFT for purposes of their states' income taxes. Specifically, the exact wording enacted by the Georgia legislature to reduce the potential for double taxation of individual owners of pass-through entities, as well as the language employed by other jurisdictions to achieve similar results, played a key role in this determination. As a state that traditionally has not provided significant guidance on state tax matters, the Tribunal's comprehensive approach taken in rendering this decision is a refreshing change, one that hopefully will be reflected in future determinations.


1 Rosenberg v. MacGinnittie, Georgia Tax Tribunal, Docket No. Tax-IIT-1414626, Nov. 25, 2014.

2 GA. CODE ANN. § 48-7-27(d)(1).

3 GA. CODE ANN. § 48-7-28.

4 For example, Texas and Tennessee impose taxes directly upon flow-through entities. Neither of these states imposes an individual income tax.

5 GA. CODE ANN. § 48-7-27(d)(1)(B), (C).

6 GA. CODE ANN. § 48-7-27(a).

7 TEX. TAX CODE ANN. § 171.101(a)(1)(B)(ii)(a). This method of computing taxable margin is one of three available methods which are discussed in further detail below. 8 The adjustments related to the District of Columbia taxes and the Georgia income tax credits were not considered in the Tribunal's decision. Both amounts are still at issue and are being resolved separately.

9 GA. COMP. R. & REGS. r. 560-7-6-.02(1). Referenced cases included: Eisner v. Macomber, 252 U.S. 189 (1920); Brandon v. State Revenue Comm'n, 186 S.E. 872 (Ga. Ct. App. 1936); and Amerada Hess Corp. v. Dir., Div. of Taxation, 526 A.2d 1029 (N.J. 1987), aff'd, 490 U.S. 66 (1989).

10 Sullenger v. C.I.R.,

11 T.C. 1076 (1948). Also cited were Kazhukauskas v. C.I.R., T.C. Memo 2012- 191 (2012); Beamer v. Franchise Tax Bd., 563 P.2d 238 (Cal. 1977); and Amerada Hess Corp. v. Dir., Div. of Taxation, 526 A.2d 1029 (N.J. 1987). 11 TEX. TAX CODE ANN. §§ 171.001(a); 171.002(a)-(b). Also, Letter No. 200609761L, Texas Comptroller of Public Accounts, Sept. 6, 2006, clarifying that S corporations and LLCs are subject to the RTFT.

12 TEX. TAX CODE ANN. § 171.101(a).

13 TEX. TAX CODE ANN. § 171.101(a)(1)(A), (B). Texas LLC determined its taxable margin using the "cost of goods sold" deduction for tax year 2008.

14 GA. CODE ANN. § 48-7-27(d)(1)(D) addresses multi-tiered situations, noting that the adjustment for the individual must be determined by allocating such income between the shareholders, partners, or members at each tier based on their profit/loss percentage.

15 Graham v. Hanna, 677 S.E.2d 686 (Ga. Ct. App. 2009).

16 GA. CODE ANN. § 48-7-27(a). 17 Graham v. Hanna, 677 S.E.2d 686 (Ga. Ct. App. 2009).

18 Tew v. State, 739 S.E.2d 423 (Ga. Ct. App. 2013).

19 Singletary v. State, 713 S.E.2d 698 (Ga. Ct. App. 2011).

20 Id.

21 In rejecting this argument, the Tribunal stated "it must be presumed that the legislature's choice of language that is different from the language in the then existing add-back provision was intended to have different consequences." Also, the potential double benefit allowed by permitting both the adjustment at issue as well as the addition to income of income taxes imposed by other taxing jurisdictions to the extent deducted from federal taxable income was rejected as "slight."

22 While the Department relied upon In re Nestle USA, Inc., Relator, 387 S.W.3d 610 (Tex. 2012) and Ardire v. Tracy, 674 N.E.2d 1155 (Ohio 1997), the Tribunal found these cases unpersuasive.

23 Letter of Findings No. 02-20120562, Indiana Department of Revenue, Apr. 24, 2013.

24 Private Letter Ruling No. 5309, Missouri Department of Revenue, Dec. 12, 2008.

25 Opinion Letter No. O-2009-005, Kansas Department of Revenue, Sept. 2, 2008.

26 Technical Advice Memorandum No. 2011-03, California Franchise Tax Board, Apr. 13, 2001.

27 FASB Interpretation Number 48 (FIN 48).

28 Citing Directive No. 08-7, Massachusetts Department of Revenue, Dec. 18, 2008; P.D. No. 08-169, Virginia Department of Revenue, Sept. 11, 2008; and Notice No. 08-08, Minnesota Department of Revenue, July 21, 2008.

29 GA. CODE ANN. § 48-7-27(b)(2).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions